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

                                    FORM 10-K

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

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

FOR THE FISCAL YEAR ENDED                                 COMMISSION
    DECEMBER 31, 2003                                 FILE NUMBER 1-3924


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

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

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

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

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

           Securities registered pursuant to Section 12(b) of the Act:


                                                                NAME OF EACH EXCHANGE
    TITLE OF EACH CLASS                                          ON WHICH REGISTERED
----------------------------                                    ----------------------
Common Stock, $.50 par value...............................           American

        Securities registered pursuant to Section 12(g) of the Act: None.

      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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

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

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

    Number of shares of common stock outstanding at March 19, 2004: 5,976,466

                      DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of Registrant's definitive proxy statement, to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of the Registrant's fiscal year, are incorporated by
reference under Part III.

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

                                TABLE OF CONTENTS

                                     PART I

Item 1.        Business
                       General
                       Forest Products Operations
                       Real Estate Operations
                       Racing Operations
                       Kaiser Aluminum

Item 2.        Properties

Item 3.        Legal Proceedings

Item 4.        Submission of Matters to a Vote of Security Holders

                                     PART II

Item 5.        Market for Registrant's Common Equity and Related Stockholder Matters

Item 6.        Selected Financial Data

Item 7.        Management's Discussion and Analysis of Financial Condition and Results
                       of Operations

Item 7A.       Quantitative and Qualitative Disclosures About Market Risk

Item 8.        Financial Statements and Supplementary Data
                       Independent Auditors' Report
                       Report of Independent Public Accountants
                       Consolidated Balance Sheet
                       Consolidated Statement of Operations
                       Consolidated Statement of Cash Flows
                       Consolidated Statement of Stockholders' Deficit
                       Notes to Consolidated Financial Statements

Item 9.        Changes in and Disagreements with Accountants on Accounting and
                       Financial Disclosure

Item 9A.       Controls and Procedures

                                    PART III

Items 10-14.   To be filed with the Registrant's definitive proxy statement

                                     PART IV

Item 15.       Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Signatures

Index of Exhibits

Glossary of Defined Terms




                                     PART I


ITEM 1.         BUSINESS

GENERAL

      MAXXAM Inc. and its subsidiaries are collectively referred to herein as
the "COMPANY" or "MAXXAM" unless otherwise indicated or the context indicates
otherwise. The Company conducts the substantial portion of its operations
through its subsidiaries, which operate in three principal industries.

o     Forest products, through MAXXAM Group Inc. ("MGI") and MGI's wholly owned
      subsidiary, The Pacific Lumber Company ("PALCO"), and Palco's wholly owned
      subsidiaries, Scotia Pacific Company LLC ("SCOTIA LLC") and Britt Lumber
      Co., Inc. ("BRITT"). MGI operates in several principal aspects of the
      forest products industry -- the growing and harvesting of redwood and
      Douglas-fir timber, the milling of logs into lumber and the manufacture of
      lumber into a variety of finished products. Housing, construction and
      remodeling are the principal markets for the Company's lumber products.

o     Real estate investment and development, through MAXXAM Property Company
      ("MPC") and other wholly owned subsidiaries of the Company. These
      subsidiaries are engaged in the business of residential and commercial
      real estate investment and development, primarily in Arizona, California,
      Puerto Rico and Texas, including associated golf course or resort
      operations in certain locations, and also own several commercial real
      estate properties.

o     Racing operations, through Sam Houston Race Park, Ltd. ("SHRP, LTD."), a
      Texas limited partnership, wholly owned by the Company. SHRP, Ltd. owns
      and operates a Class 1 pari-mutuel horse racing facility in the greater
      Houston metropolitan area, and a pari-mutuel greyhound racing facility in
      Harlingen, Texas.

      In addition to the above, the Company owns approximately 62% of Kaiser
Aluminum Corporation ("KAISER"), an integrated aluminum producer. Kaiser and a
number of its subsidiaries have filed for reorganization under Chapter 11 of the
United States Bankruptcy Code. See "--Aluminum Operations--General and
Reorganization Proceedings" and Notes 1 and 12 to the Consolidated Financial
Statements contained herein. Except as otherwise indicated, all references
herein to "Notes" represent the Notes to the Consolidated Financial Statements
contained herein.

      This Annual Report on Form 10-K contains statements which
constitute"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 ("PSLRA"). These statements appear in a
number of places (see Item 1."Business--Forest Products Operations--Timber and
Timberlands" and "--Regulatory and Environmental Factors;" most sections under
Item 3. "Legal Proceedings;" and several sections under Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations"). Such
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may vary materially
from the forward-looking statements as a result of various factors. These
factors include the effectiveness of management's strategies and decisions,
general economic and business conditions, developments in technology, new or
modified statutory or regulatory requirements, litigation developments, and
changing prices and market conditions. This Report identifies 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.

FOREST PRODUCTS OPERATIONS

   GENERAL

      The Company engages in forest products operations through MGI, Palco,
Britt and Scotia LLC. Palco, which has been in continuous operation for over 130
years, engages in several principal aspects of the forest products industry--the
growing and harvesting of redwood and Douglas-fir timber, the milling of logs
into lumber products and the manufacturing of lumber into a variety of
value-added finished products. Britt manufactures redwood fencing and decking
products from small diameter logs, a substantial portion of which Britt acquires
from Palco.

      During 2001, comprehensive external and internal reviews were conducted by
Palco with respect to its business operations. These reviews were an effort to
identify ways in which Palco could operate on a more efficient and cost
effective basis. Based upon the results of these reviews, Palco implemented a
number of changes during the last quarter of 2001 and the first quarter of 2002,
including closing two of its sawmills, eliminating certain of its operations,
including its company-staffed logging operations (now relying exclusively on
contract loggers) and its soil amendment and concrete block activities,
utilizing more efficient harvesting methods, and adopting other cost saving
measures. Palco has continued to examine ways in which to achieve additional
cost savings. Subsequent to December 31, 2003, Palco opened a new planer
facility and began construction on a $25.0 million sawmill project in Scotia.
See "--Production Facilities."

   TIMBER AND TIMBERLANDS

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

      Palco owns and manages, directly or through subsidiaries, approximately
217,000 acres of virtually contiguous commercial timberlands located in Humboldt
County along the northern California coast, an area which has very favorable
soil and climate conditions for growing timber. These timberlands, which contain
approximately 66% redwood, 30% Douglas-fir and 4% other conifer timber (by
volume), are located in close proximity to Palco's and Britt's sawmills, and
contain an extensive network of roads. Approximately 204,000 acres of Palco's
timberlands are owned by Scotia LLC (the "SCOTIA LLC TIMBERLANDS"), and Scotia
LLC has the exclusive right to harvest (the "SCOTIA LLC TIMBER RIGHTS")
approximately 12,200 acres of timberlands owned directly by Palco. The timber in
respect of the Scotia LLC Timberlands and the Scotia LLC Timber Rights is
collectively referred to as the "SCOTIA LLC TIMBER." The Scotia LLC Timberlands
and the timberlands of Palco are collectively referred to as the "PALCO
TIMBERLANDS." Substantially all of Scotia LLC's assets are pledged as security
for Scotia LLC's 6.55% Series B Class A-1 Timber Collateralized Notes, 7.11%
Series B Class A-2 Timber Collateralized Notes and 7.71% Series B Class A-3
Timber Collateralized Notes (collectively, the "TIMBER NOTES"). The Indenture
governing the Timber Notes is referred to herein as the "TIMBER NOTES
INDENTURE." Palco harvests and purchases from Scotia LLC virtually all of the
logs harvested from the Scotia LLC Timber. See "--Relationship with Scotia LLC"
below for a description of this and other relationships between Palco and Scotia
LLC.

      In March 1999, Palco, Scotia LLC, and Salmon Creek LLC, another Palco
subsidiary (collectively, the "PALCO COMPANIES"), consummated the Headwaters
Agreement (the "HEADWATERS AGREEMENT") with the United States and California.
Pursuant to the agreement, approximately 5,600 acres of timberlands owned by the
Palco Companies (the "HEADWATERS TIMBERLANDS") were transferred to the United
States in exchange for (a) an aggregate of $300.0 million, (b) approximately
7,700 acres of timberlands, and (c) approval by the federal and state
governments of habitat conservation and sustained yield plans (the
"ENVIRONMENTAL PLANS") in respect of substantially all of the Palco Timberlands.
California also agreed to offer to purchase other timberlands owned by Palco and
Scotia LLC (which purchases were subsequently consummated -- see Note 4).

      Timber generally is categorized by species and the age of a tree when it
is harvested. "OLD GROWTH" trees are often defined as trees which have been
growing for approximately 200 years or longer and "YOUNG GROWTH" trees are those
which have been growing for less than 200 years. The forest products industry
grades lumber into various classifications according to quality. The two broad
categories into which all grades fall based on the absence or presence of knots
are called "upper" and "common" grades, respectively. Old growth trees have a
higher percentage of upper grade lumber than young growth trees.

      Palco engages in extensive efforts to supplement the natural regeneration
of timber and increase the amount of timber on its timberlands. Palco is
required to comply with California forestry regulations regarding reforestation,
which generally require that an area be reforested to specified standards within
an established period of time. Pursuant to the services agreement described
below (see "--Relationship with Scotia LLC"), Palco conducts regeneration
activities on the Scotia LLC Timberlands for Scotia LLC. Reforestation of
redwood timber generally is accomplished through redwood sprouts from harvested
trees and the planting of redwood seedlings at levels designed to optimize
growth. Douglas-fir timber is regenerated almost entirely by planting seedlings.
During 2003, Palco planted an estimated 1,200,000 redwood and Douglas-fir
seedlings.

      California law requires large timberland owners, including Palco, to
demonstrate that their timber operations will not decrease the sustainable
productivity of their timberlands. The applicable regulations require timber
companies to project timber growth and harvest on their timberlands over a
100-year planning period and to demonstrate that their projected average annual
harvest for any decade within the 100-year planning period will not exceed the
average annual growth level during the last decade of the 100-year planning
period. A timber company may comply with this requirement by submitting a
sustained yield plan to the California Department of Forestry and Fire
Protection ("CDF") for review and approval. Timber companies which do not have a
sustained yield plan are allowed to follow an alternative procedure.

      Palco is also subject to federal and state laws providing for the
protection and conservation of wildlife species which have been designated as
endangered or threatened, certain of which are found on the Palco Timberlands.
These laws generally prohibit certain adverse impacts on such species (referred
to as a "TAKE"), except for incidental take which does not jeopardize the
continued existence of the affected species and which are made in accordance
with an approved habitat conservation plan and related incidental take permit. A
habitat conservation plan analyzes the impact of the incidental take and
specifies measures to monitor, minimize and mitigate such impact. As part of the
Headwaters Agreement, the federal and state governments approved the
Environmental Plans, consisting of a sustained yield plan (the "SYP") and a
multi-species habitat conservation plan (the "HCP") in respect of substantially
all of the Palco Timberlands. However, a California state court has, in
connection with two lawsuits filed against Palco, invalidated the SYP and the
incidental take permits issued by California in connection with the
Environmental Plans (the "CALIFORNIA PERMITS"). As a result of these cases,
Palco has since October 2002 been obtaining review and approval of its timber
harvesting plans ("THPS") under the alternative procedure referred to above and
expects to follow this procedure for the foreseeable future. See "--Regulatory
and Environmental Factors," Item 3. "Legal Proceedings --Forest Products
Litigation," and Note 13.

      In May 2002, Palco completed its first timber cruise since 1986. The
results of the timber cruise provided Palco with an estimate of the volume of
merchantable timber on the Palco Timberlands. The new cruise data reflected a
0.1 million MBF decrease in estimated overall timber volume as compared to the
estimated volumes reported as of December 31, 2001 using the 1986 cruise data
(adjusted for harvest and estimated growth). The new cruise data indicates that
there is significantly less old growth timber than estimated as of December 31,
2001, using the 1986 cruise data. There was also an estimated increase in young
growth timber volume almost equal to the estimated decrease in old growth timber
volume. This change in mix could adversely affect the Company's revenues.
However, because there are many variables that affect revenues and
profitability, the Company cannot quantify the effect of the revised estimate on
current and future cash flows. The new timber volumes are now being utilized in
various aspects of Palco's operations, including estimating volumes on THPs and
determining depletion expense.

   HARVESTING PRACTICES

      The ability of Palco to harvest timber depends in large part upon its
ability to obtain regulatory approval of THPs. Prior to harvesting timber in
California, companies are required to obtain the CDF's approval of a detailed
THP for the area to be harvested. A THP must be submitted by a Registered
Professional Forester and must include information regarding the method of
proposed timber operations for a specified area, whether the operations will
have any adverse impact on the environment and, if so, the mitigation measures
to be used to reduce any such impact. The CDF's evaluation of THPs incorporates
review and analysis of such THPs by several California and federal agencies and
public comments received with respect to such THPs. The number of Palco's
approved THPs and the amount of timber covered by such THPs varies significantly
from time to time, depending upon the timing of agency review and other factors.
Timber covered by an approved THP is typically harvested within a one-year
period from the date that harvesting first begins. The Timber Notes Indenture
requires Scotia LLC to use its best efforts (consistent with prudent business
practices) to maintain a number of pending THPs which, together with THPs
previously approved, would cover rights to harvest a quantity of Scotia LLC
Timber adequate to pay interest and principal amortization based on the Minimum
Principal Amortization schedule (as set forth in the Timber Notes Indenture) for
the Timber Notes for the next succeeding twelve-month period. See "--Regulatory
and Environmental Factors," Item 3. "Legal Proceedings--Forest Products
Litigation," and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for various legal, regulatory,
environmental and other challenges being faced by Palco in connection with
timber harvesting and other operations on its timberlands.

      Palco maintains a detailed geographical information system covering its
timberlands (the "GIS"). The GIS covers numerous aspects of Palco's timber
properties, including timber type, site productivity class, wildlife and
botanical data, geological information, roads, rivers and streams. Pursuant to
the Services Agreement (defined below), Palco, to the extent necessary, provides
Scotia LLC with personnel and technical assistance in updating, upgrading and
improving the GIS and the other computer systems owned by Scotia LLC. By
carefully monitoring and updating this data base and conducting field studies,
Scotia LLC's foresters are better able to develop detailed THPs addressing the
various regulatory requirements. Palco also utilizes a Global Positioning System
("GPS") which can provide precise location of geographic features through
satellite positioning. Use of the GPS greatly enhances the quality and
efficiency of the GIS data.

      Palco employs a variety of well-accepted methods of selecting trees for
harvest designed to achieve optimal growth and regeneration. These methods,
referred to as "silvicultural systems" in the forestry profession, range from
very light thinnings (aimed at enhancing the growth rate of retained trees) to
clear cutting, which results in the harvest of nearly all trees in an area (with
the exception of sub-merchantable trees and trees retained for wildlife
protection and future stand enhancement) and replacement with a new forest
stand. In between are a number of varying levels of partial harvests which can
be employed.

   PRODUCTION FACILITIES

      Palco operates two highly mechanized sawmills and related facilities
located in Fortuna and Carlotta, California. Palco's sawmills historically have
been supplied almost entirely from timber harvested from Palco's timberlands,
but are supplemented from time to time by logs purchased from third parties.
Palco has over the years implemented numerous technological advances that have
increased the operating efficiency of its production facilities and the recovery
of finished products from its timber. Palco (excluding Britt, which became a
subsidiary of Palco in early 2004) produced approximately 213, 194 and 160
million board feet of lumber in 2003, 2002 and 2001, respectively. The Fortuna
sawmill produces primarily common grade lumber. The Carlotta sawmill produces
both common and upper grade redwood lumber. As part of Palco's strategic review
of its operations, Sawmills "A" and "B" in Scotia, California, were closed in
2001. See "--General."

      In January 2004, Palco completed a new $5 million planer project in
Scotia. The new high speed state-of-the-art system will process rough sawn
boards into finished lumber much more efficiently than older planers at the
Fortuna and Carlotta mills, which the new system replaced. In mid-February 2004,
Palco announced a $25 million mill improvement project, including a new
state-of-the-art sawmill to be located in Scotia. Funds for this project will
come from existing cash resources and borrowings under Palco's new credit
facility. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities--Overview." The mill improvement project will be completed
in several phases during 2004 and early 2005. The new sawmill will allow more
efficient processing of smaller second growth logs (up to 24" in diameter) and
reduce operating and other costs. As part of the mill improvement project, the
equipment from the Carlotta mill will be moved to the new mill in Scotia and
used to process logs larger than 24" in diameter. After this equipment is moved,
the Carlotta mill will be permanently closed, and management is considering
alternative uses for the property.

      Britt's primary business is the processing of small diameter redwood logs
into fencing products for sale to retail and wholesale customers. Britt
purchases, primarily from Palco but also from other timberland owners, small
diameter (6 to 15 inch) redwood logs of varying lengths. Britt processes these
logs at its mill into a variety of fencing products, including "dog-eared" 1" by
6" fence stock in six foot lengths, 4" by 4" fence posts in 6 through 12 foot
lengths, and other lumber products in 6 through 12 foot lengths. Britt's mill
and related remanufacturing facility are located in Arcata, California. Britt
produced approximately 76, 74 and 74 million board feet of lumber in 2003, 2002
and 2001, respectively.

      Palco operates a finishing and remanufacturing plant in Scotia which
processes rough lumber into a variety of finished products such as trim, fascia,
siding and paneling. Remanufacturing enhances the value of some grades of lumber
by assembling knot-free pieces of narrower and shorter lumber into wider or
longer pieces in Palco's state-of-the-art end and edge glue plant. The result is
a standard sized upper grade product which can be sold at a significant premium
over common grade products. Palco has also installed a lumber remanufacturing
facility at its mill in Fortuna which processes low grade redwood common lumber
into value-added, higher grade redwood fence and related products.

      Palco dries a substantial portion of its lumber before it is sold. Air or
kiln-dried lumber generally commands higher prices than "green" lumber, which is
lumber sold before it has been dried. Drying also allows Palco to compete in
additional markets (due to lower shipping costs resulting from the moisture and
weight reduction which occurs in the drying process). Palco owns and can operate
up to 35 kilns having an annual capacity of approximately 95 million board feet.

      Palco owns and operates a cogeneration power plant which is fueled by the
wood residue from logging and lumber production operations. The operations of
Palco and Britt supplied 61% of the fuel in 2003. The power plant is capable of
producing up to 35 megawatts per hour and generates substantially all of the
energy requirements of Scotia, California, the town adjacent to Palco's
timberlands where several of its facilities are located and where a number of
its employees live. Palco sells surplus power to Pacific Gas and Electric
Company. In 2003, the sale of surplus power accounted for approximately 6% of
Palco's total revenues.

   PRODUCTS

      The following table sets forth the distribution of MGI's lumber production
(on a net board foot basis) and revenues by product line:


                                                 YEAR ENDED DECEMBER 31, 2003                    YEAR ENDED DECEMBER 31, 2002
                                        ---------------------------------------------     ----------------------------------------
                                        % OF TOTAL                                        % OF TOTAL
                                        LUMBER            % OF TOTAL                      LUMBER         % OF TOTAL
                                        PRODUCTION        LUMBER         % OF TOTAL       PRODUCTION     LUMBER        % OF TOTAL
              PRODUCT                   VOLUME            REVENUES       REVENUES         VOLUME         REVENUES      REVENUES
-----------------------------------     -------------     ------------   ------------     -----------    -----------   -----------

Upper grade redwood lumber.........                9%              18%            16%              8%            21%           18%
Common grade redwood lumber........               72%              70%            62%             81%            71%           60%
                                        -------------     ------------   ------------     -----------    -----------   -----------
   Total redwood lumber............               81%              88%            78%             89%            92%           78%
                                        -------------     ------------   ------------     -----------    -----------   -----------
Upper grade Douglas-fir lumber.....                1%               3%             3%              2%             4%            3%
Common grade Douglas-fir lumber....               15%               8%             7%              9%             4%            4%
                                        -------------     ------------   ------------     -----------    -----------   -----------
   Total Douglas-fir lumber........               16%              11%            10%             11%             8%            7%
                                        -------------     ------------   ------------     -----------    -----------   -----------
Other grades of lumber.............                3%               1%             1%              0%             0%            0%
                                        -------------     ------------   ------------     -----------    -----------   -----------
      Total lumber.................              100%             100%            89%            100%           100%           85%
                                        =============     ============   ============     ===========    ===========   ===========

Logs...............................                                                3%                                            7%
                                                                         ============                                   ===========

Wood chips.........................                                                2%                                            1%
                                                                         ============                                   ===========

      In 2003, MGI sold 298.7 million board feet of lumber. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Forest Products Operations" for additional
information. Lumber products vary greatly by the species and quality of the
timber from which they are produced. Lumber is sold not only by grade (such as
"upper" grade versus "common" grade), but also by board size and the drying
process associated with the lumber.

      Redwood lumber has historically been MGI's largest product category.
Redwood is commercially available only along the northern coast of California
and possesses certain unique characteristics that permit it to be sold at a
premium to many other wood products. Such characteristics include its natural
beauty, superior ability to retain paint and other finishes, dimensional
stability and innate resistance to decay, insects and chemicals. Typical
applications include exterior siding, trim and fascia for both residential and
commercial construction, outdoor furniture, decks, planters, retaining walls and
other specialty applications. Redwood also has a variety of industrial
applications because of its chemical resistance and because it does not impart
any taste or odor to liquids or solids.

