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

                              FORM 10-Q

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

          For the quarterly period ended September 30, 2005

                  Commission File Number 333-63825

                     SCOTIA PACIFIC COMPANY LLC
       (Exact name of Registrant as specified in its charter)

                   Delaware                                   68-0414690
         (State or other jurisdiction                      (I.R.S. Employer
      of incorporation or organization)                 Identification Number)

                P. O. Box 712
          125 Main Street, 2nd Floor                             95565
              Scotia, California                              (Zip Code)
   (Address of Principal Executive Offices)

       Registrant's telephone number, including area code: (707) 764-2330

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

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

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

     Registrant  meets the conditions set forth in General  Instruction  H(1)(a)
and (b) of Form  10-Q  and is  therefore  filing  this  Form  with  the  reduced
disclosure format.

                     TABLE OF CONTENTS

                                                                            Page
PART I.  -  FINANCIAL INFORMATION

         Item 1.   Financial Statements (unaudited):
                   Balance Sheet................................................
                   Statement of Operations......................................
                   Statement of Cash Flows......................................
                   Condensed Notes to 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 6.   Exhibits.....................................................
         Signature .............................................................

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

                        SCOTIA PACIFIC COMPANY LLC

                            BALANCE SHEET
                      (In millions of dollars)

                                                                             September 30,  December 31,
                                                                                 2005           2004
                                                                           ------------------------------
                                                                                        (Unaudited)
Assets
Current assets:
  Cash and cash equivalents                                                    $    0.4    $   0.5
  Marketable securities, including restricted amounts of $24.8 and
     $25.1, respectively                                                           26.8       28.2
  Receivables from Palco                                                           10.5        3.3
  Prepaid timber harvesting costs                                                   6.4        6.2
  Other current assets                                                              1.8        1.1
                                                                               --------------------------
    Total current assets                                                           45.9       39.3
Timber and timberlands, net of accumulated depletion of $296.0 and
   $290.1, respectively                                                           220.9      225.1
Property and equipment, net of accumulated depreciation of $21.7 and
   $19.6, respectively                                                             29.0       28.1
Deferred financing costs, net                                                      10.8       11.8
Restricted cash, marketable securities and other investments                        0.5        9.2
Intangible assets                                                                   3.1        3.8
                                                                               --------------------------
                                                                               $  310.2    $ 317.3
                                                                               ==========================

Liabilities and Member Deficit
Current liabilities:
  Payable to Palco                                                             $    1.1    $   1.5
  Accrued interest                                                                 11.0       23.8
  Other accrued liabilities                                                         2.8        1.9
  Short-term borrowings and current maturities of long-term debt,
      excluding $11.1 and $9.5, respectively, of repurchased Timber Notes held
      in the SAR Account                                                           67.7       33.8
                                                                               --------------------------
    Total current liabilities                                                      82.6       61.0
  Long-term debt, less current maturities and excluding $44.3 and $55.4,
      respectively, of repurchased Timber Notes held in the SAR Account           669.6      687.7
Other noncurrent liabilities                                                        0.6        0.2
                                                                               --------------------------
    Total liabilities                                                             752.8      748.9

Contingencies (See Note 3)

Member deficit                                                                   (442.6)    (431.6)
                                                                               --------------------------
                                                                               $  310.2    $ 317.3
                                                                               ==========================

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

            SCOTIA PACIFIC COMPANY LLC

              STATEMENT OF OPERATIONS
             (In millions of dollars)

                                                                  Three Months Ended        Nine Months Ended
                                                                     September 30,             September 30,
                                                               -------------------------- --------------------------
                                                                   2005         2004       2005         2004
                                                               ----------- -------------- ------------ -------------
                                                                                    (Unaudited)