      Upper grade redwood lumber, which is derived primarily from large diameter
logs and is characterized by an absence of knots and other defects, is used
primarily in distinctive interior and exterior applications. The overall supply
of upper grade lumber has been diminishing due to increasing environmental and
regulatory restrictions and other factors. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations--Forest Products Operations--Industry Overview and Selected
Operational Data." Common grade redwood lumber, historically MGI's largest
volume product, has many of the same aesthetic and structural qualities of
redwood uppers, but has some knots, sapwood and a coarser grain. Such lumber is
commonly used for construction purposes, including outdoor structures such as
decks, hot tubs and fencing.

      Douglas-fir lumber is used primarily for new construction and some
decorative purposes and is widely recognized for its strength, hard surface and
attractive appearance. Douglas-fir is grown commercially along the west coast of
North America and in Chile and New Zealand. Upper grade Douglas-fir lumber is
derived primarily from old growth Douglas-fir timber and is used principally in
finished carpentry applications. Common grade Douglas-fir lumber is used for a
variety of general construction purposes and is largely interchangeable with
common grades of other whitewood lumber.

      MGI does not have any significant contractual relationships with third
parties relating to the purchase of logs. During 2003, MGI purchased
approximately 8.6 million board feet of logs from third parties. Palco produces
softwood chips from the wood residue from its milling operations. These chips
are sold to third parties for the production of wood pulp and paper products.
Subject principally to economic feasibility, Palco also produces and sells to
third parties wood chips from hardwood trees.

   BACKLOG AND SEASONALITY

      MGI's backlog of sales orders at December 31, 2003 was $35.2 million, of
which it is estimated that $12.8 million will be shipped in the first quarter of
2004. The sales backlog at December 31, 2002, was $42.7 million, of which $13.5
million was shipped in the first quarter of 2003. MGI has historically
experienced lower first quarter sales due largely to the general decline in
construction-related activity during the winter months. As a consequence, MGI's
results in any one quarter are not necessarily indicative of results to be
expected for the full year. See "--Regulatory and Environmental Factors" below
and Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Forest Products
Operations--Industry Overview and Selected Operational Data."

   MARKETING

      The housing, construction and remodeling markets are the primary markets
for MGI's lumber products. MGI's goal is to maintain a wide distribution of its
products geographically. MGI's accounts are primarily wholesale, followed by
industrial end users, manufacturers, retailers and exporters. Upper grades of
redwood and Douglas-fir lumber are sold throughout the entire United States, as
well as to export markets. Common grades of redwood lumber are sold principally
west of the Mississippi River, with California accounting for approximately 79%
of common redwood sales in 2003. Common grades of Douglas-fir lumber are sold
primarily in California. In 2003, MGI's largest three customers accounted for
approximately 10%, 7% and 5%, respectively, of MGI's total net lumber sales.
Exports of lumber accounted for approximately 3% of MGI's total net lumber sales
in 2003. MGI markets its products through its own sales staff which focuses
primarily on domestic sales.

      MGI actively follows trends in the housing, construction and remodeling
markets in order to maintain an appropriate level of inventory and assortment of
products. Due to its high quality products, strong brand recognition,
competitive prices and long history, MGI believes it has a strong degree of
customer loyalty.

   COMPETITION

      MGI's lumber is sold in highly competitive markets. Competition is
generally based upon a combination of price, service, product availability and
product quality. MGI's products compete not only with other wood products but
with metals, masonry, plastic and other construction materials made from
non-renewable resources. The level of demand for MGI's products is dependent on
such broad factors as overall economic conditions, interest rates and
demographic trends. In addition, competitive considerations, such as total
industry production and competitors' pricing, as well as the price of other
construction products, affect the sales prices for MGI's lumber products.
Competition in the common grade redwood and Douglas-fir lumber market is
intense, with MGI competing with numerous large and small lumber producers. MGI
primarily competes with the northern California mills of Simpson, Redwood Empire
and Mendocino Redwood.

   EMPLOYEES

      As of March 1, 2004, MGI had approximately 920 employees.

   RELATIONSHIP WITH SCOTIA LLC

      Scotia LLC's foresters, wildlife and fisheries biologists, geologists,
botanists and other personnel are responsible for providing a number of forest
stewardship techniques, including protecting the timber located on the Scotia
LLC Timberlands from forest fires, erosion, insects and other damage, overseeing
reforestation activities and monitoring environmental and regulatory compliance.
Scotia LLC's personnel are also responsible for preparing THPs and updating the
information contained in the GIS. See "--Harvesting Practices" above for a
description of the GIS updating process and the THP preparation process.

      Scotia LLC and Palco are parties to several agreements, including a master
purchase agreement (the "MASTER PURCHASE AGREEMENT") and a services agreement
(the "SERVICES AGREEMENT"), relating to the conduct of their operations. The
Master Purchase Agreement governs the sale to Palco by Scotia LLC of logs
harvested from the Scotia LLC Timber. Under the Services Agreement, Palco
provides operational, management and related services to Scotia LLC with respect
to the Scotia LLC Timberlands. Scotia LLC and Palco are also parties to
agreements providing for reciprocal rights of ingress and egress through their
respective properties, the indemnification of Scotia LLC by Palco for
environmental liabilities incurred in connection with the Scotia LLC
Timberlands, and the provision of services by Scotia LLC to Palco.

   REGULATORY AND ENVIRONMENTAL FACTORS

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

      General
      Palco's business is subject to the Environmental Plans and a variety of
California and federal laws and regulations dealing with timber harvesting,
threatened and endangered species and habitat for such species, and air and
water quality. Compliance with such laws and regulations also plays a
significant role in Palco's business. The California Forest Practice Act (the
"FOREST PRACTICE ACT") and related regulations adopted by the California Board
of Forestry and Fire Protection (the "BOF") set forth detailed requirements for
the conduct of timber harvesting operations in California. These requirements
include the obligation of timber companies to obtain regulatory approval of
detailed THPs containing information with respect to areas proposed to be
harvested. See "--Harvesting Practices" above. California law also requires
large timberland owners, including Palco, to demonstrate that their proposed
timber operations constitute the maximum sustainable production of their
timberlands over time. See "--Timber and Timberlands" above. The federal
Endangered Species Act (the "ESA") and California Endangered Species Act (the
"CESA") provide in general for the protection and conservation of specifically
listed wildlife and plants. These laws generally prohibit the take of certain
species, except for incidental take pursuant to otherwise lawful activities
which do not jeopardize the continued existence of the affected species and
which are made in accordance with an approved habitat conservation plan and
related incidental take permits. A habitat conservation plan, among other
things, specifies measures to minimize and mitigate the potential impact of the
incidental take of species and to monitor the effects of the activities covered
by the plan. Palco is also subject to the California Environmental Quality Act
(the "CEQA"), which provides for protection of the state's air and water quality
and wildlife, and the California Porter-Cologne Water Quality Control Act and
federal Clean Water Act (the "CWA"), which require that Palco conduct its
operations so as to reasonably protect the water quality of nearby rivers and
streams. Compliance with such laws, regulations and judicial and administrative
interpretations, together with other regulatory and environmental matters, have
resulted in restrictions on the scope and timing of Palco's timber operations
(such as recent actions of the regional water board and its staff--see "--Water
Quality" below), increased operational costs, and engendered litigation and
other challenges to its operations.

      The Environmental Plans
      The Environmental Plans, consisting of the HCP and the SYP, were approved
by the federal and state governments upon the consummation of the Headwaters
Agreement. In connection with approval of the Environmental Plans, incidental
take permits (the "PERMITS") were issued with respect to certain threatened,
endangered and other species found on the timberlands covered by the
Environmental Plans. The Permits were to cover the 50-year term of the HCP and
allow incidental take of 17 different species covered by the HCP, including nine
species which are found on the Palco Timberlands that have been listed under the
ESA and/or the CESA (see Item 3. "Legal Proceedings--Forest Products Litigation"
for the status of two lawsuits pursuant to which a California state trial court
has invalidated the SYP and the California Permits). The agreements which
implement the Environmental Plans also provide for various remedies (including
the issuance of written stop orders and liquidated damages) in the event of a
breach by the Palco Companies of these agreements or the Environmental Plans.

      Under the HCP, harvesting activities are prohibited or restricted on
certain areas of the Palco Timberlands. Some of these restrictions continue for
the entire 50-year term of the HCP. For example, several areas (consisting of
substantial quantities of timber, including old growth redwood and Douglas-fir
timber) are designated as habitat conservation areas for the marbled murrelet, a
coastal seabird, and certain other species. Harvesting in certain other areas of
the Palco Timberlands is currently prohibited while these areas are evaluated
for the potential risk of landslide. Further, additional areas alongside streams
have been designated as buffers, in which harvesting is prohibited or
restricted, to protect aquatic and riparian habitat. Restrictions on harvest in
streamside buffers and potential landslide prone acres may be adjusted up or
down, subject to certain minimum and maximum buffers, based upon the ongoing
watershed analysis process described below. The adaptive management process
described below may also be used to modify most of these restrictions.

      The first analysis of a watershed, Freshwater, was released in June 2001.
This analysis was used by the Palco Companies and the government agencies to
develop proposed harvesting prescriptions. Prescriptions for the Van Duzen
watershed were approved in January 2004. Prescriptions for a third watershed
(Lower Eel - Eel Delta) were approved in March 2004. The Freshwater, Van Duzen
and Lower Eel prescriptions each resulted in a reduction in the size of the
streamside buffers set forth in the Environmental Plans and also provide for
geologic reviews in order to conduct any harvesting activities on potential
landslide-prone areas. This effectively reduced both the size and operational
restrictions in respect of landslide-prone areas. At least one additional
watershed analysis study is expected to be completed in 2004. The HCP required
the Palco Companies, together with the government agencies, to establish a
schedule resulting in completion of the initial watershed analysis process for
all covered lands within five years. However, due largely to the number of
agencies involved and the depth and complexity of the analyses, the process has
thus far proven to require more time than originally anticipated. Accordingly,
the Palco Companies have been working with the government agencies to establish
an appropriate timeline and to streamline the process for implementation of
watershed analysis on the remaining portions of Palco Timberlands to ensure that
such studies are time and cost efficient, and that such studies continue to
provide scientific results necessary to evaluate potential changes to the
harvesting restrictions on those lands. Palco expects to shortly receive an
extension of the five-year deadline.

      The HCP imposes certain restrictions on the use of roads on the
timberlands covered by the HCP during several months of the year and during
periods of wet weather. However, Palco has conducted, and expects to be able to
continue to conduct, some harvesting during these periods. An adaptive
management change approved in 2003 for the road restrictions has improved
Palco's ability to construct and use its roads in ways that are consistent with
the operational needs of the Palco Companies. The HCP also requires that 75
miles of roads be stormproofed (i.e., reconstructed to reduce sediment
generation) on an annual basis and that certain other roads must be improved or
repaired. The nature of this work requires that it be performed in the dry
periods of the year. To date, over 415 miles of roads have been stormproofed.

      The HCP contains an adaptive management provision, which both the state
and federal governments have clarified will be implemented on a timely and
efficient basis, and in a manner which will be both biologically and
economically sound. This provision allows the Palco Companies to propose changes
to many of the HCP prescriptions based on, among other things, economic
considerations. The regulatory agencies have also clarified that in applying
this adaptive management provision, to the extent the changes proposed do not
result in the jeopardy of a particular species, the regulatory agencies will
consider the practicality of the suggested changes, including the cost and
economic feasibility and viability. The Palco Companies and the agencies have
implemented various adaptive management changes related to wildlife and rare
plants, and other changes relating to roads and streamside buffers. These
adaptive management changes have increased Palco's ability to conduct harvesting
operations and/or reduce operating costs while still meeting the obligations of
the Environmental Plans.

      Water Quality
      Under the CWA, the Environmental Protection Agency (the "EPA") is required
to establish total maximum daily load limits ("TMDLS") in water courses that
have been declared to be "water quality impaired." The EPA and the North Coast
Regional Water Quality Control Board ("NORTH COAST WATER BOARD") are in the
process of establishing TMDLs for many northern California rivers and certain of
their tributaries, including nine water courses that flow within the Palco
Timberlands. The Company expects this process to continue into 2010. In December
1999, the EPA issued a report dealing with TMDLs on two of the nine water
courses. The agency indicated that the requirements under the HCP would
significantly address the sediment issues that resulted in TMDL requirements for
these water courses. The North Coast Water Board has begun the process of
establishing the TMDL requirements applicable to two other water courses on the
Palco Timberlands, with a targeted completion of spring 2005 for these two water
courses. Palco's scientists are actively working with North Coast Water Board
staff to ensure these TMDLs recognize and incorporate the environmental
protection measures of the HCP. The final TMDL requirements applicable to the
Palco Timberlands may require aquatic protection measures that are different
from or in addition to those in the HCP or that result from the prescriptions to
be developed pursuant to the watershed analysis process provided for in the HCP.

      The North Coast Water Board has issued orders for Palco's Elk River and
Freshwater watersheds requiring the Palco Companies to submit "Reports of Waste
Discharge" in order to conduct winter harvesting activities in these two
watersheds. After consideration of these reports, the North Coast Water Board
imposed requirements on the Palco Companies to implement additional mitigation
and erosion control practices in these watersheds for the 2002-2003 and
2003-2004 winter operating periods. The North Coast Water Board is requiring
that new watershed waste discharge requirements be developed for the Elk River
and Freshwater watersheds. The North Coast Water Board has also specified that
until these new requirements are developed, Palco must apply additional
mitigation and erosion control practices in these two watersheds and three
additional watersheds (Bear, Jordan and Stitz Creek). Palco and the North Coast
Water Board are currently in discussions to determine what these measures will
be. The requirements imposed to date by the North Coast Water Board have
modestly increased operating costs; additional requirements imposed in the
future could further increase costs and cause delays in THP approvals or lower
harvest levels. In addition, the North Coast Water Board has issued a clean up
and abatement order (the "ELK RIVER ORDER") for the Elk River watershed, which
is aimed at addressing existing sediment production sites through clean up
actions. The North Coast Water Board has also initiated the process which could
result in similar orders for the Freshwater and Bear Creek watersheds, and is
contemplating similar actions for the Jordan and Stitz Creek watersheds. The Elk
River Order, as well as additional orders in respect of the other watersheds
(should they be issued), could result in significant costs to Palco beginning in
2004 and extending over a number of years. The Palco Companies' appeal of the
Elk River Order to the State Water Resources Control Board (the "STATE WATER
BOARD") was denied. Palco is in the process of appealing the decision of the
State Water Board in state court. Palco is not able to readily move its
harvesting activities between watersheds due to, among other things, historic
harvest patterns, adjacency restrictions, and the age classes of trees.

      In October 2003, California enacted Senate Bill 810, which provides
regional water quality control boards with additional authority related to the
approval of THPs. Under this law, which became effective on January 1, 2004, a
THP "may not be approved if the appropriate regional water quality control board
finds, based on substantial evidence, that the timber operations proposed in the
plan will result in a discharge into a watercourse that has been classified as
impaired due to sediment...that causes or contributes, to a violation of the
regional water quality control plan." The Company is uncertain of the
operational and financial effects which will ultimately result from Senate Bill
810; however, because substantially all rivers and waterbodies on the Palco
Timberlands are classified as impaired, implementation of this law could result
in delays in obtaining approval of THPs, lower harvest levels and increased
costs and additional protection measures beyond those contained in the HCP. See
also Item 3. "Legal Proceedings--Forest Products Litigation" for a description
of the THP No. 520 lawsuit.

      Impact of Future Legislation
      Laws, regulations and related judicial decisions and administrative
interpretations dealing with MGI's business are subject to change and new laws
and regulations are frequently introduced concerning the California timber
industry. From time to time, bills are introduced in the California legislature
and the U.S. Congress which relate to the business of MGI, including the
protection and acquisition of old growth and other timberlands, threatened and
endangered species, environmental protection, air and water quality and the
restriction, regulation and administration of timber harvesting practices. In
addition to existing and possible new or modified statutory enactments,
regulatory requirements and administrative and legal actions, the California
timber industry remains subject to potential California or local ballot
initiatives, and federal and California judicial decisions which could affect
timber harvesting practices. It is not possible to assess the effect of such
future legislative, judicial and administrative developments on MGI or its
business.

      Timber Operators License
      In order to conduct logging operations, road building, stormproofing and
certain other activities, a company must obtain a Timber Operator's License from
the CDF. In December 2003, Palco was granted a Timber Operator's License for
2004-2005.

REAL ESTATE OPERATIONS

   GENERAL

      The Company, principally through its wholly owned subsidiaries, invests in
and develops residential and commercial real estate primarily in Puerto Rico,
Arizona, California, and Texas. Real estate properties and receivables as of
December 31, 2003 are as follows:

                                                                                                     BOOK VALUE AS
                                                                                                    OF DECEMBER 31,
                                                                                                         2003
                                                                                                   ----------------
                                                                                                     (IN MILLIONS)
Palmas del Mar (Puerto Rico):
   Undeveloped land and parcels held for sale.................................      1,183  acres   $          31.9
   Property, plant and equipment, receivables and other, net..................                                10.4
                                                                                                   ----------------
      Total...................................................................                                42.3
   Resort operations - Palmas Country Club(1).................................                                26.8
                                                                                                    --------------
        Total.................................................................                                69.1
                                                                                                   ----------------
Fountain Hills (Arizona):
   Residential, commercial and industrial developed lots......................         45  lots                3.9
   Undeveloped residential land...............................................        937  acres              11.0
   Property, plant, equipment and receivables, net............................                                 1.4
                                                                                                   ----------------
      Total...................................................................                                16.3
                                                                                                   ----------------
Mirada (California):
   Residential developed lots and lots under development......................         61  lots               23.7
   Undeveloped land...........................................................         57  acres              10.3
   Property, plant, equipment and receivables, net............................                                 0.8
                                                                                                   ----------------
      Total...................................................................                                34.8
                                                                                                   ----------------
Commercial lease properties:
   Property, plant and equipment, net:
      Lake Pointe Plaza (Texas)...............................................                               118.2
      Cooper Cameron building (Texas).........................................                                31.3
      Motel 6 facilities (10 states)..........................................                                49.6
      Other...................................................................                                 3.3
                                                                                                   ----------------
        Total.................................................................                               202.4
                                                                                                   ----------------
Other, principally receivables................................................                                 4.7
                                                                                                   ----------------
        Total real estate properties and receivables..........................                     $         327.3
                                                                                                   ================
---------------

(1)      Palmas Country Club operations include two 18-hole golf courses, a 20
         court tennis facility, a member clubhouse, and a beach club. Amounts
         shown are net of accumulated depreciation.


                                                                                                          BOOK VALUE AS
                                                                                                          OF DECEMBER 31,
                                                                                                               2003
                                                                                                         ---------------
                                                                                                          (IN MILLIONS)
Joint Ventures:
   FireRock, LLC(1):
      Residential developed lots and lots under development...................          52   lots        $          3.9
      Golf course, clubhouse and other club facilities........................                                     16.5
      Other property, plant and equipment, net................................                                      3.6
                                                                                                         ---------------
        Total.................................................................                           $         24.0
                                                                                                         ===============
      Investment in FireRock, LLC.............................................                           $          6.1
                                                                                                         ===============
------------------

(1) 50% owned.




      Revenues from real estate operations were as follows (see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Real Estate Operations" for additional
details on 2003, 2002 and 2001 results):


                                                                                                 YEARS ENDED
                                                                                                 DECEMBER 31,
                                                                                          -------------------------
                                                                                              2003         2002
                                                                                          -----------  ------------

Palmas del Mar:
   Real estate sales....................................................................  $     16.3   $      14.2
   Commercial, resort operations and other..............................................         8.2          11.1
                                                                                          -----------  ------------
      Total.............................................................................        24.5          25.3
                                                                                          -----------  ------------
Fountain Hills:
   Real estate sales....................................................................        19.3           8.7
   Commercial operations and other......................................................         4.0           3.7
                                                                                          -----------  ------------
      Total.............................................................................        23.3          12.4
                                                                                          -----------  ------------
Mirada:
   Real estate sales....................................................................         5.3           0.2
   Commercial operations and other......................................................         0.3             -
                                                                                          -----------  ------------
      Total.............................................................................         5.6           0.2
                                                                                          -----------  ------------
Commercial lease properties:
   Lake Pointe Plaza....................................................................         8.6           8.6
   Cooper Cameron building..............................................................         2.3           0.3
   Motel 6 facilities...................................................................         4.8           0.4
   Other................................................................................         0.2            -
                                                                                          -----------  ------------
          Total.........................................................................        15.9           9.3
                                                                                          -----------  ------------
Other:
   Real estate sales....................................................................         8.8           1.5
   Commercial operations and other......................................................         0.2           0.2
                                                                                          -----------  ------------
      Total.............................................................................         9.0           1.7
                                                                                          -----------  ------------
        Total...........................................................................  $     78.3   $      48.9
                                                                                          ===========  ============

FireRock, LLC(1):
   Real estate sales....................................................................  $     14.2   $      16.4
   Golf course operations ..............................................................         2.5           2.5
                                                                                          -----------  ------------
      Total.............................................................................  $     16.7   $      18.9
                                                                                          ===========  ============
-----------------

(1) 50% owned.

   PALMAS DEL MAR

      Palmas del Mar, a master-planned residential community and resort located
on the southeastern coast of Puerto Rico near Humacao ("PALMAS"), was acquired
by a subsidiary of the Company in 1984. Originally over 2,700 acres, Palmas now
has approximately 1,180 acres of undeveloped land remaining. The Company
conducts its operations at Palmas through Palmas del Mar Properties, Inc.
("PDMPI") and PDMPI's subsidiaries. PDMPI is planning the development and/or
sale of certain of the remaining acreage at Palmas. PDMPI is also considering
various alternatives to accelerate sales of its remaining acreage as well as
disposition of other assets. Resort operations include a timeshare operation and
a country club with two golf courses and tennis and beach club facilities.
Certain other amenities, including a hotel, marina, equestrian center and
various restaurants, are owned and operated by third parties.

   FOUNTAIN HILLS

      In 1968, a subsidiary of the Company purchased and began developing
approximately 12,100 acres of real property at Fountain Hills, Arizona, which is
located near Phoenix and adjacent to Scottsdale, Arizona. The year-round
population of Fountain Hills is over 21,000. Development of Fountain Hills is
substantially complete, and the Company is planning the sale or development of
the remaining acreage. Future sales are expected to consist mainly of fully
developed lots. The principal undeveloped acreage is comprised of Eagle's Nest,
a 506-acre custom lot development planned to include 245 lots, and Adero Canyon,
a 431-acre custom lot development planned to include 171 lots. The Company has
formulated its development plans with respect to these projects and arranged
financing in respect of the Eagle's Nest project. Financing of the Adero Canyon
development will be accomplished either through new or existing credit
facilities or joint venture arrangements. The local utility which supplies water
to the Fountain Hills project has received notice from the Arizona Department of
Water Resources that the demand for water in the utility's service area exceeds
certain statutory requirements. As a result, development of the Eagle's Nest
project has been delayed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Trends" for further information regarding
the status of this matter.

      In 1994, a subsidiary of the Company entered into a joint venture to
develop a 950-acre area in Fountain Hills known as SunRidge Canyon. Lot sales
concluded in 2002 and in December 2003, the Company sold its 50% interest in the
joint venture to the other participant for $1.0 million, resulting in a gain of
$0.8 million.

      In 1998, a subsidiary of the Company entered into and holds a 50% interest
in a joint venture to develop an 808 acre area in Fountain Hills known as
FireRock Country Club. The development is a residential, golf-oriented, upscale
master-planned community consisting of three phases of custom lots, three
multifamily parcels and a private country club. The club's championship-level
private 18-hole golf course opened in 2000. The multifamily parcels were sold in
2001 and 2002. Construction of the custom lot portion of the project is
virtually complete, and sell-out of the lots is nearing completion.

   MIRADA

      In 1991, a subsidiary of the Company acquired Mirada, a 220-acre luxury
resort-residential project located in Rancho Mirage, California. Mirada is a
master-planned community in the Santa Rosa Mountains, 650 feet above the
Coachella Valley floor. Three of the six parcels within the project have been
developed, one of which is the first phase of a custom lot subdivision of 46
estate lots. The Lodge at Rancho Mirage, formerly the Ritz-Carlton Rancho Mirage
Hotel, which is owned and operated by a third party, was developed on the second
parcel. The third parcel is a recently completed custom lot subdivision
comprised of 63 estate lots. The three remaining parcels encompass approximately
57 acres. Under a development agreement with the City of Rancho Mirage which
extends until 2011, this acreage may be developed with a variety of residential
and commercial uses. The Company has obtained final regulatory and environmental
approvals for development of all three of its remaining parcels within Mirada
and is formulating plans for development and/or marketing of these parcels.

   COMMERCIAL LEASE PROPERTIES

      In June 2001, subsidiaries of the Company acquired Lake Pointe Plaza, an
office complex located in Sugar Land, Texas, for a purchase price of $131.3
million. The transaction was financed by the subsidiaries through the issuance
of $117.3 million of non-recourse notes and the balance from a cash payment of
$14.0 million. The property was acquired subject to two leases to existing
tenants. All of the remaining space, representing a majority of the premises,
was simultaneously leased to an affiliate of the seller. The office complex is
fully leased for a period of 20 years under these three leases. See Note 4 for
further information.

      In November 2002, a subsidiary of the Company acquired the Cooper Cameron
building, an office building located in Houston, Texas, for a purchase price of
$32.7 million. The transaction was financed by the subsidiary through a cash
payment of $3.0 million and the issuance of $29.7 million in non-recourse notes.
At the time of the acquisition, the subsidiary simultaneously leased the
property back to the seller for a period of 22 years. See Note 4 for further
information.

      In December 2002, a subsidiary of the Company, acquired two business
trusts which own a portfolio of sixteen motel properties located in ten
different states. The purchase price consisted of a cash payment of $3.5
million. The properties secure certain non-recourse notes with an outstanding
principal balance of $49.4 million. The properties were acquired subject to an
existing lease agreement under which the properties are fully leased through
April 2019, and under which all obligations are guaranteed by the parent company
of the current tenant. See Note 4 for further information.

   MARKETING

      The Company is engaged in marketing and sales programs of varying
magnitudes at its real estate developments. The Company intends to continue
selling undeveloped acreage and semi-developed parcels, generally to builders
and developers, and fully developed lots to individuals and builders. All sales
are made directly to purchasers through the Company's wholly owned brokerage
operations and its marketing personnel, as well as through independent
contractors such as real estate brokers who are compensated by means of
customary real estate brokerage commissions. The Company may also continue to
enter into joint ventures with third parties similar to those entered into in
connection with the SunRidge Canyon and FireRock Country Club developments.

   COMPETITION AND REGULATION AND OTHER INDUSTRY FACTORS

      There is intense competition among companies in the real estate investment
and development business. Sales and payments on real estate sales obligations
depend, in part, on available financing and/or disposable income and, therefore,
are affected by changes in general economic conditions and other factors. The
real estate development and commercial real estate businesses are subject to
other risks such as shifts in population, fluctuations in the real estate
market, and unpredictable changes in the desirability of residential, commercial
and industrial areas. The resort and time-share business of Palmas competes with
similar businesses in the Caribbean, Florida and other vacation/holiday
destinations. The golfing operation at the FireRock Country Club development
competes with similar businesses in the areas in and surrounding Phoenix,
Arizona.

      The Company's real estate operations are subject to comprehensive federal,
state and local regulation. Applicable statutes and regulations may require
disclosure of certain information concerning real estate developments and credit
policies of the Company and its subsidiaries. Periodic approval is required from
various agencies in connection with the design of developments, the nature and
extent of improvements, construction activity, land use, zoning, and numerous
other matters. Failure to obtain such approval, or periodic renewal thereof,
could adversely affect the real estate development and marketing operations of
the Company and its subsidiaries. See "--General--Fountain Hills" above. Various
jurisdictions also require inspection of properties by appropriate authorities,
approval of sales literature, disclosure to purchasers of specific information,
bonding for property improvements, approval of real estate contract forms and
delivery to purchasers of a report describing the property.

   EMPLOYEES

      As of March 1, 2004, the Company's real estate operations had
approximately 70 employees.

RACING OPERATIONS

   GENERAL

      SHRP, Ltd. owns and operates Sam Houston Race Park, a Texas Class 1 horse
racing facility located within the greater Houston metropolitan area and Valley
Race Park, a greyhound racing facility located in Harlingen, Texas. In January
2004, a subsidiary of the Company applied to the Texas Racing Commission (the
"RACING COMMISSION") for an additional license to construct and operate a Class
2 horse racing facility in Laredo, Texas. The review process is only in the
preliminary stages, and there can be no assurance that the Company will obtain
this additional license as, among other things, there is a competing applicant.

   RACING OPERATIONS AND FACILITIES

      Sam Houston Race Park and Valley Race Park offer pari-mutuel wagering on
live thoroughbred, quarter horse and greyhound racing during meets approved by
the Racing Commission on a yearly basis and on simulcast horse and greyhound
racing throughout the year. Under the Texas Racing Act and related regulations
(collectively, the "RACING ACT"), commission revenues for both facilities are a
designated portion of the pari-mutuel handle. Revenues are also earned on live
and simulcast racing as both a guest and host track (i.e. both facilities
receive broadcasts of live racing conducted from other racetracks under various
guest simulcast agreements and broadcast live racing conducted at Sam Houston
Race Park and Valley Race Park to other race tracks and off track wagering sites
under various host simulcast agreements). Sam Houston Race Park and Valley Race
Park also derive revenues from food and beverages sales, admission and parking
fees, group sales, and advertising sales.

   REGULATION OF RACING OPERATIONS

      The ownership and operation of horse and greyhound racetracks in Texas are
subject to significant regulation by the Racing Commission under the Racing Act.
The Racing Act provides, among other things, for the allocation of wagering
proceeds among betting participants, purses, racetracks, the state of Texas and
for other purposes, and empowers the Racing Commission to license and regulate
substantially all aspects of horse and greyhound racing in the state. The Racing
Commission must approve the number of live race days that may be offered each
year, as well as all simulcast agreements. Class 1 horse racetracks in Texas are
entitled to conduct at least seventeen weeks of live racing for each breed of
horses (thoroughbreds and quarter horses), while greyhound tracks are entitled
to conduct live racing nearly year round.

   MARKETING AND COMPETITION

      SHRP, Ltd.'s management believes that the majority of Sam Houston Race
Park's patrons reside within a 25-mile radius, which includes most of the
greater Houston metropolitan area, and that a secondary market of occasional
patrons exists outside the 25-mile radius but within a 50-mile radius of the
facility. Sam Houston Race Park uses a number of marketing strategies in an
attempt to reach these people and make them more frequent visitors to Sam
Houston Race Park. These strategies include newspaper, television, radio and
direct mail advertising to develop awareness, and conducting promotions such as
giveaways and contests to increase customer traffic. Valley Race Park employs
similar strategies to attract patrons. Both race parks also rent out facilities
and grounds for group events, which are often unrelated to racing but which
increase revenues and expose the facility to potential customers. Sam Houston
Race Park had 127 days of live racing during 2003, and currently has 169 days of
live racing scheduled for 2004 (the extra days in 2004 were added to accommodate
requests from the racing industry to alleviate 2004 scheduling issues at the two
other Texas Class 1 horse tracks). Valley Race Park had 129 live racing
performances (over 110 days) during 2003, and currently has 130 live racing
performances (over 92 days) scheduled for 2004.

      Sam Houston Race Park competes with other forms of wagering and
entertainment, including a Louisiana "racino" (horse or dog tracks with slot
machines or other forms of gaming) located approximately 120 miles from Houston,
increasing use of the Internet for horse wagering and general gaming, casinos
located approximately 140 miles from Houston, a greyhound racetrack located 55
miles away, a wide range of sporting events and other entertainment activities
in the Houston area, the Texas State Lottery, and charitable bingo. Live racing
also faces increasing competitive pressure from simulcast signals broadcast by
racinos, which are able to offer larger purses and competitive fields. Sam
Houston Race Park could in the future also compete with other forms of gambling
in Texas, including casino gambling on Indian reservations or otherwise. While
Sam Houston Race Park believes that the location of Sam Houston Race Park is a
competitive advantage over the other more distant gaming ventures mentioned
above, the most significant challenges for Sam Houston Race Park are to maintain
its customer base in spite of the above competitive pressures and to develop and
educate new racing fans in a market where pari-mutuel wagering had been absent
from the 1930's to 1994. Other competitive factors faced by Sam Houston Race
Park include the allocation of sufficient live race days by the Racing
Commission and attraction of a sufficient number and quality of race horses to
run at Sam Houston Race Park, particularly in view of the larger purses able to
be offered by racinos. Competitive factors faced by Valley Race Park include the
Texas State Lottery, charitable bingo and Internet-based gaming, as well as the
attraction of sufficient greyhounds to run live racing, along with the ability
of Valley Race Park to market its simulcast signal due to its brief live racing
season.

      The Texas legislature, which convenes its regular session every other
year, considered a variety of alternatives during the January-June 2003 session
to address a projected budget shortfall, including enhancing state revenues
through additional forms of gaming such as video lottery terminals at existing
horse and dog racing tracks, gaming on Indian reservations, keno, and full
casinos. While the Texas legislature did not enact any of this legislation, the
Company, in conjunction with the Texas racing industry, intends to continue
pursuing legislation to expand the form of gaming available at horse and dog
racing tracks (including at any special legislative session which might be
held). No assurance can be given that these efforts will be successful.

   EMPLOYEES

      As of March 1, 2004, the Company's racing operations had approximately 550
year-round employees and approximately 200 seasonal employees.

KAISER ALUMINUM

   GENERAL AND REORGANIZATION PROCEEDINGS

      The Company owns approximately 62% of Kaiser, which operates in several
principal aspects of the aluminum industry--the mining of bauxite, the refining
of bauxite into alumina, the production of primary aluminum from alumina, and
the manufacture of fabricated (including semi-fabricated) aluminum products.
Kaiser, its principal operating subsidiary, Kaiser Aluminum & Chemical
Corporation ("KACC"), and a number of KACC's subsidiaries (collectively, the
"DEBTORS") have filed for reorganization under Chapter 11 of the U.S. Bankruptcy
Code (the "CASES"). The Cases are being jointly administered, with the Debtors
managing their businesses in the ordinary course as debtors-in- possession
subject to the control and supervision of the Bankruptcy Court (the "BANKRUPTCY
COURT"). See Note 12 for additional information regarding the status of the
Debtors' reorganization proceedings.

      The Company and its subsidiary, MAXXAM Group Holdings Inc. ("MGHI"),
collectively own 50,000,000 shares of the common stock of Kaiser (the "KAISER
SHARES"). See Note 12 for the description of an agreement which the Company and
MGHI have with Kaiser regarding disposition of the Kaiser Shares. The Debtors
have indicated that they believe that the equity of Kaiser's stockholders,
including the Company, will likely be cancelled without consideration.

   MISCELLANEOUS

      For further information concerning Kaiser, see Item 3. "Legal
Proceedings--Kaiser Litigation," Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of Operations--
Consolidated Operations--Deconsolidation of Kaiser," and Note 12.

SEGMENT INFORMATION

      See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations" and Note 3 for additional
information regarding revenues, income or loss, and total assets of the
Company's three segments, as well as revenues from the principal products
offered by each.

EMPLOYEES

      At March 1, 2004, MAXXAM and its subsidiaries had approximately 1,770
year-round and seasonal employees (excluding those employed by Kaiser), none of
whom are covered by a collective bargaining agreement.

ITEM 2.         PROPERTIES

      For information concerning the principal properties of the Company, see
Item 1. "Business."


ITEM 3.         LEGAL PROCEEDINGS

GENERAL

      Several sections in this Item contain statements which constitute
"forward-looking statements" within the meaning of the PSLRA. See this Item and
Item 1. "Business--General" for cautionary information with respect to such
forward- looking statements.

      The following describes certain legal proceedings in which the Company or
its subsidiaries are involved. The Company and certain of its subsidiaries are
also involved in various claims, lawsuits and other proceedings not discussed
herein which relate to a wide variety of matters. Uncertainties are inherent in
the final outcome of those and the below-described matters, and it is presently
impossible to determine the actual costs that ultimately may be incurred.

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

MAXXAM INC. LITIGATION

      This section describes certain legal proceedings in which MAXXAM Inc. (and
in some instances, certain of its subsidiaries) is involved. The term "Company,"
as used in this section, refers to MAXXAM Inc., except where reference is made
to the Company's consolidated financial position, results of operations or
liquidity.

   USAT MATTERS

      On December 26, 1995, the United States Department of Treasury's Office of
Thrift Supervision ("OTS") initiated a formal administrative proceeding (the
"OTS ACTION") against the Company and others alleging, among other things,
misconduct by the Company and certain of its affiliated persons (collectively,
the "RESPONDENTS") and others with respect to the failure of United Savings
Association of Texas ("USAT"). The OTS sought damages ranging from $326.6
million to $821.3 million under various theories. Following 110 days of
proceedings before an administrative law judge during 1997-1999, and over two
years of post-trial briefing, on September 12, 2001, the administrative law
judge issued a recommended decision in favor of the Respondents on each claim
made by the OTS. On October 17, 2002, the OTS action was settled for $0.2
million and with no admission of wrongdoing on the part of the Respondents. The
Respondents also agreed to accept for three years certain restrictions with
respect to insured financial institutions (including not becoming a controlling
shareholder or otherwise serving as an institution-affiliated party). The
Company does not believe that these restrictions are significant as it has no
present or contemplated intention to engage in any of these activities.

      On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC")
filed a civil action entitled Federal Deposit Insurance Corporation, as manager
of the FSLIC Resolution Fund v. Charles E. Hurwitz (the "FDIC ACTION") in the
U.S. District Court for the Southern District of Texas (No. H-95-3956). The
original complaint was against Mr. Charles E. Hurwitz (Chairman and Chief
Executive Officer of the Company) and alleged damages in excess of $250.0
million based on the allegation that Mr. Hurwitz was a controlling shareholder,
de facto senior officer and director of USAT, and was involved in certain
decisions which contributed to the insolvency of USAT. The FDIC action has been
dismissed as a result of the settlement of the OTS action. This dismissal does
not affect the motion for sanctions described in the following paragraph.

      On May 31, 2000, the Respondents filed a counterclaim to the FDIC action
in the U.S. District Court in Houston, Texas (No. H95-3956). On November 8,
2002, the Respondents filed an amended counterclaim and an amended motion for
sanctions (collectively, the "SANCTIONS MOTION"). The Sanctions Motion states
that the FDIC illegally paid the OTS to bring claims against the Respondents and
that the FDIC illegally sued for an improper purpose. The Respondents are
seeking as a sanction to be made whole for the attorneys' fees they have paid
(plus interest) in connection with the OTS and FDIC actions. As of December 31,
2003, such fees were in excess of $40.0 million. The Respondents are pursuing
this claim vigorously.

      In September 1997, the Company filed suit against a group of its insurers
after unsuccessful negotiations with certain of the insurers regarding coverage,
under the terms of certain directors and officers liability policies, of
expenses incurred in connection with the OTS and FDIC actions. The insurers
requested arbitration and as a result the lawsuit was dismissed in April 1998.
Following binding arbitration, the arbitration panel in February 2003 awarded
the Company $6.5 million plus interest. The matter was subsequently settled for
$8.0 million.

      On January 16, 2001, an action was filed against the Company, Federated
Development Company (the predecessor of a principal shareholder of the Company;
"FEDERATED") and certain of the Company's directors in the Court of Delaware
Chancery Court entitled Alan Russell Kahn v. Federated Development Co., MAXXAM
Inc., et al., Civil Action 18623NC (the "KAHN LAWSUIT"). The plaintiff purports
to bring this action as a stockholder of the Company derivatively on behalf of
the Company. The lawsuit concerns the OTS and FDIC actions, and the Company's
advancement of fees and expenses on behalf of Federated and certain of the
Company's directors in connection with these actions. It alleges that the
defendants have breached their fiduciary duties to the Company, and have wasted
corporate assets, by allowing the Company to bear all of the costs and expenses
of Federated and certain of the Company's directors related to the OTS and FDIC
actions. The plaintiff seeks to require Federated and certain of the Company's
directors to reimburse the Company for all costs and expenses incurred by the
Company in connection with the OTS and FDIC actions, and to enjoin the Company
from advancing to Federated or certain of the Company's directors any further
funds for costs or expenses associated with these actions. The parties to the
Kahn lawsuit have agreed to an indefinite extension of the defendants'
obligations to respond to the plaintiffs' claims. Although it is impossible to
assess the ultimate outcome of the Kahn lawsuit, the Company believes that the
resolution of this matter should not result in a material adverse effect on its
consolidated financial position, results of operations or liquidity.

FOREST PRODUCTS LITIGATION

      A California state court has invalidated the SYP in connection with two
lawsuits filed against the Palco Companies and described below, which decision
has been appealed. Other pending lawsuits could affect Palco's ability to
implement the HCP, implement certain of Palco's approved THPs, or carry out
certain other operations, as discussed below. One such lawsuit was resolved
during 2003 (see below). Certain of the remaining pending cases are described
below.

      In March 1999, 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. (the
"EPIC-SYP/PERMITS LAWSUIT") was filed in Superior Court in Humboldt County,
California (No. CV-990445). This action alleged, among other things, various
violations of the CESA and the CEQA, 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
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 (the "USWA
LAWSUIT") was filed in Superior Court in Humboldt County, California (No.
CV-990452) challenging the validity and legality of the SYP. The
EPIC-SYP/Permits and USWA lawsuits were consolidated for trial. On October 31,
2003, the Court entered a judgment invalidating the SYP and the California
Permits due to several deficiencies in agency procedures and the failure of
Palco to submit a complete and comprehensible SYP. The Court's decision,
however, allowed for harvesting on THPs which rely on the SYP and were approved
prior to July 23, 2003. The short-term effect of the ruling was to preclude
approval, under the SYP, of a small number of THPs which were under review but
had not been approved, and a minor reduction in 2003 harvesting that had been
expected from these specific THPs. As a result of this case, Palco has since
October 2002 been obtaining review and approval of new THPs under a procedure
provided for in the forest practice rules that does not depend upon the SYP and
the California Permits, and expects to follow this procedure for the foreseeable
future. On November 19, 2003, Palco appealed the October 31, 2003, decision. On
January 29, 2004, the plaintiffs in these lawsuits filed claims against the
defendants totaling $5.8 million for reimbursement of attorneys fees and other
expenses incurred in connection with these matters.