Log sales to Palco                                             $    25.7   $     21.7     $    59.2   $      50.9
                                                               ----------- -------------- ------------ -------------
Operating expenses:
  General and administrative                                         8.2          6.4          22.3          16.3
  Depletion, depreciation and amortization                           3.3          3.3           8.8           8.6
                                                               ----------- -------------- ------------ -------------
                                                                    11.5          9.7          31.1          24.9
                                                               ----------- -------------- ------------ -------------
Operating income                                                    14.2         12.0          28.1          26.0
                                                               ----------- -------------- ------------ -------------
Other income (expense):
  Interest and other income                                          1.1         (0.2)          2.3           1.1
  Interest expense                                                 (14.1)       (13.8)        (41.6)        (41.4)
                                                               ----------- -------------- ------------ -------------
                                                                   (13.0)       (14.0)        (39.3)        (40.3)
                                                               ----------- -------------- ------------ -------------
Net income (loss)                                              $     1.2   $      (2.0)   $   (11.2)   $    (14.3)
                                                               =========== ============== ============ =============

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

           SCOTIA PACIFIC COMPANY LLC

             STATEMENT OF CASH FLOWS
            (In millions of dollars)

                                                                                              Nine Months Ended
                                                                                                September 30,
                                                                                          --------------------------
                                                                                              2005         2004
                                                                                          ------------ -------------
                                                                                                 (Unaudited)

Cash flows from operating activities:
  Net loss                                                                                $  (11.2)    $  (14.3)
  Adjustments to reconcile net loss to net cash used for operating activities:
    Depletion, depreciation and amortization                                                   8.8          8.6
    Amortization of deferred financing costs                                                   1.0          1.0
    Increase (decrease) in cash resulting from changes in:
      Receivables from Palco                                                                  (7.3)        (2.9)
      Prepaid timber harvesting costs                                                         (0.2)        (0.4)
      Payable to Palco                                                                         0.4          0.1
      Accrued interest                                                                       (12.8)       (14.0)
      Other accrued liabilities                                                                0.6          0.4
      Other                                                                                   (0.6)        (0.3)
                                                                                          ------------ -------------
      Net cash used for operating activities                                                 (21.3)       (21.8)
                                                                                          ------------ -------------

Cash flows from investing activities:
  Proceeds from sales of marketable securities and other investments                           1.1          1.2
  Net proceeds from restricted cash                                                            9.1         12.0
  Capital expenditures                                                                        (4.8)        (6.1)
                                                                                          ------------ -------------
      Net cash provided by investing activities                                                5.4          7.1
                                                                                          ------------ -------------

Cash flows from financing activities:

  Principal payments on Timber Notes and other timber related debt                           (15.6)       (17.2)
  Borrowings under line of credit agreement, net                                              31.4         31.4
                                                                                          ------------ -------------
      Net cash provided by financing activities                                               15.8         14.2
                                                                                          ------------ -------------

Net decrease in cash and cash equivalents                                                     (0.1)         (0.5)
Cash and cash equivalents at beginning of period                                               0.5           0.9
                                                                                          ------------ -------------
Cash and cash equivalents at end of period                                                $    0.4     $     0.4
                                                                                          ============ =============

Supplemental disclosure of non-cash financing activities:
  Repurchases of debt using restricted cash                                               $     -      $     4.8
Supplemental disclosure of cash flow information:
  Interest paid                                                                           $   53.4     $    54.3

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

                   SCOTIA PACIFIC COMPANY LLC

               CONDENSED NOTES TO FINANCIAL STATEMENTS

1.    Basis of Presentation

     The information contained in the following condensed notes to the financial
statements  is condensed  from that which would  appear in the annual  financial
statements; accordingly, the financial statements included herein should be read
in conjunction with the financial statements and related notes thereto contained
in the Form 10-K. Any capitalized  terms used but not defined in these Condensed
Notes to Financial  Statements  are defined in the  "Glossary of Defined  Terms"
contained in Appendix A.  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 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 financial  position of
the Company at September 30, 2005,  the results of operations  for the three and
nine months ended  September 30, 2005 and 2004,  and the cash flows for the nine
months  ended  September  30,  2005 and  2004.  The  Company  is a wholly  owned
subsidiary  of  Palco,  which is a  wholly-owned  subsidiary  of MGI.  MGI is an
indirect wholly owned subsidiary of MAXXAM.