      In July 2001, an action entitled Environmental Protection Information
Center v. The Pacific Lumber Company, Scotia Pacific Company LLC (No. C01-2821)
was filed in the U.S. District Court for the Northern District of California
(the "BEAR CREEK LAWSUIT") and later amended to add the EPA as a defendant. The
lawsuit alleges that Palco's harvesting and other forestry activities under
certain of its approved THPs will result in discharges of pollutants in
violation of the CWA. The plaintiff asserts that the CWA requires the defendants
to obtain a permit from the North Coast Water Board before beginning timber
harvesting and road construction activities and is seeking to enjoin these
activities until such permit has been obtained. The plaintiff also seeks civil
penalties of up to $27,500 per day for the defendant's alleged continued
violation of the CWA. On October 14, 2003, in connection with certain motions
that had been filed, the Court upheld the validity of an EPA regulation which
exempts harvesting and other forestry activities from certain discharge
requirements. Both state and federal agencies, along with Palco and other timber
companies, have relied upon this regulation for more than 25 years. However, the
Court interpreted the regulation in such a way as to narrow the forestry
operations which are exempted, thereby limiting the regulation's applicability
and subjecting culverts and ditches to permit requirements. This ruling has
widespread implications for the timber industry in the United States. The case
is not yet final as the trial has not yet been held, and there are many
unresolved issues involving interpretation of the Court's decision and its
application to actual operations. Should the decision ultimately become final
and held to apply to Palco's timber operations, it may have some or all of the
following effects: impose additional permitting requirements, delay approvals of
THPs, increase harvesting costs, and add water protection measures beyond those
contained in the HCP. Nonetheless, it is not likely that civil penalties will be
awarded for operations that occurred prior to the Court's decision due to the
historical reliance by timber companies on the regulation and the Company's
belief that the requirements under the HCP are adequate to ensure that sediment
and pollutants from its harvesting activities will not reach levels harmful to
the environment. While the impact of a conclusion to this case that upholds the
October 14, 2003, ruling may be adverse, the Company does not believe that such
an outcome would have a material adverse impact on the Company's consolidated
financial condition, results of operations or liquidity. Nevertheless, due to
the numerous ways in which the Court's interpretation of the regulation could be
applied to actual operations, there can be no assurance that this will be the
case. Palco has filed a motion requesting that the Court permit an intermediate
appeal of its October 14 ruling.

      On November 20, 2002, an action entitled Humboldt Watershed Council, et al
v. North Coast Regional Water Quality Control Board, et al. (No. CPF02-502062)
(the "HWC 2002 LAWSUIT"), naming Palco as real party in interest, was filed in
the Superior Court for the County of San Francisco. The suit sought to enjoin
Palco's timber operations in the Elk River and Freshwater watersheds until and
unless the regional and state water boards imposed on those operations waste
discharge requirements that met standards demanded by the plaintiff. In August
2003, this case was dismissed by the Court at the request of the plaintiff.

      On November 20, 2002, two similar actions entitled Alan Cook, et al. v.
Gary Clark, et al. (the "COOK ACTION") and Steve Cave, et al. v. Gary Clark, et
al. (the "CAVE ACTION") were filed in the Humboldt County Superior Court (No.'s
DR020718 and DR 020719, respectively), which also name 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 Palco Timberlands), resulting in personal injury and damage to the
plaintiffs' properties. Plaintiffs further allege that in order to have THPs
approved in the affected areas, the defendants engaged in certain unfair
business practices. The plaintiffs seek, among other things, compensatory and
exemplary damages, injunctive relief, and appointment of a receiver to ensure
that the watershed is restored. The Cave action contains similar allegations and
requests similar relief with respect to the Elk River watershed (a portion of
which is contained on the Palco Timberlands). 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 a
civil suit entitled The People of the State of California v. The Pacific Lumber
Company, Scotia Pacific Holding Company and Salmon Creek Corporation in the
Superior Court of Humboldt County (No. DR030070) (the "HUMBOLDT DA ACTION"). The
suit was filed under California's unfair competition law and alleges that the
Palco Companies used certain unfair business practices in connection with
completion of the Headwaters Agreement, and that this resulted in the Palco
Companies being able to harvest significantly more trees under the Environmental
Plans than would have otherwise been the case. The suit seeks a variety of
remedies including a civil penalty of $2,500 for each additional tree that has
been or will be harvested due to this alleged increase in harvest, as well as
restitution and an injunction in respect of the additional timber harvesting
allegedly being conducted. A hearing on Palco's motions for sanctions and
dismissal of the case was held on July 28, 2003, and Palco is awaiting the
Court's decision. The Company believes that this suit is without merit; however,
there can be no assurance that the Palco Companies will prevail or that an
adverse outcome would not be material to the Company's consolidated financial
position, results of operations and/or liquidity.

      On December 17, 2003, an action entitled Humboldt Watershed Council, et
al. v. North Coast Regional Water Quality Board, et al. (the "HWC 2003
LAWSUIT"), naming Palco as real party in interest, was filed in the Humboldt
County Superior Court (No. CV030961). The plaintiffs allege that the North Coast
Water Board should have required waste discharge reports in respect of all
timber harvesting activities in the Freshwater and Elk River watersheds, and are
seeking to have this requirement imposed on Palco. The Company does not believe
that the resolution of this action should result in a material adverse effect on
its financial condition, results of operations or liquidity.

      On November 16, 2001, Palco filed a case entitled The Pacific Lumber
Company, et al. v. California State Water Resources Control Board (No. DR010860)
in the Humboldt County Superior Court (the "THP NO. 520 LAWSUIT") alleging that
the State Water Board had no legal authority to impose mitigation measures that
were requested by the staff of the North Coast Water Board during the THP review
process and rejected by the CDF. When the staff of the North Coast Water Board
attempted to impose these mitigation measures in spite of the CDF's decision,
Palco appealed to the State Water Board, which imposed certain of the requested
mitigation measures and rejected others. Palco filed the THP No. 520 lawsuit
challenging the State Water Board's decision, and in January 2003, the Superior
Court granted Palco's request for an order invalidating the imposition of these
additional measures. The State Water Board appealed this decision and on March
18, 2004 the appellate court reversed the decision of the Superior Court. The
appellate court's decision could result in increased demands by the regional and
state water boards and their staffs to impose controls and limitations upon
Palco's timber harvesting beyond those provided for by the Environmental Plans
or could provide additional regulatory powers to the regional and state water
boards and their staffs beyond those provided in Senate Bill 810. Palco intends
to seek review of the appellate court's decision by the California Supreme
Court.

KAISER LITIGATION

      See Note 12 for a discussion of Kaiser's reorganization proceedings.
Kaiser is a defendant in a number of lawsuits, some of which involve claims of
multiple persons, in which the plaintiffs allege that certain of their injuries
were caused by, among other things, exposure to asbestos during, and as a result
of, their employment or association with Kaiser or exposure to products
containing asbestos produced or sold by Kaiser. A variety of other lawsuits and
claims are pending against Kaiser. Generally, claims against Kaiser arising from
actions or omissions prior to the dates on which the Debtors filed their Cases
will be settled in connection with Kaiser's plan of reorganization.

OTHER MATTERS

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


ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Not applicable.
                                     PART II

ITEM 5.         MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS

      The Company's common stock, $.50 par value ("COMMON STOCK"), is traded on
the American Stock Exchange. The stock symbol is MXM. The following table sets
forth, for the calendar periods indicated, the high and low sales prices per
share of the Company's Common Stock as reported on the American Stock Exchange
Consolidated Composite Tape.


                                                                            2003                      2002
                                                                   ------------------------------------------------
                                                                      HIGH         LOW          HIGH        LOW
                                                                   ----------  -----------   ----------  ----------

   First quarter...................................................     $   9.61     $   8.20      $ 17.80    $   9.40
   Second quarter..................................................        15.31         8.84        13.35       10.50
   Third quarter...................................................        16.16        12.90        11.05        7.00
   Fourth quarter..................................................        19.73        14.65        10.90        6.04

      The following table sets forth the number of record holders of each class
of publicly owned securities of the Company at March 1, 2004:


                                                                                                      NUMBER OF
                                                                                                       RECORD
                                         TITLE OF CLASS                                               HOLDERS
------------------------------------------------------------------------------------------------     -----------

Common Stock....................................................................................           2,860
Class A $.05 Non-cumulative Participating Convertible Preferred Stock...........................              20

      The Company has not declared any cash dividends on its capital stock and
has no present intention to do so.




ITEM 6.           SELECTED FINANCIAL DATA

      The following summary of consolidated financial information for each of
the five years ended December 31, 2003 is not reported upon herein by
independent public accountants and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto which are contained in
Item 8 herein.


                                                                                      YEARS ENDED DECEMBER 31,
                                                                       ------------------------------------------------------
                                                                          2003      2002(1)     2001        2000       1999
                                                                       ---------- ---------- ---------- ----------- ---------
                                                                         (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS:
   Net sales.....................................................      $   336.6  $   468.5  $ 2,039.8  $  2,468.9  $2,369.9
   Income (loss) before income taxes and minority interests(2)...          (10.6)     (95.3)      41.6        66.6      94.5
   Net income (loss).............................................          (11.6)     (84.0)    (456.0)       33.9      73.6

CONSOLIDATED BALANCE SHEET AT END OF PERIOD:
   Total assets..................................................        1,060.8    1,107.3    3,935.3     4,504.0   4,393.1
   Long-term debt, less current maturities.......................          953.5      982.3    1,706.8     1,882.8   1,956.8
   Stockholders' equity (deficit) (3)............................         (601.9)    (582.5)    (475.6)       49.1      27.8

PER SHARE INFORMATION:
   Basic net income (loss) per share.............................      $   (1.79) $  (12.87) $  (69.28) $     4.47  $   9.58
                                                                       ========== ========== ========== =========== =========
   Diluted net income (loss) per share...........................      $   (1.79) $  (12.87) $  (69.28) $     4.47  $   9.49
                                                                        ========== ========== ========== =========== =========

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


(1)  Results for the Company's aluminum operations have been in cluded for the
     period from January 1, 2002, through February 11, 2002 and  for the three
     years ended December 31, 2001. Such results have been excl uded for the
     subsequent periods. See Note 1 for a discussion of the Cha pter 11 filings
     by the Debtors (which commenced February 12, 2002).
(2)  Income (loss) before income taxes and minority interests i ncludes the
     following items:
     o  2003 includes a gain on the sale of acreage in the Griz zly Creek grove
        of $16.8 million (see Note 4), $8.0 million of insuranc e recoveries
        related to the OTS and FDIC actions (see Note 13), as w ell as a $1.4
        million charge to write-down the Company's casino-relat ed assets to
        estimated fair value (see Note 3).
     o  2002 includes other items of $0.5 million attributable  to Kaiser for the
        period from January 1, 2002, through February 11, 2002  (see Note 3).
     o  2001 includes the following related to Kaiser: additional valuation
        allowances related to Kaiser's deferred tax assets of $505.4 million
        (see Note 10), business interruption insurance recoveries of $36.6
        million (see Note 3), a gain of $163.6 million on the sale of an
        approximate 8.3% interest in QAL (see Note 4), a charge of $57.2 million
        for asbestos-related claims, and net gains on power sales and several
        other non-recurring items totaling $163.6 million (see Note 3). 2001
        results include the following related to forest products: a gain of
        $16.7 million on the sale of acreage in the Grizzly Creek grove (see
        Note 4).
     o  2000 includes the following related to Kaiser: estimated business
        interruption insurance recoveries of $110.0 million and several other
        non-recurring items totaling $48.9 million (see Note 3). 2000 results
        include the following related to forest products: a gain on the sale of
        the Owl Creek grove of $60.0 million.
     o  1999 includes the following related to Kaiser: a gain on the involuntary
        conversion at its Gramercy, Louisiana, facility of $85.0 million, a
        charge of $53.2 million for asbestos-related claims and a gain of $50.5
        million on the sale of AKW L.P. 1999 results include the following
        related to forest products: a gain of $239.8 million on the sale of the
        Headwaters Timberlands.
(3)  MAXXAM Inc. did not declare or pay any cash dividends during the five year
     period ended December 31, 2003.




ITEM 7.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS

      The following should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto appearing in Item 8.

RESULTS OF OPERATIONS

      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See Item 1. "Business--General" and
below for cautionary information with respect to such forward-looking
statements.

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

      CONSOLIDATED OPERATIONS

      Selected Operational Data

      The following table presents selected financial information for the years
ended December 31, 2003, 2002 and 2001 for the Company's consolidated
operations.

                                                                                       YEARS ENDED DECEMBER 31,
                                                                                   --------------------------------
                                                                                      2003       2002       2001
                                                                                   ---------  ---------  ----------
                                                                                       (IN MILLIONS OF DOLLARS)

Net sales.........................................................................    336.6   $  468.5   $ 2,039.8
Costs and expenses................................................................   (312.7)    (484.5)   (1,994.4)
Gains on sales of timberlands and other assets....................................     17.5        0.9        16.7
                                                                                   ---------  ---------  ----------
Operating income (loss)...........................................................     41.4      (15.1)       62.1
Other income (expenses), net......................................................     25.0       12.6       170.2
Interest expense..................................................................    (77.0)     (92.8)     (190.7)
                                                                                   ---------  ---------  ----------
Income (loss) before income taxes and minority interest........................... $  (10.6)  $  (95.3)  $    41.6
                                                                                   =========  =========  ==========

Revenues by segment as a percentage of total:
   Forest products................................................................     61.9 %     42.6 %     9.1 %
   Real estate....................................................................     23.3 %     10.4 %     3.4 %
   Racing.........................................................................     14.8 %     11.2 %     2.6 %
   Aluminum.......................................................................        - %     35.8 %    84.9 %
                                                                                    ---------- ---------- ---------
                                                                                      100.0 %    100.0 %    100.0%
                                                                                    ========== ========== =========

      Deconsolidation of Kaiser
      Under generally accepted accounting principles for entities consolidated
through voting interests, consolidation is generally required for investments of
more than 50% of the outstanding voting stock of an investee, except when
control is not held by the majority owner. Under these rules, legal
reorganization or bankruptcy represent conditions which can preclude
consolidation in instances where control rests with the bankruptcy court, rather
than the majority owner. As a result of Kaiser's filing for bankruptcy (as
discussed in Note 1), Kaiser's financial results were deconsolidated beginning
February 12, 2002, and the Company began reporting its investment in Kaiser
using the cost method, under which the investment is reflected as a single
amount on the Company's balance sheet of $(516.2) million, and the recording of
earnings or losses from Kaiser was discontinued after February 11, 2002. Since
Kaiser's results are no longer consolidated and the Company believes that it is
not probable that it will be obligated to fund losses related to its investment
in Kaiser, any adjustments reflected in Kaiser's financial statements subsequent
to February 12, 2002 (relating to the recoverability and classification of
recorded asset amounts and classification of liabilities or the effects on
existing stockholders' deficit as well as adjustments made to Kaiser's financial
information for loss contingencies and other matters), are not expected to
affect the Company's financial results.

      The following condensed pro forma financial data reflects the results of
operations of the Company, excluding Kaiser, for the periods presented (in
millions, except share data).




                                                                                   YEARS ENDED DECEMBER 31,
                                                                          -----------------------------------------
                                                                              2003          2002           2001
                                                                          ------------  ------------  -------------

Net sales...............................................................  $     336.6   $     301.0   $      307.1
Costs and expenses......................................................       (295.2)       (292.5)        (315.9)
                                                                          ------------  ------------  -------------
Operating income (loss).................................................         41.4           8.5           (8.8)
Other income (expenses), net............................................         25.0          20.7           39.4
Interest expense........................................................        (77.0)        (80.2)         (81.7)
                                                                          ------------  ------------  -------------
Loss before income taxes and minority interests.........................        (10.6)        (51.0)         (51.1)
Income tax benefit......................................................         (1.0)         15.2           16.7
Minority interests......................................................            -           0.3              -
                                                                          ------------  ------------  -------------
Net loss................................................................  $     (11.6)  $     (35.5)  $      (34.4)
                                                                          ============  ============  =============

Basic and diluted net loss per share....................................  $     (1.79)  $     (5.45)  $      (5.22)

      See Notes 1 and 12 for further discussion of Kaiser's reorganization
proceedings and other information regarding the Company's investment in Kaiser.

      OVERVIEW OF CONSOLIDATED RESULTS OF OPERATIONS

      Net Sales
      Net sales for 2003 totaled $336.6 million, compared to $468.5 million in
2002. The decline is primarily attributable to the deconsolidation of Kaiser's
financial results beginning February 12, 2002, the date Kaiser filed for Chapter
11 reorganization. Net sales for 2002 included $167.5 million attributable to
Kaiser for the period from January 1, 2002 to February 11, 2002, whereas 2003
included none of Kaiser's financial results. Net sales for the Company's forest
products segment increased $9.1 million for 2003 versus 2002, reflecting
favorable trends in lumber prices, while net sales for the real estate segment
increased $29.4 million for 2003 as compared to 2002, primarily due to increased
sales of real estate acreage and commercial lots. Net sales for the Company's
racing segment declined by $2.9 million. Net sales declined to $468.5 million in
2002 from $2,039.8 million in 2001, primarily due to the deconsolidation of
Kaiser's financial results. The forest products segment's net sales increased
$14.1 million for 2002 over the prior year primarily due to larger volumes of
lumber shipments, while lower sales of real estate acreage and commercial lots
contributed to a $20.2 million decline in net sales for the real estate segment
for 2002 versus 2001.

      Operating Income (Loss)
      The Company recorded operating income of $41.4 million in 2003 compared to
an operating loss of $15.1 million in 2002. Operating income for the Company's
forest products segment increased $15.7 million for 2003, primarily due to $17.5
million in gains on sales of timberlands and other assets, while the real estate
segment's operating results improved from a loss of $0.2 million in 2002 to
income of $17.1 million in 2003 as a result of the increase in net sales
discussed above. Results for the racing segment declined from operating income
of $0.4 million in 2002 to an operating loss of $1.9 million in 2003. Kaiser
contributed $23.6 million to the consolidated operating loss for 2002. The
Company's consolidated operating loss of $15.1 million in 2002 reflected a
decline from operating income of $62.1 million in 2001, primarily due to
operating results for the Company's aluminum segment, which decreased from
operating income of $70.8 million in 2001 to an operating loss of $23.6 million
for the period from January 1, 2002 to February 11, 2002. Operating income
improved for the forest products segment as a result of the increase in net
sales discussed above as well as a decline in cost of sales. Results for the
real estate segment were negatively impacted by the decline in net sales
discussed above.

      Income (Loss) Before Income Taxes and Minority Interests
      The Company's consolidated loss before income taxes and minority interests
decreased by $84.7 million in 2003 compared to the prior year, principally due
to the improved operating results discussed above. In addition, the Company's
investment, interest and other income for 2003 includes income related to an
$8.0 million reimbursement from an insurer for certain costs incurred in
connection with the OTS and FDIC actions. Interest expense decreased $8.1
million in 2003 from the preceding year as a result of early extinguishment of
MGHI's Senior Secured Notes (the "MGHI NOTES"). Results decreased in 2002 as
compared to 2001 primarily due to the deconsolidation of Kaiser's financial
results. In addition, the Company had lower returns on investments in cash
equivalents and marketable securities in 2002 versus 2001 and lower earnings
from real estate joint ventures. Excluding results from Kaiser, improvements in
operating income contributed favorably to the loss before income taxes and
minority interests.

      FOREST PRODUCTS OPERATIONS

      Industry Overview and Selected Operational Data

      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and Item 1.
"Business--General" for cautionary information with respect to such
forward-looking statements.

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

      Regulatory and environmental matters play a significant role in the
Company's forest products operations. See Item 1. "Business - Forest Products
Operations - Regulatory and Environmental Matters" and Note 13 for a discussion
of these matters. Regulatory compliance and related litigation have caused and
may continue to cause delays in approval of THPs and delays in harvesting on
THPs once they are approved. This could result in a decline in harvest, an
increase in the cost of logging operations and increased costs related to timber
harvest litigation.

      As discussed in Item 1. "Business--Regulatory and Environmental
Factors--Water Quality," the North Coast Water Board is requiring Palco to apply
various waste discharge reporting, mitigation and erosion control requirements
in respect of timber harvesting activities in several of its watersheds, and may
impose additional measures in the future. The requirements imposed to date have
modestly increased operating costs; additional requirements imposed in the
future could further increase costs and cause delays in THP approvals or lower
harvest levels.

      Also discussed in Note 13 is the enactment of California Senate Bill 810,
which provides regional water quality control boards with additional authority
related to the approval of THPs. Implementation of this law could result in
delays in obtaining approvals of THPs, increased costs and additional water
protection measures beyond those contained in the HCP.

      Furthermore, there can be no assurance that certain other pending legal,
regulatory and environmental matters or future governmental regulations,
legislation or judicial or administrative decisions, adverse weather conditions,
or low lumber or log prices, will not have a material adverse effect on the
Company's financial position, results of operations or liquidity. See Item 1.
"Business--Forest Products Operations--Regulatory and Environmental Factors,"
Item 3. "Legal Proceedings" and Note 13 for further information regarding
regulatory and legislative matters and legal proceedings relating to the
Company's forest products operations.

      During 2001, comprehensive external and internal reviews were conducted of
Palco's business operations. These reviews were conducted in an effort to
identify ways in which Palco could operate on a more efficient and cost
effective basis. Based upon the results of these reviews, Palco implemented a
number of changes during the last quarter of 2001 and the first quarter of 2002,
including closing two of its four sawmills, eliminating certain of its
operations, including its company-staffed logging operations (now relying
exclusively on contract loggers) and its soil amendment and concrete block
activities, utilizing more efficient harvesting methods and adopting other cost
saving measures. Palco has continued to examine ways in which to achieve
additional cost savings. Subsequent to December 31, 2003, Palco opened a new
planer facility in Scotia and began construction on a $25.0 million sawmill
project in Scotia. Funds for this project will come from existing cash resources
and borrowings under Palco's new credit facility. See "--Financial Condition and
Investing and Financing Activities--Overview." As part of the project, the
equipment from Palco's Carlotta mill will be moved to the new mill in Scotia.
After this equipment is moved, the Carlotta mill will be permanently closed, and
management is considering alternative uses for the property. Further actions may
be taken during the next year as a result of Palco's continuing evaluation
process, and additional writedowns of certain assets may be required.

      The following table presents selected operational and financial
information for the years ended December 31, 2003, 2002 and 2001 for the
Company's forest products operations.


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                  ---------------------------------
                                                                                     2003       2002        2001
                                                                                  ---------- ----------  ----------
                                                                                       (IN MILLIONS OF DOLLARS,
                                                                                     EXCEPT SHIPMENTS AND PRICES)
Shipments:
   Lumber: (1)
      Redwood upper grades......................................................       26.4       27.0        16.2
      Redwood common grades.....................................................      215.8      224.3       165.0
      Douglas-fir upper grades..................................................        4.4        4.7         8.8
      Douglas-fir common grades.................................................       44.4       22.4        50.5
      Other.....................................................................        7.7        0.1         3.9
                                                                                  ---------- ----------  ----------
   Total lumber.................................................................      298.7      278.5       244.4
                                                                                  ========== ==========  ==========
   Cogeneration power (2).......................................................      163.5      152.4       128.2
                                                                                  ========== ==========  ==========
Average sales price:
   Lumber: (3)
      Redwood upper grades......................................................  $   1,275  $   1,317   $   1,770
      Redwood common grades.....................................................        601        544         577
      Douglas-fir upper grades..................................................      1,249      1,351       1,323
      Douglas-fir common grades.................................................        346        342         337
   Cogeneration power (4).......................................................         61         60          89
Net sales:
   Lumber, net of discount......................................................  $   184.0  $   170.4   $   152.2
   Logs.........................................................................        6.5       14.4        10.6
   Cogeneration power...........................................................       11.4        9.4        11.7
   Wood chips...................................................................        3.4        2.3         6.8
   Other........................................................................        3.2        2.9         4.0
                                                                                  ---------- ----------  ----------
      Total net sales ..........................................................  $   208.5  $   199.4   $   185.3
                                                                                  ========== ==========  ==========
Operating income (loss)(5)......................................................  $    34.5  $    18.8   $   (10.8)
                                                                                  ========== ==========  ==========
Loss before income taxes........................................................  $   (18.1) $   (33.5)  $   (59.6)
                                                                                  ========== ==========  ==========

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

(1)   Lumber shipments are expressed in millions of board feet.
(2)   Power deliveries are expressed in thousands of megawatts.
(3)   Dollars per thousand board feet.
(4)   Dollars per megawatt.
(5)   Operating income (loss) for 2003 and 2001 includes $16.8 million and $16.7
      million, respectively, of gains on the sales of timberlands in the Grizzly
      Creek grove. Operating loss for 2001 includes other charges totaling $8.2
      million described further in Note 3.

      Net Sales
      The forest products segment's net sales for 2003 increased compared to the
preceding year. Lumber sales increased by $13.6 million primarily as a result of
higher average sales prices of redwood common grade lumber. Although lumber
shipments were higher, this improvement was unfavorably impacted by a shift in
the mix of product from higher priced redwood and upper grade Douglas fir lumber
to lower priced common grade Douglas fir lumber. Net sales of logs to third
parties decreased $7.9 million or 55% in 2003. Sales of surplus power from
Palco's cogeneration power plant increased over the prior year due to increases
in both volume and prices.

      Net sales for 2002 increased over the prior year period primarily due to
increased shipments of redwood lumber. These improvements were offset in part by
lower shipments of Douglas-fir and lower average sales prices for redwood
lumber.

      Operating Income (Loss)
      The forest products segment's operating income of $34.5 million reflected
an increase of $15.7 million over 2002. Results for 2003 include a $16.8 million
gain on the sale of timberlands in the Grizzly Creek grove. Although gross
margins on sales of lumber increased, higher harvesting costs per unit limited
the improvement to $2.4 million. Gross margins from cogeneration power increased
$1.7 million, which was more than offset by a decline of $3.2 million on log
sales. Selling, general and administrative expenses increased $3.9 million,
primarily due to increases in salaries and benefits, severance costs, expenses
associated with a public relations campaign by Palco, and costs related to
various legal matters.

      The forest products segment had operating income for 2002 as compared to
an operating loss for 2001. In addition to the increase in net sales discussed
above, cost of sales and operations decreased from the prior year, resulting in
improved gross margins on lumber and log sales. The decline in cost of sales and
operations primarily reflects the benefits of cost saving and restructuring
measures taken in late 2001 and early 2002. Selling, general and administrative
expenses increased from the prior year, however, primarily as a result of an
increase in administrative, litigation and other expenses.

      Loss Before Income Taxes
      The loss before income taxes decreased $15.4 million in 2003 compared to
2002. The decrease was principally attributable to the increase in operating
income discussed above. Investment, interest and other income (expense) and
interest expense for 2003 were comparable to 2002.

      The loss before income taxes for 2002 decreased from the comparable prior
year period, primarily as a result of the improvement in operating results
discussed above.

   REAL ESTATE OPERATIONS

      Industry Overview and Selected Operational Data
      The Company, principally through its wholly owned subsidiaries, invests in
and develops residential and commercial real estate, primarily in Arizona,
California, Puerto Rico, and Texas. The following table presents selected
operational and financial information for the years ended December 31, 2003,
2002 and 2001, respectively, for the Company's real estate operations.


                                                                                   Years Ended December 31,
                                                                           ----------------------------------------
                                                                               2003         2002         2001
                                                                           -----------  ------------ ------------
                                                                                   (IN MILLIONS OF DOLLARS)
Net sales:
   Real estate:
      Fountain Hills.....................................................  $     19.3   $       8.7  $      33.6
      Mirada.............................................................         5.3           0.2            -
      Palmas.............................................................        16.3          14.2         11.7
      Other..............................................................         8.8           1.5          2.9
                                                                           -----------  ------------ ------------
        Total............................................................        49.7          24.6         48.2
                                                                           -----------  ------------ ------------

   Resort, commercial and other:
      Fountain Hills.....................................................         4.0           3.7          3.5
      Mirada.............................................................         0.3             -          0.2
      Palmas.............................................................         8.2          11.1         12.6
      Commercial lease properties........................................        15.9           9.3          4.4
      Other..............................................................         0.2           0.2          0.2
                                                                           -----------  ------------ ------------
        Total............................................................        28.6          24.3         20.9
                                                                           -----------  ------------ ------------

   Total net sales.......................................................  $     78.3   $      48.9  $      69.1
                                                                           ===========  ============ ============

Operating income (loss):
   Fountain Hills........................................................  $      9.8   $       0.1  $      19.3
   Mirada................................................................           -          (1.9)        (1.7)
   Palmas................................................................        (5.4)         (2.1)        (8.8)
   Commercial lease properties...........................................         5.9           3.4          1.6
   Other.................................................................         6.8           0.3          0.5
                                                                           -----------  ------------ ------------
      Total operating income (loss)......................................  $     17.1   $      (0.2) $      10.9
                                                                           ===========  ============ ============

Investment, interest and other income (expense), net:
   Equity in earnings from real estate joint ventures....................  $      0.7   $       2.5  $       5.5
   Other.................................................................         5.2           3.7          7.0
                                                                           -----------  ------------ ------------
                                                                           $      5.9   $       6.2  $      12.5
                                                                           ===========  ============ ============

Income (loss) before income taxes........................................  $      4.1   $      (7.2) $      14.8
                                                                           ===========  ============ ============


      Net Sales
      Net sales for the real estate segment include: revenues from sales of
developed lots, bulk acreage and other real property associated with the
Company's real estate developments; revenues from resort and other commercial
operations conducted at these real estate developments; and lease revenues from
a number of commercial properties.

      Net sales for the real estate segment increased $29.4 million or 60% in
2003 from the year ago period. Real estate sales at Fountain Hills increased
$10.6 million over 2002 to $19.3 million for 2003 due to an increase in acreage
and commercial lot sales, while revenues from lot sales at Mirada increased $5.1
million over the prior year to $5.3 million for 2003. The Company sold a parcel
of real estate in Lake Havasu, Arizona, for $8.8 million during 2003, which
contributed to the favorable trend in net sales. In addition, the Company's
commercial lease properties (several of which were acquired in the fourth
quarter of 2002) added sales of $15.9 million for an increase of $6.6 million
over the prior year. Real estate sales at Palmas increased slightly in 2003;
however, this was more than offset by a decline in resort and commercial
operations at Palmas, which was due in large part to the closing of the
Company's casino facility in March 2003 (see Note 3).

      Net sales decreased for 2002 versus 2001, primarily as a result of lower
real estate sales at Fountain Hills. Results for 2001 included $13.7 million for
the sale of a 354-acre parcel to the town of Fountain Hills. The decrease was
offset in part by higher real estate sales at Palmas, in addition to rental
income from the Company's commercial lease properties (primarily the Lake Pointe
Plaza office complex acquired in June 2001; see Note 4).

      Operating Income (Loss)
      Operating results for the real estate segment improved in 2003, largely
due to the increase in sales discussed above. Operating results for 2003 also
include a $1.4 million charge to recognize the impairment of Palmas' casino
assets related to the closure of a hotel which was owned and operated by a third
party from whom the casino leased space.

      The segment experienced an operating loss for 2002 as compared to
operating income for 2001, primarily due to the lower real estate sales at the
Company's Fountain Hills development project discussed above. This decline was
offset in part by a decrease in operating losses at Palmas, which experienced an
increase in real estate sales, and an increase in operating income from the Lake
Pointe Plaza office complex.

      Income (Loss) Before Income Taxes
      Income (loss) before income taxes increased $11.3 million in 2003 compared
to 2002, essentially due to the impact of the improved operating results
discussed above. Interest expense increased $5.7 million in 2003 compared to
2002, primarily due to increased borrowings used to fund the acquisition of
several commercial lease properties in late 2002. In addition, results for 2003
included a gain of approximately $0.8 million on the sale of the Company's
equity interest in the Sunridge Canyon real estate joint venture (see Note 7).

      The segment experienced a loss before income taxes for 2002 versus income
before income taxes in 2001 as a result of the decrease in operating income
discussed above, in addition to lower equity in earnings from the FireRock real
estate joint venture. In addition, 2001 results included a gain of approximately
$3.0 million from insurance recoveries on property damage at Palmas resulting
from a 1998 hurricane.

   RACING OPERATIONS

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

      The following table presents selected operational and financial
information for the years ended December 31, 2003, 2002 and 2001, respectively,
for the Company's racing operations.


                                                                                   Years Ended December 31,
                                                                           ----------------------------------------
                                                                               2003         2002         2001
                                                                           -----------  ------------ ------------
                                                                                   (IN MILLIONS OF DOLLARS)
Number of live race days:
   Sam Houston Race Park.................................................         127           126          128
   Valley Race Park......................................................         110           110          105

Handle:
   Sam Houston Race Park:
      On-track handle....................................................  $    134.2   $     146.3  $     145.5
      Off-track handle...................................................       173.4         188.9        190.0
                                                                           -----------  ------------ ------------
        Total............................................................  $    307.6   $     335.2  $     335.5
                                                                           ===========  ============ ============

   Valley Race Park:
      On-track handle....................................................  $     20.0   $      22.3  $      21.2
      Off-track handle...................................................         4.0           3.7          4.4
                                                                           -----------  ------------ ------------
        Total............................................................  $     24.0   $      26.0  $      25.6
                                                                           ===========  ============ ============

Net sales:
   Sam Houston Race Park:
      Gross pari-mutuel commissions......................................  $     34.5   $      37.3  $      37.0
      Other revenues.....................................................         9.4           8.9          9.2
                                                                           -----------  ------------ ------------
        Total............................................................        43.9          46.2         46.2
                                                                           -----------  ------------ ------------
   Valley Race Park:
      Gross pari-mutuel commissions......................................         4.7           5.2          5.1
      Other revenues.....................................................         1.2           1.3          1.4
                                                                           -----------  ------------ ------------
        Total............................................................         5.9           6.5          6.5
                                                                           -----------  ------------ ------------
   Total net sales.......................................................  $     49.8   $      52.7  $      52.7
                                                                           ===========  ============ ============

Operating income (loss):
   Sam Houston Race Park.................................................  $     (1.2)  $       0.7  $       1.2
   Valley Race Park......................................................        (0.7)         (0.3)        (0.3)
                                                                           -----------  ------------ ------------
      Total operating income ............................................  $     (1.9)  $       0.4  $       0.9
                                                                           ===========  ============ ============

Income (loss) before income taxes........................................  $     (1.7)  $       0.4  $       1.0
                                                                           ===========  ============ ============

      Net Sales
      Net sales for the Company's racing segment totaled $49.8 million for 2003,
a decrease of $2.9 million or 5.5% from the previous year. While the number of
live and simulcast race days for 2003 was comparable to 2002, the segment's
overall average daily attendance at both Sam Houston Race Park and Valley Race
Park declined for 2003. This negatively impacted pari-mutuel commissions.

      Net sales for the racing segment were unchanged for 2002 compared to 2001.
Although the segment experienced fewer live race days and lower average
attendance at Sam Houston Race Park, these declines were partially offset by
higher pari-mutuel commissions at Valley Race Park.

      Operating Income
      Operating results decreased by $2.3 million in 2003. The major reasons for
the decrease were the lower net sales discussed above, in addition to the impact
of a $1.1 million increase in operating expenses. The increase in operating
expenses was largely driven by an increase in selling, general and
administrative expenses including costs associated with legislative efforts.

      Operating income for the racing segment for 2002 decreased from 2001 due
to the decrease in net sales discussed above and an increase in cost of sales
and selling, general and administrative expenses.

      Income Before Income Taxes
      The decrease in income before income taxes for this segment for 2003 as
compared to 2002, as well as the decrease in income before income taxes for 2002
versus 2001, are both attributable to the decreases in operating income for the
respective periods discussed above.


   OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS


                                                                                      YEARS ENDED DECEMBER 31,
                                                                                  ---------------------------------
                                                                                     2003       2002        2001
                                                                                  ----------  ---------  ----------
                                                                                            (IN MILLIONS)

Operating loss..................................................................  $    (8.3)  $  (10.5)  $    (9.7)
Income (loss) before income taxes...............................................        5.1      (10.7)       (7.2)

      Operating Loss
      The operating losses represent corporate general and administrative
expenses that are not attributable to the Company's industry segments. The
decrease in the operating loss in 2003 versus 2002, as well as the increase in
the operating loss in 2002 versus 2001, was primarily due to certain general and
administrative expenses incurred in 2002 as a result of Kaiser's Chapter 11
filing (see Note 1). The operating loss for 2002 also included severance and
moving expenses incurred as a result of reduction in Corporate staff and office
space.

      Income (loss) Before Income Taxes
      Income (loss) before income taxes includes operating losses, investment,
interest and other income (expense) and interest expense, including amortization
of deferred financing costs, that are not attributable to the Company's industry
segments. Results for 2003 include income related to an $8.0 million
reimbursement from an insurer for certain costs incurred in connection with the
OTS and FDIC actions (see Note 13). Interest expense decreased $8.1 million from
the preceding year as a result of early extinguishment of the MGHI Notes. The
loss before income taxes increased in 2002 due to a decrease in earnings from
the investments described in Note 5, offset in part by a $3.6 million gain on
repurchases of the MGHI Notes and lower interest expense as a result of early
extinguishment of the MGHI Notes.

   PROVISION FOR INCOME TAXES

      The Company generated a loss before income taxes of $10.6 million for
2003; however, the Company has recorded no tax benefit associated with the loss
for the period. The provision for income taxes of $1.0 million reflected in the
Consolidated Statement of Operations consists principally of state and local
taxes. Each period, the Company evaluates the appropriate factors in determining
the realizability of the deferred tax assets attributable to losses and credits
generated in the current period and those being carried forward. These factors
are discussed further in Note 10. Based on this evaluation, the Company provided
full valuation allowances with respect to the deferred tax assets attributable
to losses and credits generated during 2003. These valuation allowances were in
addition to the valuation allowances which were provided in prior years.

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See this section and Item 1.
"Business--General" for cautionary information with respect to such
forward-looking statements.

   OVERVIEW

      The Company conducts its operations primarily through its subsidiaries.
Creditors of subsidiaries of the Company have priority with respect to the
assets and earnings of such subsidiaries over the claims of the creditors of the
Company. Certain of the Company's subsidiaries, principally Palco and Scotia
LLC, are restricted by their various debt instruments as to the amount of funds
that can be paid in the form of dividends or loaned to affiliates. Scotia LLC is
highly leveraged and has significant debt service requirements. In addition,
Palco's anticipated capital expenditures for investments in new sawmill
equipment will require cash from existing resources as well as Palco's new
credit facility (see "Forest Product Operations" below for further information
regarding Palco's new credit facility). "MAXXAM Parent" is used in this section
to refer to the Company on a stand-alone basis without its subsidiaries.

      The following table summarizes certain data related to financial condition
and to investing and financing activities of the Company and its subsidiaries.
As a result of the deconsolidation of Kaiser, the balances at December 31, 2002,
exclude amounts attributable to Kaiser. For comparison purposes, such amounts
have also been excluded from the selected information related to changes in cash
and cash equivalents for the years ended December 31, 2002 and 2001,
respectively.


                                       FOREST PRODUCTS
                                -----------------------------
                                 SCOTIA     PALCO                 REAL                           MAXXAM
                                  LLC     AND OTHER     MGI      ESTATE    RACING      MGHI      PARENT     TOTAL
                                --------  ----------   ------   --------   -------   --------  ----------  --------
                                                             (IN MILLIONS OF DOLLARS)
Debt and credit facilities
   (excluding intercompany
   notes)
Short-term borrowings and
   current maturities of long-
   term debt:
   December 31, 2003.........  $   17.6  $      0.2   $    -   $   10.7  $      -   $      -  $        -  $   28.5
   December 31, 2002.........      16.7         0.3        -       13.5         -          -           -      30.5

Long-term debt, excluding
   current maturities:
   December 31, 2003(1)......  $  713.9  $      0.3   $    -   $  238.8  $    0.5   $      -  $        -  $  953.5
   December 31, 2002.........     737.7         0.4        -      244.0       0.2          -           -     982.3


Revolving credit facilities:
   December 31, 2003:
   Facility commitment
      amounts ...............  $   58.5  $     47.5(2)$    -   $    4.5  $      -   $      -  $        -  $  110.5
      Borrowings.............         -           -        -          -         -          -           -        -
      Letters of credit......         -         0.3        -        3.1         -          -           -       3.4
      Unused and available
        credit...............      58.5        26.9        -        1.4         -          -           -      86.8

Cash, cash equivalents,
   marketable securities
   and other investments
December 31, 2003:
   Current amounts restricted
      for debt service.......  $   23.6  $        -   $    -   $    0.2  $      -   $      -  $        -  $   23.8
   Other current amounts.....       3.8        24.3      0.3        7.4       3.4          -        88.9     128.1
                               --------- -----------  -------  --------- ---------  --------- ----------- ---------
                                   27.4        24.3      0.3        7.6       3.4          -        88.9     151.9
                               --------- -----------  -------  --------- ---------  --------- ----------- ---------

   Long-term amounts
      restricted for debt
      service................      35.4           -        -        1.4         -          -           -      36.8
   Other long-term restricted
      amounts................         -         2.7        -        4.1         -          -           -       6.8
                               --------- -----------  -------  ---------   -------  --------- -----------  --------
                                   35.4         2.7        -        5.5         -          -           -      43.6
                               --------- -----------  -------  --------- ---------  --------- ----------- ---------
                               $   62.8  $     27.0   $  0.3   $   13.1  $    3.4   $      -  $     88.9  $  195.5
                               ========= ===========  =======  ========= =========  ========= =========== =========

December 31, 2002:
   Current amounts restricted
      for debt service.......  $   24.5  $        -   $    -   $    0.3  $      -   $      -  $        -  $   24.8
   Other current amounts.....       4.9        34.3      0.6        6.4       5.2        0.3        74.8     126.5
                               --------- -----------  -------  --------- ---------  --------- ----------- ---------
                                   29.4        34.3      0.6        6.7       5.2        0.3        74.8     151.3
                               --------- -----------  -------  --------- ---------  --------- ----------- ---------

   Long-term amounts
      restricted for debt
      service................  $   52.9  $        -   $    -   $    1.4  $      -   $      -  $        -  $   54.3
   Other long-term restricted
      amounts................        -          2.7        -        6.6         -          -           -       9.3
                               --------- -----------  -------  --------- ---------  --------- ----------- ---------
                                   52.9         2.7        -        8.0         -          -           -      63.6
                               --------- -----------  -------  --------- ---------  --------- ----------- ---------
                               $   82.3  $     37.0   $  0.6   $   14.7  $    5.2   $    0.3  $     74.8  $  214.9
                               ========= ===========  =======  ========= =========  ========= =========== =========
------------------

Table and Notes continued on next page


                                       FOREST PRODUCTS
                                -----------------------------
                                 SCOTIA     PALCO                 REAL                           MAXXAM
                                  LLC     AND OTHER     MGI      ESTATE    RACING      MGHI      PARENT     TOTAL
                                --------  ----------   ------   --------   -------   --------  ----------  --------
                                                             (IN MILLIONS OF DOLLARS)
Changes in cash and cash
      equivalents
Capital expenditures:
   December 31, 2003(3)......  $   7.7   $     11.4  $     -   $    3.5  $    1.0   $      -  $      0.2  $   23.8
   December 31, 2002(3)......      7.2          5.0        -       93.6       0.6          -         0.1     106.5
   December 31, 2001(3)......      6.2          7.2        -      133.9       2.0          -         0.7     150.0

Net proceeds from dispositions
   of property and investments:
   December 31, 2003(4)......  $  11.4   $     10.1  $     -   $    1.0  $      -   $      -  $        -  $   22.5
   December 31, 2002.........        -          2.0        -          -         -          -           -       2.0
   December 31, 2001(4)......      1.3         18.6        -          -         -          -           -      19.9

Borrowings (repayments) of
   debt and credit facilities,
   net of financing costs:
   December 31, 2003.........  $ (16.6)  $     (0.1) $     -   $   (8.5) $    0.3   $      -  $        -  $  (24.9)
   December 31, 2002.........    (15.0)       (18.7)       -       83.1       0.1      (84.6)          -     (35.1)
   December 31, 2001.........    (14.2)       (18.9)       -      126.9         -      (25.1)      (13.4)     55.3

Dividends and advances
   received (paid):
   December 31, 2003.........  $     -   $     (0.5) $   0.4   $  (12.0) $   (1.2)  $      -  $     13.3  $      -
   December 31, 2002(5)......    (29.4)        22.9     (2.5)       3.2      (3.6)       9.0         0.4         -
   December 31, 2001(5)......    (79.9)        86.2    (23.4)     (17.8)     (4.0)      17.1        21.8         -


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

(1)  The decrease in Scotia LLC's long-term debt between December 31, 2002, and
     December 31, 2003, was the result of principal payments on the Timber Notes
     of $16.5 million. In addition, Scotia LLC made principal payments on the
     Timber Notes of $14.8 million and $14.2 million in 2002 and 2001,
     respectively. The decrease in real estate long-term debt between 2002 and
     2003 was due primarily to payments of $3.7 million on the Lakepointe,
     Beltway, and Motel Notes (each as defined in Note 4), and payments on other
     real estate long-term debt totaling $1.5 million.
(2)  As a result of the Palco Credit Agreement entered into in January 2004
     (defined below) the commitment amount has been reduced from $47.5 million
     as of December 31, 2003, to $35.0 million.
(3)  Capital expenditures for Palco include $4.9 million for a new lumber planer
     and $1.3 million towards a new sawmill project in 2003. Capital
     expenditures and borrowings for the Real Estate segment for 2002 reflect
     the purchase of several commercial lease properties in the fourth quarter
     of 2002 (see Note 4). Capital expenditures and borrowings for the Real
     Estate segment for 2001 reflect the purchase of the Lake Pointe Plaza
     office complex (see Note 4).
(4)  Proceeds from dispositions of property and investments includes $8.2
     million and $10.0 million in 2003 for Scotia LLC and Palco, respectively,
     from the sale of acreage in the Grizzly Creek grove, and $1.3 million and
     $18.5 million in 2001 for Scotia LLC and Palco, respectively, from the sale
     of acreage in the Grizzly Creek grove.
(5)  In March 2002, Scotia LLC released $29.4 million from the SAR Account (as
     defined below) and distributed this amount to Palco. In 2001, $79.9 million
     of dividends were paid by Scotia LLC to Palco, $63.9 million of which was
     made using proceeds from the sale of Scotia LLC's Owl Creek grove. In
     addition to the $79.9 million of dividends from Scotia LLC, Palco received
     $9.3 million from MGI related to repayment of intercompany debt.