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

     The North  Coast Water  Board is  requiring  the Company and Palco 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 Company  Timberlands.  As harvesting  activities on the
Company  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
"Water  Quality"  section of Note 3 are expected to result in reduced harvest in
the future.  The staff of the North Coast Water Board has  circulated for public
review and comment draft WWDRs for the Freshwater and Elk River  watersheds.  If
these draft WWDRs are approved in their  current  form,  there would likely be a
significant adverse impact on current and future harvest levels.

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

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

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

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

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

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

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

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

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

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

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

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

     The Company's Line of Credit allows it to borrow up to one year's  interest
due on the Timber  Notes.  On June 20, 2003,  the Line of Credit was extended to
July 7, 2006.  At or near the  completion of such  extension,  the Company would
request that the Line of Credit be extended for an additional period of not less
than 364 days.  If not  extended,  the  Company  may draw  upon the full  amount
available.  The amount drawn would be repayable in 12 semiannual installments on
each note payment date (after the payment of certain other items,  including the
Aggregate  Minimum  Principal   Amortization  Amount,  as  defined,  then  due),
commencing  approximately two and one-half years following the date of the draw.
At December 31, 2004, the Company could have borrowed a maximum of $57.1 million
under the Line of Credit, and there were $18.2 million in borrowings outstanding
under the facility.  At September 30, 2005, the maximum  availability  under the
Line of Credit was $55.4 million, and borrowings outstanding were $49.5 million.

     On the note  payment  date in  January  2005,  the  Company  used the funds
available  under the Line of Credit to pay all of the $28.5  million of interest
due ($26.3  million net of interest  due in respect of Timber  Notes held by the
Company). The Company also repaid $17.1 million of principal on the Timber Notes
(an amount equal to Scheduled Amortization) using funds held in the SAR Account.

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

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

     In addition,  there can be no assurance  that certain other pending  legal,
regulatory  and  environmental  matters  or  future  governmental   regulations,
legislation or judicial or administrative decisions, adverse weather conditions,
or low  lumber or log  prices,  will not have a material  adverse  effect on the
financial condition,  results of operations or liquidity. See Note 3 for further
discussion regarding regulatory and legislative matters and legal proceedings.

     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 financial
statements  on a  recurring  basis  and  records  the  effect  of any  necessary
adjustments prior to filing the financial  statements with the SEC.  Adjustments
made to estimates often relate to improved information not previously available.
Uncertainties  regarding such estimates and related  assumptions are inherent in
the  preparation  of the Company's  financial  statements;  accordingly,  actual
results could differ from these estimates.  Risks and uncertainties are inherent
with respect to the ultimate outcome of the litigation  discussed in Note 3. The
results of a resolution of such  uncertainties  could have a material  effect on
the  Company's  financial   position,   results  of  operations  and  liquidity.

     Reclassifications

     Certain  reclassifications  have been made to prior  periods'  consolidated
financial  statements to be consistent with the current  period's  presentation.
This includes the  reclassification of restricted cash from financing activities
to investing activities in the Statement of Cash Flows.

     New Accounting Standard

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

2.   Restricted Cash, Cash Equivalents, Marketable Securities and Other Investments

     Cash, cash equivalents, marketable securities and other investments include
the following amounts which are restricted under the terms of the Company's debt
agreements (in millions):
                                                                     September 30,   December 31,
                                                                          2005           2004
                                                                    -------------------------------
Amounts held in SAR Account:
  Current portion of restricted marketable securities
       and other investments                                          $   24.8       $    25.1
  Long term portion of restricted marketable securities
       and other investments                                              49.8            68.5
                                                                    -------------------------------
                                                                          74.6            93.6
  Less: Amounts attributable to Timber Notes held
       in SAR Account                                                    (51.8)          (61.8)
                                                                    -------------------------------
     Total amounts held in SAR Account                                    22.8            31.8
Other amounts restricted under the Indenture                               2.5             2.5
                                                                    -------------------------------
Total restricted cash, cash equivalents, marketable securities
       and other investments                                        $     25.3       $    34.3
                                                                    ===============================

3.   Contingencies

     Regulatory  and  environmental  matters  play  a  significant  role  in the
Company's business, which is subject to a variety of California and federal laws
and regulations,  as well as the HCP, dealing with timber harvesting  practices,
threatened  and  endangered  species and habitat for such  species,  and air and
water quality.

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

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

     Water Quality
     Laws and  regulations  dealing with water quality are impacting the Company
and Palco 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  Company
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 Company  Timberlands.  The Company  expects this process to
continue  into  2010.  The final TMDL  requirements  applicable  to the  Company
Timberlands may require aquatic  protection  measures that are different from or
in  addition to those in the HCP or that  result  from the  prescriptions  to be
developed pursuant to the watershed analysis process provided for in the HCP.

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

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

     The  North  Coast  Water  Board in  December  2003  directed  its  staff to
formulate  WWDRs for the  Freshwater  and Elk River  watersheds  on the  Company
Timberlands.  As harvesting activities on the Company 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 this section are expected to result in
reduced  harvest in the  future.  The staff of the North  Coast  Water Board has
circulated  for public review and comment draft WWDRs for the Freshwater and Elk
River watersheds. If these draft WWDRs are approved in their current form, there
would  likely be a  significant  adverse  impact on current  and future  harvest
levels.

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

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

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

     Timber Harvest Litigation
     A California  state court has  invalidated  the SYP in connection  with two
lawsuits filed against the Palco Companies,  as described below,  which decision
has been appealed.  Other pending judicial and  administrative  proceedings,  as
described below, could affect the Company's and Palco's ability to implement the
HCP,  implement  certain  approved  THPs,  or carry  out other  operations.  The
Services  Agreement  requires Palco to prepare and file on behalf of the Company
(at Palco's cost) all pleadings and motions,  and otherwise  diligently  pursue,
appeals of any denial,  and defense of any challenge to approval,  of any THP or
the Environmental Plans or similar plan or permit and related matters.

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

     In July 2001, the Bear Creek lawsuit was filed and later amended to add the
EPA as a defendant.  The lawsuit  alleges  that  harvesting  and other  forestry
activities  under  certain  of  the  Company's  approved  THPs  will  result  in
discharges of pollutants in violation of the CWA. The plaintiff asserts that the
CWA requires the  defendants to obtain a permit from the North Coast Water Board
before  beginning  timber  harvesting  and road  construction  activities and is
seeking to enjoin  these  activities  until such permit has been  obtained.  The
plaintiff  also seeks civil  penalties  of up to $27,500 per day for the alleged
continued  violation of the CWA. On October 14, 2003, in connection with certain
motions that had been filed,  the Court upheld the validity of an EPA regulation
which exempts  harvesting and other forestry  activities from certain  discharge
requirements.  Both state and federal agencies, along with the Company and other
timber  companies,  have  relied  upon this  regulation  for more than 25 years.
However,  the Court  interpreted  the  regulation in such a way as to narrow the
forestry  operations  which are  exempted,  thereby  limiting  the  regulation's
applicability and subjecting culverts and ditches to permit  requirements.  This
ruling has widespread implications for the timber industry in the United States.
The case is not yet final as the trial has not yet been held, and there are many
unresolved  issues  involving  interpretation  of the Court's  decision  and its
application  to actual  operations.  The Company has recently filed a motion for
summary  judgment  on the ground  that it has met the  requirements  for a storm
water pollution  prevention permit under a general permit issued by the state of
California.