   MAXXAM PARENT AND MGHI

      The Company may from time to time purchase shares of its Common Stock on
national exchanges or in privately negotiated transactions. During the fourth
quarter and twelve months ended December 31, 2003, the Company purchased an
aggregate of 536,800 and 551,400 shares, respectively, of its Common Stock on
national exchanges.

      MAXXAM Parent and MGHI own the 50,000,000 Kaiser Shares, representing an
approximate 62% interest. As a result of the Cases, the value of Kaiser common
stock has declined substantially, and the market value of the Kaiser Shares
based on the price per share quoted at the close of business on March 19, 2004,
was $6.0 million. There can be no assurance that such value would be realized
should the Kaiser Shares be sold, and it is likely that the Company's ownership
interest in Kaiser will be cancelled without consideration. Disposition of the
Kaiser Shares is restricted under an agreement among Kaiser, MAXXAM Parent and
MGHI. See also Notes 1 and 12.

      MAXXAM Parent expects that its general and administrative costs, net of
cost reimbursements from subsidiaries will range from $7.0 million to $9.0
million for the next year. There can be no assurance, however, that MAXXAM
Parent's cash requirements for its corporate, general and administrative
expenses will not increase.

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

      MAXXAM Parent believes that its existing resources will be sufficient to
fund its working capital requirements for the next year. With respect to
long-term liquidity, MAXXAM Parent believes that its existing cash and cash
resources, together with distributions from the real estate and racing segments,
should be sufficient to meet its working capital requirements. However, there
can be no assurance that this will be the case.

   FOREST PRODUCTS OPERATIONS

      Substantially all of MGI's consolidated assets are owned by Palco, and a
significant portion of Palco's consolidated assets are owned by Scotia LLC. The
holders of the Timber Notes have priority over the claims of creditors of Palco
with respect to the assets and cash flows of Scotia LLC. Palco's credit facility
(discussed below) contains certain restrictive covenants which effectively
preclude the distribution of funds from Palco to MGI.

      The Scotia LLC Line of Credit allows Scotia LLC to borrow up to one year's
interest on the Timber Notes (the "SCOTIA LLC LINE OF CREDIT"). On June 20,
2003, the Scotia LLC Line of Credit was extended to July 7, 2006. At or near the
completion of such extension, Scotia LLC will request that the Scotia LLC Line
of Credit be extended for an additional period of not less than 364 days. If not
extended, Scotia LLC may draw upon the full amount available. The amount drawn
would be repayable in 12 semiannual installments on each note payment date
(after the payment of certain other items, including the Aggregate Minimum
Principal Amortization Amount, as defined, then due), commencing approximately
two and one-half years following the date of the draw. At December 31, 2003,
Scotia LLC could have borrowed a maximum of $58.5 million under the Scotia LLC
Line of Credit, and had no borrowings outstanding under the Scotia LLC Line of
Credit.

      On the note payment date in January 2003, Scotia LLC had $5.6 million set
aside in the note payment account to pay the $27.9 million of interest due (net
of $1.9 million of additional interest due in respect of Timber Notes held by
Scotia LLC). The funds available under the Scotia LLC Line of Credit were used
to pay the remaining amount of interest due. Scotia LLC repaid $12.1 million of
principal on the Timber Notes (an amount equal to Scheduled Amortization, as set
forth in the Timber Notes Indenture ("SCHEDULED AMORTIZATION"); see Note 9)
using funds held in the Scheduled Amortization Reserve Account, a reserve
account which was established to support principal payments on the Timber Notes
(the "SAR ACCOUNT").

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

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

      With respect to the note payment date in July 2004, Scotia LLC expects to
use the funds available under the Scotia LLC Line of Credit to pay the entire
$26.7 million of interest which will be due (net of $2.1 million of additional
interest which would be due in respect of Timber Notes held by Scotia LLC).
Scotia LLC expects to repay $4.6 million of principal on the Timber Notes (an
amount equal to Scheduled Amortization) using funds held in the SAR Account.

      In 2003, $5.4 million of funds from the SAR Account were used to
repurchase $6.4 million principal amount of Timber Notes, as permitted under the
Timber Notes Indenture, resulting in gains of $0.7 million (net of unamortized
deferred financing costs) on extinguishment of debt. In March 2004, $3.6 million
of funds from the SAR Account were used to repurchase $3.8 million principal
amount of Timber Notes, resulting in a small gain (net of unamortized deferred
financing costs) on extinguishment of debt.

      Due to its highly leveraged condition, Scotia LLC is more sensitive than
less leveraged companies to factors affecting its operations, including low log
prices, governmental regulation and litigation affecting its timber harvesting
practices (see "--Results of Operations--Forest Products Operations" above and
Note 13), and general economic conditions. Scotia LLC's cash flows from
operations are significantly impacted by harvest volumes and log prices. The
Master Purchase Agreement between Scotia LLC and Palco (see Item 1.
"Business--Forest Products Operations--Relationship with Scotia LLC")
contemplates that all sales of logs by Scotia LLC to Palco will be at fair
market value (based on stumpage prices) for each species and category of timber.
The Master Purchase Agreement provides that if the purchase price equals or
exceeds the "SBE Price" and a structuring price set forth in a schedule to the
Timber Notes Indenture, the purchase price is deemed to be at fair market value.
If the purchase price equals or exceeds the SBE Price, but is less than the
structuring price, then Scotia LLC is required to engage an independent forestry
consultant to confirm that the purchase price reflects fair market value.

      In January 2004, the State Board of Equalization adopted the new Harvest
Value Schedule for the first half of 2004. The prices published in that schedule
reflected a 12.7% increase in the SBE Price for small redwood logs and a 3.4%
decrease for small Douglas-fir logs from the prices published for the second
half of 2003.

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

      As discussed in Note 4, Palco and Scotia LLC received $10.0 million and
$8.2 million, respectively, in November 2003 from the sale of timberlands in the
Grizzly Creek grove. The proceeds received by Scotia LLC were used to pay down a
portion of the Scotia LLC Line of Credit.

      With respect to short-term liquidity, Scotia LLC believes that cash flows
from operations and funds available under the Scotia LLC Line of Credit (in
respect of interest payments) and the SAR Account (in respect of principal
payments), should provide sufficient funds to meet its working capital, capital
expenditures and debt service obligations through 2004; however, there can be no
assurance that this will be the case. With respect to long-term liquidity,
although Scotia LLC believes that cash flows from operations and funds available
under the Scotia LLC Line of Credit and the SAR Account should be adequate to
meet its working capital, capital expenditure and debt service obligations
unless log prices continue to improve there can be no assurance that this will
be the case. In addition, liquidity, capital resources and results of operations
will be adversely affected if harvest levels decline or costs increase as a
result of the various regulatory, environmental and litigation matters discussed
in "--Results of Operations--Forest Products Operations--Industry Overview and
Selected Operational Data" above and Note 13. See also Note 9 for further
information regarding the Timber Notes.

      At December 31, 2003, $0.3 million of letters of credit and no borrowings
were outstanding under Palco's prior revolving credit agreement. Unused
availability was limited to $24.4 million at December 31, 2003. On January 23,
2004, Palco entered into a new $35.0 million asset-based credit agreement with a
bank (the "PALCO CREDIT AGREEMENT"). This agreement provides revolving credit
for three years after which Palco may request a one-year extension. Borrowings
under the agreement bear interest at rates based upon (and at variable margins
above) LIBOR or the prime rate, and are secured by the substantial portion of
Palco's assets. At February 29, 2004, $12.0 million was outstanding under the
Palco Credit Agreement. In accordance with the agreement, Palco is required to
maintain borrowings of $12.0 million through February 12, 2005, Palco had $6.4
million of unused availability at February 29, 2004. Palco anticipates that with
respect to the first quarter of 2004, it will not meet certain quarterly
earnings thresholds required under the Palco Credit Agreement, and is therefore
seeking a waiver from the lender. The lender has preliminarily indicated that it
will grant such a waiver; however, there can be no assurance that this will be
the case.

      Capital expenditures were made during the past three years to improve
production efficiency and reduce operating costs. In February 2004, Palco
undertook a project to construct a new sawmill in Scotia, California. The
project is expected to cost $25.0 million with various phases scheduled for
completion from August 2004 through early 2005. Funds for this project will come
from existing cash resources and borrowings under the Palco Credit Agreement.
Palco believes that the new sawmill will reduce annual operating costs by at
least $20.0 million beginning in 2005. As part of the project, the equipment
from Palco's Carlotta mill will be moved to the new mill in Scotia. After this
equipment is moved, the Carlotta mill will be permanently closed, and management
is considering alternative uses for the property. Capital expenditures,
excluding expenditures for the new sawmill and for timberlands, are estimated to
be between $6.0 million and $8.0 million per year for the 2004 - 2005 period.
Palco and Scotia LLC may purchase additional timberlands from time to time as
appropriate opportunities arise.

      The Company estimates that funding requirements for pension benefits for
2004 will range from $1.6 million to $6.8 million. Palco's share of these
amounts ranges from $0.7 million to $4.4 million. Such funding requirements are
uncertain due to legislation currently pending in Congress.

      Palco will require funds available under the Palco Credit Agreement in
order to meet its working capital and capital expenditure requirements for the
next year. Palco's ability to meet such requirements could be adversely affected
should the lender, under the Palco Credit Agreement, not grant Palco the waiver
discussed above. Furthermore, Palco's cash flows from operations may be
adversely affected by diminished availability of logs from Scotia LLC, lower
lumber prices, adverse weather conditions, pending legal, regulatory and
environmental matters or increased funding requirements for its pension plan.
See "--Results of Operations--Forest Products Operations" above as well as Note
13 for further discussion of the regulatory, environmental and legal matters
affecting harvest levels.

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

   REAL ESTATE OPERATIONS

      One of the Company's development projects in Fountain Hills has been
delayed as a result of a local utility's current inability to demonstrate that
it has adequate water supplies, and this delay will have a somewhat negative
impact on cash flows for 2004. See "Trends--Real Estate Operations" below for
further discussion of this matter.

      In March 2003, the Company's casino facility at its Palmas del Mar
operation in Puerto Rico ceased operations due to the closure of a hotel which
was owned and operated by a third party from whom the casino leased adjacent
space. As discussed further in Note 3, the Company does not expect that it will
be able to lease space for its casino operations from the new hotel owner at
Palmas, and therefore does not expect cash flows from these operations in the
future. Net cash flows from the casino's operations for 2002 were approximately
$0.8 million. Furthermore, the Company expects that the new hotel owner will not
reopen the hotel until some time in late 2004 or 2005. PDMPI benefitted from the
revenues generated as a result of guests of the hotel using PDMPI's golf course
and other resort related assets, and the hotel's continued closure could
adversely affect the performance of PDMPI in other ways which are not able to be
quantified.

      Capital expenditures are expected to be approximately $2.0 million to $3.0
million in 2004. The Company expects that these expenditures will be funded by
existing cash and available credit facilities.

      The Company believes that the existing cash and credit facilities of its
real estate subsidiaries, excluding PDMPI, are sufficient to fund the working
capital and capital expenditure requirements of such subsidiaries for the next
year. With respect to the long-term liquidity of such subsidiaries, the Company
believes that their ability to generate cash from the sale of their existing
real estate, together with their ability to obtain financing and joint venture
partners, should provide sufficient funds to meet their working capital and
capital expenditure requirements. PDMPI and its subsidiaries, however, have
required advances from MAXXAM Parent in prior years to fund their operations,
and PDMPI may require such advances in the future.

   RACING OPERATIONS

      Capital expenditures and investments in new ventures are expected to be
approximately $0.4 million in 2004.

      With respect to short-term and long-term liquidity, SHRP, Ltd.'s
management expects that SHRP, Ltd. will generate cash flows from operations;
however, there can be no assurance that this will be the case.

   KAISER'S OPERATIONS

      As a result of the filing of the Cases, claims against the Debtors for
principal and accrued interest on secured and unsecured indebtedness existing on
the Filing Date are stayed while the Debtors continue business operations as
debtors- in-possession, subject to the control and supervision of the Court. At
this time, it is not possible to predict the effect of the Cases on the
businesses of the Debtors. With respect to the Company's interest in Kaiser, the
Debtors have indicated that the equity of Kaiser's stockholders will likely be
cancelled without consideration. See Note 12 for further information.

OFF-BALANCE SHEET ARRANGEMENTS

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

CONTRACTUAL OBLIGATIONS

      The following table presents information with respect to the Company's
contractual obligations as of December 31, 2003 (in millions).


                                                                         PAYMENTS DUE BY PERIOD
                                                      ------------------------------------------------------------
                                                                    LESS THAN 1     2-3         4-5      More than
              CONTRACTUAL OBLIGATIONS                     TOTAL       YEAR        Years       Years       5 Years
----------------------------------------------------  -----------  ----------  ----------- -----------  ----------

   Long-term debt obligations(1)....................  $    982.0   $    28.5   $     62.2  $     63.0   $   828.3
   Operating lease obligations......................        16.0         4.3          6.2         4.4         1.1
   Purchase obligations(2)..........................         0.4         0.4            -           -           -
   Other long-term liabilities reflected on the
      Company's balance sheet(3)(4)(5)(6)...........         6.4         2.1          1.0         3.3           -
                                                      -----------  ----------  ----------- -----------  ----------
        Total.......................................  $  1,004.8   $    35.3   $     69.4  $     70.7   $   829.4
                                                      ===========  ==========  =========== ===========  ==========

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

(1)   Includes capital lease obligations of $1.3 million as of December 31, 2003.
(2)   Excludes $17.9 million in 2004 and $3.0 million in 2005 under a contract
      entered into in 2004 for completion of Palco's new sawmill project.
      Includes $0.4 million in 2004 for completion of Palco's new lumber planer.
      Excludes ordinary course of business purchase orders.
(3)   Excludes expected funding for pension benefits for 2004 and subsequent
      years. Expected funding requirements for pension benefits for 2004 range
      from $1.6 million to $6.8 million; however, such funding requirements are
      uncertain due to legislation currently pending in Congress. Funding
      requirements for pension benefits after 2004 are excluded due to the
      significant variability in the assumptions required to project the timing
      of future cash payments. Also excluded are reserves for litigation,
      environmental remediation, self-insurance claims, and other contingent
      liabilities due to uncertainty as to the timing of when cash payments will
      be required.
(4)   Includes $0.4 million in 2005 and $1.6 million in 2008 for PDMPI's cost
      sharing agreement with the Puerto Rico Power Authority for the
      construction of an electrical substation that will provide capacity to new
      projects within PDMPI.
(5)   Includes $1.0 million in 2004, $0.4 million in 2005 and $1.7 million in 2008 under the terms of various executive compensation
      agreements.
(6)   Includes $1.1 million in 2004 and $0.2 million in 2005 for contractual
      amounts owed under agreements with various professional services firms
      (principally audit and tax compliance fees).

TRENDS

   REAL ESTATE OPERATIONS

      On January 28, 2004, the Arizona Department of Water Resources and the
local utility which supplies water to the Company's Fountain Hills project
entered into a Consent Order addressing the state's notification that the demand
for water in the utility's service area exceeded certain statutory requirements.
The local utility is actively pursuing various alternatives to resolve the
matter. Nevertheless, one of the Company's development projects has been delayed
as a result, and this delay will have a somewhat negative impact on cash flows
from the Fountain Hills development for 2004. At this time, the Company cannot
determine the likelihood of the water utility resolving this issue in the short
term versus a longer period of time. The impacts of an extended delay in
resolving this issue could include increased development costs, delays in
development, or the inability to develop the remaining acreage for an indefinite
period of time.

   RACING OPERATIONS

      In July 2003, the Texas Racing Commission approved live race dates for
2004. As a result, Sam Houston Race Park will more than double to 95 the number
of dates for its quarter horse meet in 2004. The extra days were added to
accommodate requests from the racing industry to alleviate 2004 scheduling
issues at two other Class 1 racetracks. The additional live race dates granted
for 2004 are not likely to be granted in 2005 and beyond.

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

                                                                                          YEARS ENDED DECEMBER 31,
                                                                                  ----------------------------------------
                                                                                     2002           2003          2004
                                                                                  ----------     ----------    -----------
Live Thoroughbred Race Days...................................................            84             84             74
Live Quarter Horse Race Days..................................................            42             43             95
Simulcast-only Days...........................................................           238            237            192

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

      The Texas legislature, which convenes its regular session every other
year, considered a variety of alternatives during the January-June 2003 session
to address a projected budget shortfall, including enhancing state revenues
through additional forms of gaming such as video lottery terminals at existing
horse and dog racing tracks, gaming on Indian reservations, keno, and full
casinos. While the Texas legislature did not enact any of this legislation, the
Company, in conjunction with the Texas racing industry, intends to continue
pursuing legislation to expand the form of gaming available at horse and dog
racing tracks (including at any special legislative session which might be
held). No assurance can be given that these efforts will be successful.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      This section contains statements which constitute "forward-looking
statements" within the meaning of the PSLRA. See Item 1. "Business--General" and
below for cautionary information with respect to such forward-looking
statements.

      The discussion and analysis of the Company's financial condition and
results of operations is based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
consolidated financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and liabilities.
Estimates are based on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. The result of this
process forms the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. The Company
re-evaluates its estimates and judgments on a regular, ongoing basis. Actual
results may differ from these estimates due to changed circumstances and
conditions.

      The following accounting policies and estimates are considered critical in
light of the potentially material impact that the estimates, judgments and
uncertainties affecting the application of these policies might have on the
Company's reported financial information.

      Principles of Consolidation-Deconsolidation of Kaiser
      Under generally accepted accounting principles for entities consolidated
through voting interests, consolidation is generally required for investments of
more than 50% of the outstanding voting stock of an investee, except when
control is not held by the majority owner. Under these principles, legal
reorganization or bankruptcy represent conditions which can preclude
consolidation in instances where control rests with the bankruptcy court, rather
than the majority owner. As discussed above, on February 12, 2002, Kaiser and
certain of its subsidiaries filed for reorganization under Chapter 11 of the
Code. As a result, the Company deconsolidated Kaiser's financial results
beginning February 12, 2002, and began reporting its investment in Kaiser using
the cost method.

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

      The Company expects it will consider reversal of these losses when either:
(1) Kaiser's bankruptcy is resolved and the amount of the Company's remaining
investment in Kaiser is determined or (2) the Company disposes of the Kaiser
Shares. Accordingly, these consolidated financial statements do not reflect any
adjustments related to the deconsolidation of Kaiser other than presenting the
Company's investment in Kaiser using the cost method, which reflects the
investment as a single amount on its balance sheet, and discontinuing the
recording of earnings or losses from Kaiser after February 11, 2002. When either
of the events described above occurs, the Company will re-evaluate the
appropriate accounting treatment of its investment in Kaiser based upon the
facts and circumstances at such time. The Debtors have indicated that the equity
of Kaiser's stockholders will likely be cancelled without consideration as a
result of Kaiser's plan of reorganization.

      Loss Contingencies
      The Company is involved in various claims, lawsuits and other proceedings
discussed in Note 13. Such litigation involves uncertainty as to possible losses
the Company may ultimately realize when one or more future events occur or fail
to occur. The Company accrues and charges to income estimated losses from
contingencies when it is probable (at the balance sheet date) that an asset has
been impaired or liability incurred and the amount of loss can be reasonably
estimated. Differences between estimates recorded and actual amounts determined
in subsequent periods are treated as changes in accounting estimates (i.e., they
are reflected in the financial statements in the period in which they are
determined to be losses, with no retroactive restatement).

      The Company estimates the probability of losses on legal contingencies
based on the advice of internal and external counsel, the outcomes from similar
litigation, the status of the lawsuits (including settlement initiatives),
legislative and regulatory developments, and other factors. Risks and
uncertainties are inherent with respect to the ultimate outcome of litigation.
See Note 13 for further discussion of the Company's material legal
contingencies.

      Deferred Tax Asset Valuation Allowances
      As of December 31, 2003, the Company had $82.4 million of deferred tax
assets (net of $67.5 million in valuation allowances and $75.2 million of
deferred tax liabilities). The deferred tax assets and liabilities reported in
the Company's balance sheet reflect the amount of taxes that the Company has
prepaid or will receive a tax benefit for (an asset) or will have to pay in the
future (a liability) because of temporary differences that result from
differences in timing of revenue recognition or expense deductibility between
generally accepted accounting principles and the Internal Revenue Code.
Accounting rules require that a deferred tax asset be reduced by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not (a likelihood of more than 50%) that some portion or all of the deferred tax
asset will not be realized. The Company considers all available evidence, both
positive and negative, to determine whether a valuation allowance is needed. The
need for a valuation allowance ultimately depends on the existence of sufficient
taxable income to realize the benefit of a future deductible amount.

      Assessing the need for and amount of a valuation allowance for deferred
tax assets requires significant judgment. The fact that a benefit may be
expected for a portion but not all of a deferred tax asset increases the
judgmental complexity. Projections of future taxable income, by their very
nature, require estimates and judgments about future events that, although they
might conceivably be predictable, are far less certain than events that have
already occurred and can be objectively measured.

      Uncertainties that might exist with respect to the realization of the
Company's deferred tax assets relate to future taxable income. See Note 10 for
further discussion of the Company's valuation allowances on deferred tax assets.

      Obligations Related to Pension and Other Postretirement Benefit Plans
      Estimating future benefit payments for purposes of measuring pension
benefit obligations requires the Company to make a number of assumptions about
future experience. These assumptions are combined with the terms of the
Company's plans to produce an estimate of required future benefit payments,
which is discounted to reflect the time value of money. As a result, assumptions
about the covered population (demographic assumptions) and about the economic
environment (economic assumptions) significantly affect pension and other
postretirement benefit obligations. The most significant demographic assumptions
are expected retirement age, life expectancy, and turnover, while the key
economic assumptions are the discount rate, the salary growth rate, and the
expected return on plan assets.

      The projected benefit obligation for the Company's pension plans and the
accumulated postretirement benefit obligation for the Company's other
postretirement benefit plans was determined using a discount rate of 6.25% at
December 31, 2003, and 6.75% at December 31, 2002. The assumed long-term rate of
compensation increase is 4.20%. The assumed long-term rate of return on plan
assets is 8.00%. Plan assets consist principally of common stocks, U.S.
government and other fixed-income obligations.

      The estimated impact of a 25 basis point decrease in the discount rate
(from 6.25% to 6.00%) would increase the Company's aggregate benefit obligation
by approximately $3.5 million, while the estimated impact of a 25 basis point
increase in the discount rate (from 6.25% to 6.50%) would decrease the Company's
aggregate benefit obligation by approximately $3.3 million.

      Generally accepted accounting principles are applied to determine the
expense that the Company recognizes related to pension obligations, while
pension plan funding is governed by tax and labor laws. The Company expects
pension expense to be approximately $3.2 million in 2004, while cash
contributions are expected to range from $1.6 million to $6.8 million in 2004
(expected funding requirements for 2004 are uncertain due to legislation
currently pending in Congress). This compared to pension expense of $3.4 million
and cash contributions of $4.6 million in 2003.

      At December 31, 2003, the Company had $21.4 million in accrued liabilities
related to pension benefits. This amount consists of an accrued liability of
$15.1 million reflecting the cumulative excess of the amount the Company has
expensed over the amount the Company has funded since inception of its plans, as
well as an additional minimum liability of $6.3 million reflecting the excess of
the accumulated benefit obligation over the fair value of plan assets. The
decrease in 2003 in the underfunded status of the Company's plans is primarily
due to higher investment returns. This favorable impact was offset in part by
the impact of the lower discount rate.

      See Note 11 for further discussion of the Company's obligations related to
pension and other postretirement benefit plans.

      Impairment of Noncurrent Assets
      The Company reviews noncurrent assets for impairment when circumstances
indicate that the carrying amount of such assets may not be recoverable.
Impairment is indicated if the total undiscounted future cash flows expected to
result from use of the assets, including the possible residual value associated
with their eventual disposition, are less than the carrying amount of the
assets. Assets are written down to fair value and a loss is recognized upon
impairment. Fair value increases on assets previously written down for
impairment losses are not recognized.

      Considerable judgment is exercised in the Company's assessment of the need
for an impairment write-down. Indicators of impairment must be present. The
estimates of future cash flows, based on reasonable and supportable assumptions
and projections, require management's subjective judgments. In some instances,
situations might exist where impairments are the result of changes in economic
conditions or other factors that develop over time, which increases the
subjectivity of assumptions made. Depending on the assumptions and estimates
used, the estimated future cash flows projected in the evaluation of long-lived
assets can vary within a wide range of outcomes. A probability- weighted
approach is used for situations in which alternative courses of action to
recover the carrying amount of long- lived assets are under consideration or a
range is estimated for the amount of possible future cash flows.

NEW ACCOUNTING STANDARDS

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


ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company is exposed to changes in interest rates primarily under the
Scotia LLC Line of Credit and the New Palco Credit Agreement, as well as certain
other debt facilities used to finance real estate development activities. These
facilities bear interest at either the prime interest rate or LIBOR plus a
specified percentage point spread. The Scotia LLC Line of Credit was established
in conjunction with the offering of the Timber Notes. The Company's objective in
maintaining its other variable rate borrowings is flexibility in borrowing funds
and making repayments without penalties. As of December 31, 2003, there were
$15.6 million in borrowings outstanding under all variable rate facilities.
Based on the amount of borrowings outstanding under these facilities during
2003, a 1% change in interest rates effective from the beginning of the year
would have resulted in an increase or decrease in annual interest expense of
$0.3 million.

      All of the Company's other debt is fixed-rate, and therefore, does not
expose the Company to the risk of higher interest payments due to changes in
market interest rates. The Company does not utilize interest rate swaps or
similar hedging arrangements.


ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Stockholders of MAXXAM Inc.:

We have audited the accompanying consolidated balance sheet of MAXXAM Inc. and
subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related
consolidated statements of operations, cash flows and stockholders' deficit for
the years then ended. Our audits also included the 2003 and 2002 financial
statement schedules listed in the Index at Item 15(a)(2). These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on the 2003
and 2002 financial statements and financial statement schedules based on our
audits. The financial statements as of December 31, 2001, and for the year then
ended were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion, with an explanatory paragraph regarding the
deconsolidation of Kaiser Aluminum Corporation ("Kaiser"), on those financial
statements and stated that such 2001 financial statement schedules, when
considered in relation to the 2001 basic financial statements taken as a whole,
presented fairly, in all material respects, the information set forth therein in
their report dated April 12, 2002.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of MAXXAM Inc. and subsidiaries as of
December 31, 2003 and 2002, and the results of their operations and their cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the 2003 and 2002
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, on February 12,
2002, Kaiser, a majority owned consolidated subsidiary of MAXXAM Inc., and
certain of its subsidiaries filed for reorganization under Chapter 11 of the
United States Bankruptcy Code. As a result, Kaiser's financial results were
deconsolidated beginning February 12, 2002 and MAXXAM Inc. began reporting its
investment in Kaiser using the cost method.

DELOITTE & TOUCHE LLP

Houston, Texas
March 26, 2004


      THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP IN CONNECTION WITH MAXXAM INC.'S FILING ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN
LLP IN CONNECTION WITH THIS FILING ON FORM 10-K. THE CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2001 AND 2000, THE CONSOLIDATED STATEMENTS OF OPERATIONS,
STOCKHOLDERS' EQUITY AND CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND
1999, AND THE INFORMATION IN THE SCHEDULE FOR 2000 AND 1999 REFERRED TO IN THE
AUDIT REPORT HAVE NOT BEEN INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS OR
SCHEDULE. SEE ALSO EXHIBIT 23.2 REGARDING LIMITATIONS ON RECOVERY RESULTING FROM
THE INABILITY TO FILE THE CONSENT OF ARTHUR ANDERSEN LLP IN CONNECTION HEREWITH.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To MAXXAM Inc.:

We have audited the accompanying consolidated balance sheets of MAXXAM Inc. (a
Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
2001. These consolidated financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MAXXAM Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

As discussed in Note 1 to the consolidated financial statements, on February 12,
2002, Kaiser Aluminum Corporation (Kaiser), a majority owned consolidated
subsidiary of MAXXAM Inc., and certain of its subsidiaries filed for
reorganization under Chapter 11 of the United States Bankruptcy Code. As a
result, Kaiser's financial results will be deconsolidated beginning February 12,
2002 and MAXXAM Inc. will begin reporting its investment in Kaiser using the
cost method. Kaiser and subsidiaries represent 69 percent and 73 percent of
MAXXAM Inc.'s total consolidated assets at December 31, 2001 and 2000, and 86
percent, 87 percent and 87 percent of its total consolidated revenues for the
years ended December 31, 2001, 2000 and 1999, respectively. See Note 1 for a
discussion of the impact on MAXXAM Inc.'s consolidated financial statements.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a)(2) of this Form 10-K is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

                                                              ARTHUR ANDERSEN LLP

Houston, Texas
April 12, 2002




                          MAXXAM INC. AND SUBSIDIARIES

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

                                                                                                 DECEMBER 31,
                                                                                           ------------------------
                                                                                               2003         2002
                                                                                           -----------  -----------
ASSETS
Current assets:
   Cash and cash equivalents.............................................................. $     35.0         45.6
   Marketable securities and other short-term investments.................................      116.9        105.7
   Receivables:
      Trade, net of allowance for doubtful accounts of $0.4 and $2.9, respectively........       12.4         11.4
      Other...............................................................................        2.6          4.6
   Inventories:
      Lumber..............................................................................       17.7         22.2
      Logs................................................................................       11.8         12.4
   Prepaid expenses and other current assets..............................................       31.6         41.8
                                                                                           -----------  -----------
        Total current assets..............................................................      228.0        243.7
Property, plant and equipment, net of accumulated depreciation of $164.6 and
   $140.4, respectively...................................................................      367.9        375.2
Timber and timberlands, net of accumulated depletion of $214.2 and $204.5,
   respectively...........................................................................      217.9        227.3
Investments in and advances to unconsolidated affiliates..................................        6.1          7.6
Deferred income taxes.....................................................................       95.2         82.4
Restricted cash, marketable securities and other investments..............................       43.6         63.6
Long-term receivables and other assets....................................................      102.1        107.5
                                                                                           -----------  -----------
                                                                                           $  1,060.8   $  1,107.3
                                                                                           ===========  ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable....................................................................... $     10.8   $     12.2
   Accrued interest.......................................................................       25.8         26.0
   Accrued compensation and related benefits..............................................       12.8         14.0
   Other accrued liabilities..............................................................       23.4         27.6
   Short-term borrowings and current maturities of long-term debt.........................       28.5         30.5
                                                                                           -----------  -----------
        Total current liabilities.........................................................      101.3        110.3
Long-term debt, less current maturities...................................................      953.5        982.3
Accrued postretirement medical benefits...................................................       10.7         10.3
Losses in excess of investment in Kaiser..................................................      516.2        516.2
Other noncurrent liabilities..............................................................       81.0         70.7
                                                                                           -----------  -----------
        Total liabilities.................................................................    1,662.7      1,689.8
                                                                                           -----------  -----------

Commitments and contingencies (see Note 13)

Stockholders' deficit:
   Preferred stock, $0.50 par value; $0.75 liquidation preference; 12,500,000
      shares authorized; Class A $0.05 Non-Cumulative Participating Convertible
      Preferred Stock; 669,040 shares issued; 668,195 shares outstanding..................        0.3          0.3
   Common stock, $0.50 par value; 28,000,000 shares authorized; 10,063,359 shares
      issued; 5,976,466 and 6,527,671 shares outstanding, respectively....................        5.0          5.0
   Additional capital.....................................................................      225.3        225.3
   Accumulated deficit....................................................................     (619.8)      (608.2)
   Accumulated other comprehensive loss...................................................      (88.0)       (89.2)
   Treasury stock, at cost (shares held:  preferred - 845; common - 4,086,893 and
      3,535,688, respectively) ...........................................................     (124.7)      (115.7)
                                                                                           -----------  -----------
        Total stockholders' deficit.......................................................     (601.9)      (582.5)
                                                                                           -----------  -----------
                                                                                           $  1,060.8   $  1,107.3
                                                                                           ===========  ===========


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





                          MAXXAM INC. AND SUBSIDIARIES

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


                                                                                   YEARS ENDED DECEMBER 31,
                                                                           ----------------------------------------
                                                                               2003          2002          2001
                                                                           ------------  ------------  ------------
Net sales:
   Forest products.......................................................  $     208.5   $     199.4   $     185.3
   Real estate...........................................................         78.3          48.9          69.1
   Racing................................................................         49.8          52.7          52.7
   Aluminum..............................................................            -         167.5       1,732.7
                                                                           ------------  ------------  ------------
                                                                                 336.6         468.5       2,039.8
                                                                           ------------  ------------  ------------
Cost and expenses:
   Cost of sales and operations:
      Forest products....................................................        144.4         136.5         170.3
      Real estate........................................................         25.1          19.6          28.4
      Racing.............................................................         41.0          42.4          42.0
      Aluminum...........................................................            -         158.6       1,457.1
   Selling, general and administrative expenses..........................         63.7          82.6         163.6
   Gains on sales of timberlands and other assets........................        (17.5)         (0.9)        (16.7)
   Impairment of assets..................................................          1.4             -          19.9
   Depreciation, depletion and amortization..............................         37.1          44.8         113.1
                                                                           ------------  ------------  ------------
                                                                                 295.2         483.6       1,977.7
                                                                           ------------  ------------  ------------

Operating income (loss):
   Forest products.......................................................         34.5          18.8         (10.8)
   Real estate...........................................................         17.1          (0.2)         10.9
   Racing................................................................         (1.9)          0.4           0.9
   Aluminum..............................................................            -         (23.6)         70.8
   Corporate.............................................................         (8.3)        (10.5)         (9.7)
                                                                           ------------  ------------  ------------
                                                                                  41.4         (15.1)         62.1
Other income (expense):
   Gains on sale of interest in QAL......................................            -             -         163.6
   Investment, interest and other income (expense), net..................         25.0          12.6           6.6
   Interest expense......................................................        (74.8)        (88.9)       (182.9)
   Amortization of deferred financing costs..............................         (2.2)         (3.9)         (7.8)
                                                                           ------------  ------------  ------------
Income (loss) before income taxes and minority interests.................        (10.6)        (95.3)         41.6
Benefit (provision) for income taxes.....................................         (1.0)         10.4        (535.7)
Minority interests.......................................................            -           0.9          38.1
                                                                           ------------  ------------  ------------
Net loss.................................................................  $     (11.6)  $     (84.0)  $    (456.0)
                                                                           ============  ============  ============

Basic and diluted loss per common and common equivalent share............  $     (1.79)  $    (12.87)  $    (69.28)



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






                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN MILLIONS OF DOLLARS)


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                  ---------------------------------
                                                                                     2003       2002        2001
                                                                                  ---------  ----------  ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss.....................................................................  $  (11.6)  $   (84.0)  $  (456.0)
   Adjustments to reconcile net loss to net cash provided
      by (used for) operating activities:
      Depreciation, depletion and amortization..................................      37.1        44.8       113.1
      Non-cash impairments and restructuring charges............................       1.4           -        49.9
      Gains on sales of assets..................................................     (18.3)       (4.7)     (189.9)
      Net losses (gains) on marketable securities...............................      (5.2)        3.1        (8.0)
      Minority interests........................................................         -        (0.9)      (38.1)
      Amortization of deferred financing costs and discounts on long-term debt..       2.1         3.9         7.8
      Equity in loss of unconsolidated affiliates, net of dividends
        received................................................................       1.3         1.2         0.8
      Other.....................................................................      (0.7)       (2.4)        3.4
      Increase (decrease) in cash resulting from changes in:
        Receivables.............................................................      (0.2)       25.6       228.1
        Inventories.............................................................       4.4        15.5        69.8
        Prepaid expenses and other assets.......................................      (2.6)       46.8        21.1
        Accounts payable........................................................      (1.1)       10.7       (36.2)
        Accrued and deferred income taxes.......................................       0.6        18.9       505.2
        Other accrued liabilities...............................................      (1.6)      (48.6)      (49.0)
        Accrued interest........................................................      (0.2)        6.0        (4.1)
        Long-term assets and long-term liabilities..............................       9.7       (71.0)      (21.6)
        Other...................................................................       0.2         1.6        12.3
                                                                                  ---------  ----------  ----------
        Net cash provided by (used for) operating activities....................      15.3       (33.5)      208.6
                                                                                  ---------  ----------  ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net proceeds from dispositions of property and investments...................      22.5         6.5       191.6
   Net sales (purchases) of marketable securities and other investments.........      (2.5)       46.1       (99.4)
   Capital expenditures.........................................................     (23.8)     (111.3)     (333.3)
   Decrease in cash attributable to deconsolidation of Kaiser...................         -      (130.4)          -
   Other........................................................................       0.4         0.7         2.4
                                                                                  ---------  ----------  ----------
        Net cash used for investing activities..................................      (3.4)     (188.4)     (238.7)
                                                                                  ---------  ----------  ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuances of long-term debt....................................       2.9        92.9       136.2
   Redemptions, repurchases of and principal payments on long-term debt.........     (27.7)     (105.4)     (131.1)
   Borrowings (repayments) under revolving and short-term credit facilities.....         -       (21.1)      (49.5)
   Incurrence of deferred financing costs.......................................      (0.1)       (1.5)       (5.4)
   Redemption of Kaiser preference stock........................................         -           -        (5.6)
   Restricted cash withdrawals, net.............................................      11.4        31.6         7.4
   Treasury stock purchases.....................................................      (9.0)          -        (2.9)
   Other........................................................................         -        (1.2)          -
                                                                                  ---------   ---------  ----------
        Net cash used for financing activities..................................     (22.5)       (4.7)      (50.9)
                                                                                  ---------   ---------  ----------

NET DECREASE IN CASH AND CASH EQUIVALENTS.......................................     (10.6)     (226.6)      (81.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................................      45.6       272.2       353.2
                                                                                  ---------  ----------  ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................................  $   35.0   $    45.6   $   272.2
                                                                                  =========  ==========  ==========


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






                          MAXXAM INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
                   (IN MILLIONS, EXCEPT PER SHARE INFORMATION)


                                                                                  YEARS ENDED DECEMBER 31,
                                                                         ------------------------------------------
                                                                              2003          2002          2001
                                                                         ------------- ------------- --------------
PREFERRED STOCK ($.50 PAR)
   Balance at beginning and end of year................................  $        0.3  $        0.3  $         0.3
                                                                         ============= ============= ==============

COMMON STOCK ($.50 PAR)
   Balance at beginning and end of year................................  $        5.0  $        5.0  $         5.0
                                                                         ============= ============= ==============

ADDITIONAL CAPITAL
   Balance at beginning and end of year................................  $      225.3  $      225.3  $       225.3
                                                                         ============= ============= ==============

ACCUMULATED DEFICIT
   Balance at beginning of year........................................  $     (608.2) $     (524.2) $       (68.2)
      Net loss.........................................................         (11.6)        (84.0)        (456.0)
                                                                         ------------- ------------- --------------
   Balance at end of year..............................................  $     (619.8) $     (608.2) $      (524.2)
                                                                         ============= ============= ==============

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
   Minimum pension liability adjustment................................  $        1.1  $       (7.4) $      (103.5)
      Applicable income taxes..........................................          (0.1)          3.0           38.4
   Unrealized gains (losses) on available-for-sale investments.........           0.2          (0.7)           0.5
      Applicable income taxes..........................................             -           0.3           (0.2)
   Cumulative effect of accounting change..............................             -             -            2.3
      Applicable income taxes..........................................             -             -           (0.5)
   Unrealized gains (losses) on derivatives............................             -         (12.1)          52.5
      Applicable income taxes..........................................             -             -          (19.4)
   Reclassification for realized gains (losses) on derivatives.........             -          (6.0)         (16.7)
      Applicable income taxes..........................................             -             -            5.8
   Valuation allowance on deferred tax assets..........................             -             -          (25.0)
                                                                         ------------- ------------- --------------
   Other comprehensive income (loss)...................................           1.2         (22.9)         (65.8)
   Accumulated other comprehensive loss at beginning of year...........         (89.2)        (66.3)          (0.5)
                                                                         ------------- ------------- --------------
   Accumulated other comprehensive loss at end of year.................  $      (88.0) $      (89.2) $       (66.3)
                                                                         ============= ============= ==============

TREASURY STOCK
   Balance at beginning of year........................................  $     (115.7) $     (115.7) $      (112.8)
      Treasury stock purchases.........................................          (9.0)            -           (2.9)
                                                                         ------------- ------------- --------------
   Balance at end of year..............................................  $     (124.7) $     (115.7) $      (115.7)
                                                                         ============= ============= ==============

COMPREHENSIVE INCOME (LOSS)
   Net loss............................................................  $      (11.6) $      (84.0) $      (456.0)
   Other comprehensive income (loss)...................................           1.2         (22.9)         (65.8)
                                                                         ------------- ------------- --------------
   Total comprehensive loss............................................  $      (10.4) $     (106.9) $      (521.8)
                                                                         ============= ============= ==============


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





                          MAXXAM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 INDEX OF NOTES

Number          Description
------          -----------

1               Basis of Presentation and Summary of Significant Accounting Policies
2               New Accounting Standards
3               Segment Information and Other Items
4               Significant Acquisitions and Dispositions
5               Cash, Cash Equivalents, Marketable Securities and Other Investments
6               Property, Plant and Equipment
7               Investments in Unconsolidated Affiliates
8               Short-term Borrowings
9               Long-term Debt
10              Income Taxes
11              Employee Benefit and Incentive Plans
12              Investment in Kaiser
13              Commitments and Contingencies
14              Stockholders' Deficit
15              Supplemental Cash Flow and Other Information
16              Quarterly Financial Information (Unaudited)

1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PRESENTATION

      The Company
      The consolidated financial statements generally include the accounts of
MAXXAM Inc. and its majority and wholly owned subsidiaries. See, however,
"Deconsolidation of Kaiser" below. All references to the "COMPANY" include
MAXXAM Inc. and its majority owned and wholly owned subsidiaries, unless
otherwise indicated or the context indicates otherwise. Intercompany balances
and transactions have been eliminated. Investments in affiliates (20% to 50%
ownership) are accounted for using the equity method of accounting.