     Should the decision  ultimately become final and be held to apply to all of
Palco's timber operations on the Company Timberlands, it may have some or all of
the following effects:  imposing additional  permitting  requirements,  delaying
approvals of THPs,  increasing  harvesting  costs,  and adding water  protection
measures beyond those contained in the HCP.  Nonetheless,  the Company  believes
that it is not likely that civil  penalties will be awarded for operations  that
occurred prior to the Court's decision due to the historical  reliance by timber
companies on the regulation and the Company's belief that the requirements under
the HCP are adequate to ensure that  sediment  and  pollutants  from  harvesting
activities  on the  Company  Timberlands  will not reach  levels  harmful to the
environment.  While the impact of a  conclusion  to this case that  upholds  the
October 14, 2003 ruling may be adverse,  the Company  does not believe that such
an outcome  would  have a material  adverse  impact on the  Company's  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 the Company, Palco and certain affiliates as defendants.  On April 4, 2003,
the  plaintiffs  in these  actions  filed  amended  complaints  and  served  the
defendants  with notice of the  actions.  The Cook action  alleges,  among other
things,  that defendants'  logging  practices have contributed to an increase in
flooding along  Freshwater  Creek (which runs through the Company  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 Company  Timberlands).  The Company  does not believe the  resolution  of
these  actions  should  result in a  material  adverse  effect on its  financial
condition, results of operations or liquidity.

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

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

     On November 16,  2001,  the Company and Palco filed the THP No. 520 lawsuit
alleging that the State Water Board had no legal authority to impose  mitigation
measures that were  requested by the staff of the North Coast Water Board during
the THP review  process and rejected by the CDF prior to approving the THP. When
the staff of the North Coast Water Board  attempted to impose  these  mitigation
measures in spite of the CDF's  decision,  the Company and Palco appealed to the
State Water Board,  which imposed certain of the requested  mitigation  measures
and  rejected  others.  The  Company  and Palco  filed the THP No.  520  lawsuit
challenging the State Water Board's decision,  and in January 2003, a California
state court granted their request for an order  invalidating  the  imposition of
these additional measures.  The State Water Board appealed this decision, and on
March 18, 2004,  the appellate  court  reversed the decision of the state court.
The appellate court's decision could result in increased demands by the regional
and state water boards and their staffs to impose controls and limitations  upon
timber  harvesting on the Company  Timberlands  beyond those provided for by the
Environmental  Plans  or  could  provide  additional  regulatory  powers  to the
regional and state water boards and their staffs beyond those provided in Senate
Bill 810.  The Company and Palco  filed a petition  for review of the  appellate
court's decision by the California  Supreme Court,  which in June 2004 agreed to
review the decision. Briefing was completed on April 26, 2005, and a hearing has
been set for November 10, 2005.

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

4.   Comprehensive Income (Loss) and Member Deficit

     Comprehensive income (loss) includes the following (in millions):

                                                                Three Months Ended           Nine Months Ended
                                                                   September 30,                September 30,
                                                               -------------------------- --------------------------
                                                                   2005         2004          2005         2004
                                                               -------------------------- ------------ -------------
Net income (loss)                                              $    1.2     $  (2.0)       $  (11.2)    $   (14.3)
Other comprehensive income (loss):
  Net change in fair value of available-for-sale investments          -         0.1             0.2          (0.6)
                                                               -------------------------- ------------ -------------
Total comprehensive income (loss)                              $    1.2     $  (1.9)       $  (11.0)    $   (14.9)
                                                               ========================== ============ =============

      A reconciliation of the activity in member deficit is as follows (in
millions):
                                          Nine Months Ended
                                            September 30,
                                       -------------------------
                                          2005          2004
                                       -----------  ------------

Balance at beginning of period        $   (431.6)   $   (411.2)
Comprehensive loss                         (11.0)        (14.9)
                                      ------------ -------------
Balance at end of period              $   (442.6)   $   (426.1)
                                      ============ =============

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 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.

     Logging operations on the Company  Timberlands are highly seasonal and have
historically been  significantly  higher in the months of April through November
than in the months of December through March.  Management  expects that revenues
and cash flows will continue to be markedly  seasonal because of the harvesting,
road use, wet weather and other restrictions  imposed by the HCP and regulation.
As a  result  of  these  restrictions,  a  substantial  majority  of the  future
harvesting on the Company  Timberlands can be expected to be concentrated during
the period from June through October of each year.

     Log Sales to Palco
     The following  table  presents  price,  volume and revenue  amounts for the
Company for the periods indicated (revenues in millions).

                                     Three Months Ended September 30, 2005   Three Months Ended September 30, 2004
                                     -------------------------------------------------------------------------------
                                                     Price                                   Price
                                       MBFE         $/MBFE       Revenues         MBFE      $/MBFE      Revenues
                                     ----------- ------------- ------------- ----------- ------------- -------------
Redwood                               21,900      $    952      $    20.8         19,900  $    811   $     16.2
Douglas Fir                            7,200           640            4.7          9,800       545          5.3
Other                                    600           404            0.2            500       351          0.2
                                     -----------               ------------- -----------              -------------
                                      29,700           865      $    25.7         30,200       717    $    21.7
                                     ===========               =========================              =============

                                      Nine Months Ended September 30, 2005   Nine Months Ended September 30, 2004
                                     -------------------------------------------------------------------------------
                                                     Price                                   Price
                                      MBFE          $/MBFE       Revenues         MBFE       $/MBFE      Revenues
                                     ----------- ------------- ------------- ----------- ------------ -------------
Redwood                               55,000      $    892      $    49.0         55,200  $    762    $    42.1
Douglas Fir                           16,200           605            9.9         16,500       513          8.5
Other                                  1,700           189            0.3          1,300       259          0.3
                                     -----------                ------------- -----------              -------------
                                      72,900           812      $    59.2         73,000       697     $   50.9
                                     ===========                ============= ===========              =============

     For the three months ended  September 30, 2005, the Company  experienced an
overall 18.4% increase in revenues and a 1.7% decrease in sales volume  compared
to the three  months  ended  September  30,  2004.  The  increase  in revenue is
attributable  to both  the  increase  in sales  volume  of  redwood  logs and an
increase  in the  average  realized  price of all log types.  For the first nine
months of 2005, revenues increased 16.3% as a result of price increases.

     Operating Income and Net Loss
     Despite the increase in revenues, operating income was only slightly higher
due to a  substantial  increase  in  legal  and  advisor  fees  relating  to the
Company's  efforts to restructure the Timber Notes,  increased THP costs related
to logs sold during the period,  severance costs related to a reduction in force
and increases in certain forest management costs.

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.

     Due to its highly leveraged  condition,  the Company is more sensitive than
less  leveraged  companies to factors  affecting  its  operations  and financial
results,  including  adverse weather  conditions,  low log prices,  governmental
regulation,  environmental  litigation  and  general  economic  conditions.  The
Company's  cash flows from  operations  are  significantly  impacted  by harvest
volumes and log prices.

     Regulatory and  environmental  matters as well as legal actions have played
and are  expected  to  continue  to  play a  significant  role in the  Company's
operations. The Company has previously experienced delays in the approval of its
THPs as the result of  regulatory  compliance  and  litigation  challenges,  and
expects  these  difficulties  to  persist.   Moreover,  the  Company  expects  a
recurrence  of the  additional  delays that have recently  been  experienced  in
harvesting on previously-approved  THPs due to regulatory oversight by the North
Coast Water Board (see below).  The foregoing matters have in the past adversely
affected  timber  harvest levels and timber  harvesting  and other costs;  these
effects are expected to continue.  In addition,  there can be no assurance  that
certain other pending  legal,  regulatory  and  environmental  matters or future
governmental  regulations,  legislation or judicial or administrative decisions,
adverse weather  conditions,  or low lumber or log prices,  will have a material
adverse effect on the financial condition, results of operations or liquidity of
the Company's operations.  See Item 1.  "Business--Regulatory  and Environmental
Factors" of the Form 10-K and Note 3 for further discussion of these matters.

     The North  Coast Water  Board is  requiring  the Company and Palco 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 Company  Timberlands.  As harvesting  activities on the
Company  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
"Water  Quality"  section of Note 3 are expected to result in reduced harvest in
the future.  The staff of the North Coast Water Board has  circulated for public
review and comment draft WWDRs for the Freshwater and Elk River  watersheds.  If
these draft WWDRs are approved in their  current  form,  there would likely be a
significant adverse impact on current and future harvest levels.

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

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

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

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

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

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

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

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

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

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

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

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

     The Company's Line of Credit allows it to borrow up to one year's  interest
due on the Timber  Notes.  On June 20, 2003,  the Line of Credit was extended to
July 7, 2006.  At or near the  completion of such  extension,  the Company would
request that the Line of Credit be extended for an additional period of not less
than 364 days.  If not  extended,  the  Company  may draw  upon the full  amount
available.  The amount drawn would be repayable in 12 semiannual installments on
each note payment date (after the payment of certain other items,  including the
Aggregate  Minimum  Principal   Amortization  Amount,  as  defined,  then  due),
commencing  approximately two and one-half years following the date of the draw.
At December 31, 2004, the Company could have borrowed a maximum of $57.1 million
under the Line of Credit, and there were $18.2 million in borrowings outstanding
under the facility.  At September 30, 2005, the maximum  availability  under the
Line of Credit was $55.4 million, and borrowings outstanding were $49.5 million.

     On the note  payment  date in  January  2005,  the  Company  used the funds
available  under the Line of Credit to pay all of the $28.5  million of interest
due ($26.3  million net of interest  due in respect of Timber  Notes held by the
Company). The Company also repaid $17.1 million of principal on the Timber Notes
(an amount equal to Scheduled Amortization) using funds held in the SAR Account.

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

     The Master  Purchase  Agreement  between the Company and Palco (see Item 1.
"Business--  Operation of Company  Timberlands"  of the Form 10-K)  contemplates
that all sales of logs by the  Company  to Palco  will be at fair  market  value
(based on stumpage  prices) for each  species and  category of logs.  The Master
Purchase Agreement provides that if the purchase price equals or exceeds the SBE
Price and a  structuring  price  set forth in a  schedule  to the  Timber  Notes
Indenture,  the  purchase  price is deemed to be at fair  market  value.  If the
purchase price equals or exceeds the SBE Price, but is less than the structuring
price, then the Company is required to engage an independent forestry consultant
to confirm that the purchase price reflects fair market value. In December 2004,
the  California  State  Board of  Equalization  adopted  the new  Harvest  Value
Schedule for the first six months of 2005. The prices published in that schedule
(which exceeded the applicable structuring prices) reflected a 14.3% increase in
the SBE Price for small redwood logs and a 12.5% increase for small  Douglas-fir
logs from the prices  published for the second half of 2004.  In June 2005,  the
California  State Board of  Equalization  adopted the new Harvest Value Schedule
for the second half of 2005.  The prices  established  in that  schedule  (which
exceed the applicable  structuring  prices) reflected a 4.2% increase in the SBE
Price for small  redwood  logs from the price  published  for the first  half of
2005.  There was no change in the  small  Douglas-fir  log price  from the price
published for the first half of 2005.

     Capital  expenditures  were $4.8  million for the first nine months of 2005
and are  estimated to be between $3.5 million and $4.1 million for the remainder
of 2005  (subject  to  available  cash).  The Company  may  purchase  additional
timberlands from time to time as appropriate opportunities arise.

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

     See Note 3 and Part I, Item 2.  "Management's  Discussion  and  Analysis of
Financial  Conditions  and  Results  of   Operations--Financial   Condition  and
Investing  and  Financing   Activities"   for  information   regarding   various
regulatory,  environmental,  litigation  and other matters which have caused and
are expected to continue to cause delays in the approval of the  Company's  THPs
and the  ability to harvest on THPs once they are  approved,  as well as adverse
impacts on timber  harvest levels and timber  harvesting  and other costs.  Both
Palco and the Company are evaluating their liquidity alternatives.  There can be
no assurance  that the Company  and/or Palco will have  sufficient  liquidity to
satisfy  their  debt  service   obligations   and  fund  their  working  capital
requirements.

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

Critical Accounting Policies and Estimates

     See Item 7.  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations--Critical  Accounting Policies" of the Form 10-K for a
discussion of the Company's  critical  accounting  policies.  There have been no
material  changes in the Company's  critical  accounting  policies and estimates
provided in the December 31, 2004 Form 10-K.

New Accounting Pronouncements

     See  Note 1 for a  discussion  of a new  accounting  pronouncement  and its
potential impact on the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to changes in  interest  rates  primarily  under the
Line of Credit. As of September 30, 2005, there were $49.5 million in borrowings
outstanding  under  all  variable  rate  facilities.  Based  on  the  amount  of
borrowings  outstanding  under these  facilities  during the nine  months  ended
September 30, 2005, a 1.0% change in interest rates effective from the beginning
of the year would have  resulted in an increase or decrease in interest  expense
of $0.3 million.

ITEM 4. CONTROLS AND PROCEDURES

     The Company maintains  disclosure controls and procedures that are designed
to ensure that  information  required to be disclosed in the  Company's  reports
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported  within the time  periods  specified in the rules and forms of the 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.

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

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

                 PART II. OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

     The information set forth in Note 3 is incorporated herein by reference.

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

                            SIGNATURE

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

                    SCOTIA PACIFIC COMPANY LLC

Date: November 9, 2005         By:        /S/     GARY L.CLARK
                                        ----------------------------------
                                                 Gary L. Clark
                                     Vice President - Finance and Administration
                                    (Principal Financial and Accounting Officer)

                            APPENDIX A

                     Glossary of Defined Terms

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

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

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

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

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

CBD:  Center for Biological Diversity

CDF:  California Department of Forestry and Fire Protection

CDF Harvest Limit: Annual harvest limit established by the CDF

CDFG:  California Department of Fish and Game

CESA:  California Endangered Species Act

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

Company  Timberlands:  Approximately  204,000 acres of timberlands  owned by the
Company

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

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

CWA:  Federal Clean Water Act

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

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

Environmental Plans:  The HCP and the SYP

EPA:  Environmental Protection Agency

EPIC:  Environmental Protection Information Association

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

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

FASB:  Financial Accounting Standards Board

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

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

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, the Company,  Salmon Creek ,
the  United  States  and  California   which  provided  the  framework  for  the
acquisition by the United States and California of the Headwaters Timberlands

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

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

Indenture:  The indenture governing the Timber Notes

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

Master Purchase Agreement:  Agreement which governs the sale of logs to Palco by
the Company

MAXXAM:  MAXXAM Inc.

Mbfe: A concept  developed for use in structuring  the Timber Notes;  under this
concept one thousand  board feet,  net  Scribner  scale,  of old growth  redwood
timber equates to one Mbfe

MGI:  MAXXAM Group Inc., an indirect wholly owned subsidiary of MAXXAM

Moody's:  Moody's Investors Service

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

Noteholders: Holders of the Timber Notes

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

Omnibus Amendment:  Amendment to Revolving  Credit  Facility and Term Loan (and
other loan documents) entered into on October 25, 2005

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

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

Palco Companies:  The Company, Palco and Salmon Creek, collectively

Palco Credit Agreement:  Palco's revolving credit facility with a bank providing
for borrowings up to $30.0 million based on certain collateral  balances,  which
was terminated in connection  with the closing of the Revolving  Credit Facility
and Term Loan

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

PSLRA:  Private Securities Litigation Reform Act of 1995

Revolving Credit  Facility:  Revolving credit facility among Palco and Britt, as
Borrowers, and Credit Suisse First Boston

S&P:  Standard & Poor's Rating Service

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

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

SEC:  The Securities and Exchange Commission

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

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

State Board of Equalization:  The California State Board of Equalization

State Water Board:  California State Water Resources Control Board

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

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

Term Loan: $35.0 million term loan among Palco and Britt, as borrowers,  and the
CIT Group/Business Credit, Inc.

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

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

Timber  Notes:  The  Company'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

TMDLs:  Total maximum daily load limits

Trustee:  The trustee under the Indenture

UBS:  UBS Securities LLC

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

WWDRs:  Watershed-wide discharge requirements
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