      The Company conducts the substantial portion of its operations through its
subsidiaries, which operate in three principal industries:

o     Forest products, through MAXXAM Group Inc. ("MGI") and MGI's wholly owned
      subsidiary, The Pacific Lumber Company ("PALCO"). Palco's wholly owned
      subsidiaries are Scotia Pacific Company LLC ("SCOTIA LLC"), Salmon Creek
      LLC ("SALMON CREEK") and Britt Lumber Co., Inc. ("BRITT"). MGI operates in
      several principal aspects of the forest products industry - the growing
      and harvesting of redwood and Douglas-fir timber, the milling of logs into
      lumber and the manufacture of lumber into a variety of finished products.
      Housing, construction and remodeling are the principal markets for the
      Company's lumber products.

o     Real estate investment and development, through MAXXAM Property Company
      ("MPC") and other wholly owned subsidiaries of the Company. These
      subsidiaries are engaged in the business of residential and commercial
      real estate investment and development, primarily in Arizona, California,
      Puerto Rico, and Texas, including associated golf course or resort
      operations in certain locations, and also own several commercial real
      estate properties.

o     Racing operations, through Sam Houston Race Park, Ltd. ("SHRP, LTD."), a
      Texas limited partnership, in which the Company owns a 100% interest.
      SHRP, Ltd. owns and operates a Class 1 pari-mutuel horse racing facility
      in the greater Houston metropolitan area and a pari-mutuel greyhound
      racing facility in Harlingen, Texas.

      In addition to the above, the Company owns approximately 62% of Kaiser
Aluminum Corporation ("KAISER"), an integrated aluminum producer. Results and
activities for MAXXAM Inc. (excluding its subsidiaries) and for MAXXAM Group
Holdings Inc. ("MGHI") are not included in the above segments. MGHI owns 100% of
MGI and is a wholly owned subsidiary of the Company.

      Deconsolidation of Kaiser
      Under generally accepted accounting principles for entities consolidated
through voting interests, consolidation is generally required for investments of
more than 50% of the outstanding voting stock of an investee, except when
control is not held by the majority owner. Under these rules, legal
reorganization or bankruptcy represent conditions which can preclude
consolidation in instances where control rests with the bankruptcy court, rather
than the majority owner. As discussed below, on February 12, 2002, Kaiser and
certain of its subsidiaries filed for reorganization under Chapter 11 of the
United States Bankruptcy Code. As a result, the Company discontinued
consolidating Kaiser's financial results beginning February 12, 2002, and the
Company began reporting its investment in Kaiser using the cost method, under
which the investment is reflected as a single amount on the Company's balance
sheet of $(516.2) million, and the recording of earnings or losses from Kaiser
was discontinued after February 11, 2002.

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

      The Company expects it will consider reversal of its losses in excess of
its investment in Kaiser when either: (1) Kaiser's bankruptcy is resolved and
the amount of the Company's remaining investment in Kaiser is determined or (2)
the Company disposes of its shares of Kaiser common stock. Accordingly, these
consolidated financial statements do not reflect any adjustments related to the
deconsolidation of Kaiser other than presenting the Company's investment in
Kaiser using the cost method. When either of the events described above occurs,
the Company will re-evaluate the appropriate accounting treatment of its
investment in Kaiser based upon the facts and circumstances at such time. It is
likely that the Company's ownership interest in Kaiser will be cancelled. See
Note 12 for further discussion of the Company's investment in Kaiser.

      The following condensed pro forma financial data reflects the results of
operations of the Company, excluding Kaiser, for the periods presented (in
millions, except share data).


                                                                                   YEARS ENDED DECEMBER 31,
                                                                          -----------------------------------------
                                                                              2003          2002           2001
                                                                          ------------  ------------  -------------

Net sales...............................................................  $     336.6   $     301.0   $      307.1
Costs and expenses......................................................       (295.2)       (292.5)        (315.9)
                                                                          ------------  ------------  -------------
Operating income (loss).................................................         41.4           8.5           (8.8)
Other income (expenses), net............................................         25.0          20.7           39.4
Interest expense........................................................        (77.0)        (80.2)         (81.7)
                                                                          ------------  ------------  -------------
Loss before income taxes and minority interests.........................        (10.6)        (51.0)         (51.1)
Income tax benefit......................................................         (1.0)         15.2           16.7
Minority interests......................................................            -           0.3              -
                                                                          ------------  ------------  -------------
Net loss................................................................  $     (11.6)  $     (35.5)  $      (34.4)
                                                                          ============  ============  =============

Basic and diluted net loss per share....................................  $     (1.79)  $     (5.45)  $      (5.22)

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

      Risks and uncertainties are inherent with respect to the ultimate outcome
of the litigation discussed in Note 13. The results of a resolution of such
uncertainties could have a material effect on the Company's consolidated
financial position, results of operations or liquidity. In addition,
uncertainties related to the projection of future taxable income could affect
the realization of the Company's deferred tax assets discussed in Note 10.
Estimates of future benefit payments used to measure the Company's pension and
other postretirement benefit obligations discussed in Note 11 are subject to a
number of assumptions about future experience, as are the estimated future cash
flows projected in the evaluation of long-lived assets for possible impairment.
To the extent there are material differences between these estimates and actual
results, the Company's financial statements or liquidity could be affected.

      Reclassifications
      Certain reclassifications have been made to prior years' consolidated
financial statements to be consistent with the current year's presentation.
Pari-mutuel costs and expenses for the Company's racing segment have been
reclassified as costs of sales and operations in the Consolidated Statement of
Operations. Pari-mutuel commissions have been reclassified and presented on a
gross basis to better reflect current industry reporting practice. These
revenues were previously reported net of pari-mutuel costs and expenses.

   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Concentrations of Credit Risk
      Cash equivalents and restricted marketable securities are invested
primarily in short to medium-term investment grade debt instruments as well as
other types of corporate and government debt obligations. The Company mitigates
its concentration of credit risk with respect to these investments by generally
purchasing investment grade products (ratings of A1/P1 short-term or at least
BBB/Baa3 long-term). No more than 5% is invested in the same issue. Unrestricted
marketable securities are invested primarily in debt securities. Other
unrestricted short-term investments consist of interests in limited partnerships
which invest in debt securities, corporate common stocks and option contracts.
These investments are managed by financial institutions.

      Securities Held-to-Maturity and Available-for-Sale
      Management determines the appropriate classification of investment
securities at the time of purchase and re- evaluates such designation as of each
balance sheet date. Debt securities are classified as held-to-maturity when the
Company has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost. Interest on securities
classified as held-to-maturity is included in investment, interest and other
income (expense), net.

      Marketable equity and debt securities that are not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are stated at fair market value, with the unrealized gains and
losses, net of tax, reported in other comprehensive income, a separate component
of shareholders' equity. Realized gains and losses and declines in value judged
to be other-than-temporary on available-for-sale securities are included in
investment, interest and other income (expense), net. Interest and dividends on
securities classified as available-for-sale are also included in investment,
interest, and other income (expense), net. The cost of securities sold is
determined using the first-in, first-out method. The fair value of substantially
all securities is determined by quoted market prices.  The fair value of
marketable debt securities includes accrued interest.

      Inventories
      Inventories are stated at lower of cost or market. Cost is primarily
determined using the last-in, first-out method. Inventory costs consist of
material, labor and manufacturing overhead, including depreciation and
depletion.

      Timber Harvest and Other Long-Term Assets
      Direct costs associated with the preparation of timber harvesting plans
("THPS") are capitalized and reflected in prepaid expenses and other current
assets on the balance sheet. These costs are expensed as the timber covered by
the related THP is harvested. Costs associated with the preparation of the
Company's sustained yield plan ("SYP") and the Company's multi-species habitat
conservation plan ("HCP") were capitalized and are reflected in long-term
receivables and other assets. These costs are being amortized over 10 years.

      The carrying amounts of the Company's SYP and HCP intangible assets are as
follows (in millions):


                                                                                                DECEMBER 31,
                                                                                         --------------------------
                                                                                             2003          2002
                                                                                         ------------  ------------

SYP/HCP................................................................................. $       8.3   $       8.3
Less: Accumulated amortization..........................................................        (3.6)         (2.7)
                                                                                         ------------  ------------
                                                                                         $       4.7   $       5.6
                                                                                         ============  ============

      The Company evaluates its intangible assets with finite lives for
impairment whenever events or changes in circumstances indicate that such assets
might be impaired. The remaining useful life of intangible assets with finite
lives are evaluated annually to determine whether events or circumstances
warrant changes in the estimated useful lives of such assets.

      Amortization of intangible assets for the year ended December 31, 2003,
was $0.9 million. The estimated amortization expense for the next five years is
$0.9 million per year. Estimated amortization will change if events or
circumstances warrant the revision of estimated useful lives.

      Timber and Timberlands
      Timber and timberlands are stated at cost, net of accumulated depletion.
Depletion is computed utilizing the units- of-production method based upon
estimates of timber quantities. Periodically, the Company will review its
depletion rates considering currently estimated merchantable timber and will
adjust the depletion rates prospectively.

      Revenue Recognition
      Revenues from the sale of logs, lumber products and by-products are
recorded when the legal ownership and the risk of loss passes to the buyer,
which is generally at the time of shipment.

      The Company recognizes income from land sales in accordance with SFAS No.
66, "Accounting for Sales of Real Estate" ("SFAS NO. 66"). In accordance with
SFAS No. 66, certain real estate sales are accounted for under the percentage of
completion method, under which income is recognized based on the estimated stage
of completion of individual contracts. The unrecognized income associated with
such sales has been recorded as deferred real estate sales and is reflected in
other noncurrent liabilities on the balance sheet. Additionally, in certain
circumstances the cost recovery or installment method is used whereby the gross
profit associated with these transactions is deferred and recognized when
appropriate. The unrecognized income associated with such sales is reflected as
a reduction of long- term receivables and other assets in the balance sheet.

      The Company recognizes revenues from pari-mutuel commissions received on
live and simulcast horse and greyhound racing in the period in which the
performance occurred. The Company also receives revenues in the form of fees
paid by other racetracks for the broadcast of the Company's live races to the
offsite locations. Other sources of revenue include food and beverage sales,
admission and parking fees, corporate sponsorships and advertising, club
memberships, suite rentals and other miscellaneous items.

      Deferred Financing Costs
      Costs incurred to obtain debt financing are deferred and amortized,
generally on a straight-line basis, over the estimated term of the related
borrowing.

      Asset Impairment
      The Company reviews long-lived assets and identifiable intangible assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable. Impairment losses are
recorded on assets used in operations when indicators of impairment are present
and the undiscounted cash flows to be generated by those assets are less than
the carrying amount. Impairment losses are also recorded for long-lived assets
which are expected to be disposed.

      Under certain conditions, the results of operations of a component of an
entity which either has been disposed or is classified as held for sale would be
reported in discontinued operations. The Company classifies long-lived assets as
held for sale if the following conditions are satisfied:

      o Management commits to a plan to sell a long-term operating asset;
      o The asset is available for immediate sale;
      o An active effort to locate a buyer is underway; and
      o It is probable that the sale will be completed within one year.

      Legal Contingencies
      The Company is currently involved in various claims and proceedings which
are reviewed for potential financial exposure on a regular basis. If the
potential loss from any claim or legal proceeding is considered probable and is
reasonably estimable as of the balance sheet date, a liability is accrued. The
Company estimates the probability of losses on legal contingencies based on the
advice of internal and external counsel, the outcomes from similar litigation,
the status of the lawsuits (including settlement initiatives), legislative
developments, and other factors. See Note 13 for a description of the Company's
material legal proceedings.

      Income Taxes
      Deferred income taxes are computed using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities (temporary
differences) and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.

      The Company records valuation allowances to reduce deferred tax assets to
the amount of future tax benefit that is more likely than not to be realized.
The Company considers future taxable income and ongoing tax planning strategies
in assessing the need for a valuation allowance. See Note 10 for further
discussion of the Company's income taxes.

      Stock-based Compensation
      The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB OPINION NO. 25") and
related interpretations in accounting for stock options (or stock appreciation
rights, as applicable) issued to employees and outside directors. Under APB
Opinion No. 25, because the exercise price of the Company's employee stock
options equals or exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recognized when stock options are granted.
However, compensation expense is recorded in each period prior to exercise based
on the excess of market value at the end of each period over the exercise price,
if applicable (i.e., compensation expense is adjusted up or down as the market
value of the Company's stock changes).

      The following table illustrates the pro forma effect on net income and
earnings per share had the Company accounted for its stock options under the
fair value method. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period
(in millions, except per share information).


                                                                                     YEARS ENDED DECEMBER 31,
                                                                               ------------------------------------
                                                                                   2003        2002         2001
                                                                               ----------- -----------  -----------
Net loss, as reported........................................................  $    (11.6) $    (84.0)  $   (456.0)
   Add: Stock-based employee compensation expenses included in reported net
      loss, net of related tax effects.......................................         0.8           -            -
   Deduct: Total stock-based employee compensation expense determined under
      the fair value method for all awards, net of related tax effects.......        (1.8)       (1.3)        (1.3)
                                                                               ----------- -----------  -----------
Pro forma net loss...........................................................  $    (12.6) $    (85.3)  $   (457.3)
                                                                               =========== ===========  ===========

Basic and diluted loss per share:
   As reported...............................................................  $    (1.79) $   (12.87)  $   (69.28)
   Pro forma.................................................................       (1.94)     (13.07)      (69.51)


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


                                                                                   YEARS ENDED DECEMBER 31,
                                                                           ----------------------------------------
                                                                                2003         2002         2001
                                                                           ------------- ------------ -------------

Dividend yield...........................................................          -           -            -
Expected volatility......................................................         0.39        0.38         0.36
Risk-free interest rate..................................................         4.76%       4.92%        5.32%
Expected life (years)....................................................         6.64        6.63         6.59
Weighted average fair value..............................................  $      9.50   $   10.65    $   13.65

      Per Share Information
      Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period, including the weighted average impact of any shares of common stock of
the Company ("COMMON STOCK") issued and treasury stock acquired during the year
from the date of issuance or repurchase and the dilutive effect of the Company's
Class A $0.05 Non-Cumulative Participating Convertible Preferred Stock (the
"CLASS A PREFERRED STOCK") which is convertible into Common Stock. Diluted
earnings per share calculations also include the dilutive effect of common and
preferred stock options.


                                                                             2003          2002         2001
                                                                         ------------  ------------ ------------
Weighted average shares outstanding:
   Common Stock.........................................................   6,465,919     6,527,671    6,581,979
   Effect of dilution:
      Class A Preferred Stock...........................................           - (1)         - (1)        - (1)
                                                                         ------------  ------------ ------------
Weighted average number of common and common equivalent
    shares - Basic......................................................   6,465,919     6,527,671    6,581,979
   Effect of dilution:
      Stock options (1).................................................           - (1)         - (1)        - (1)
                                                                         ------------  ------------ ------------
Weighted average number of common and common equivalent
    shares - Diluted....................................................   6,465,919     6,527,671    6,581,979
                                                                         ============  ============ ============
------------------

(1)  The Company had a loss for the years ended December 31, 2003, 2002 and
     2001; the Class A Preferred Stock and options were therefore not included
     in the computation of earnings per share for the period.

2.    NEW ACCOUNTING STANDARDS

      Financial Reporting - Pension Accounting
      In December 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other
Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and 106."
("SFAS NO. 132 (REVISED 2003)"). This statement replaces the original SFAS No.
132 and revises employers' disclosures about pension plans and other
postretirement benefit plans to require more information about the economic
resources and obligations of such plans. It does not change the measurement or
recognition of those plans required by previous FASB statements. SFAS No. 132
(Revised 2003) is effective for financial statements of public companies with
fiscal years ending after December 15, 2003, except estimated future benefit
payment disclosures are not required until fiscal years ending after June 15,
2004. The interim-period disclosures required by this statement are effective
for interim periods beginning after December 15, 2003. See Note 11 for the
Company's pension and other postretirement plan disclosures, including those
required by the above Statement.

      Consolidation of Variable Interest Entities
      In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which established
criteria to identify and assess a company's interest in variable interest
entities and for consolidating those entities. In December 2003, the FASB
revised FIN 46 and codified certain FASB Statement of Positions previously
issued for FIN 46 in FASB Interpretation No. 46, Revised December 2003 ("FIN
46R"). FIN 46R is currently effective for variable interest entities created or
obtained after January 2003, and will be effective for all variable interest
entities for interim periods beginning after March 15, 2004. The adoption of FIN
46R is not expected to require the consolidation by the Company of any
additional entities.

3.    SEGMENT INFORMATION AND OTHER ITEMS

      REPORTABLE SEGMENTS
      As discussed in Note 1, the Company's operations are organized and managed
as distinct business units which offer different products and services and are
managed separately through the Company's subsidiaries.

      The Company has three reportable segments and the accounting policies of
the segments are the same as those described in Note 1. The Company evaluates
segment performance based on net sales, operating income excluding depreciation,
depletion and amortization, and income before income taxes and minority
interests.

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

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





                                                                                  CONSOL-
                                             REPORTABLE SEGMENTS                  IDATED
                                         ---------------------------               TOTAL                   CONSOL-
                             DECEMBER     FOREST     REAL                         EXCLUDING                IDATED
                                31,      PRODUCTS   ESTATE   RACING   CORPORATE   ALUMINUM   ALUMINUM (1)   TOTAL
                             ---------   --------   -------  -------  ---------  ----------  ------------  --------

Investment, interest and other
   income (expense), net....   2003      $   5.5    $  5.9   $  0.2   $   13.4   $    25.0   $         -   $  25.0
                               2002          7.4       6.2        -        8.0        21.6          (8.1)     13.5
                               2001         11.3      12.5      0.1       15.5        39.4         (32.8)      6.6


Interest expense(2).........   2003         58.1      18.9        -          -        77.0             -      77.0
                               2002         58.8      13.2        -        8.2        80.2          12.6      92.8
                               2001         60.1       8.6        -       13.0        81.7         109.0     190.7

Depreciation, depletion and
   amortization.............   2003         21.0      14.2      1.7        0.2        37.1             -      37.1
                               2002         22.8      10.4      1.6        0.3        35.1           9.7      44.8
                               2001         19.4       7.6      1.5        0.3        28.8          84.3     113.1

Income (loss) before income
   taxes and minority
   interests................   2003        (18.1)      4.1     (1.7)       5.1       (10.6)            -     (10.6)
                               2002        (33.5)     (7.2)     0.4      (10.7)      (51.0)        (44.3)    (95.3)
                               2001        (59.6)     14.8      1.0       (7.2)      (51.0)         92.6      41.6

Capital expenditures........   2003         19.1       3.5      1.0        0.2        23.8             -      23.8
                               2002         12.2      93.6      0.6        0.1       106.5           4.8     111.3
                               2001         13.4     133.9      2.0        0.7       150.0         148.7     298.7

Total assets................   2003        483.6     359.5     33.6      184.1     1,060.8             -   1,060.8
                               2002        525.3     377.1     36.4      168.5     1,107.3             -   1,107.3


--------------------
(1)   For 2002, amounts attributable to the aluminum segment are for the period
      from January 1, 2002, through February 11, 2002. Kaiser's results were
      deconsolidated commencing February 12, 2002 (see Notes 1 and 12).
(2)   Interest expense also includes amortization of deferred financing costs.
(3)   As a result of the deconsolidation of Kaiser, the aluminum segment's
      balance sheet amounts are not included in the consolidated total as of
      December 31, 2003 and 2002.

      OTHER ITEMS

      Forest Products
      During 2001, comprehensive external and internal reviews were conducted of
Palco's business operations. These reviews were conducted in an effort to
identify ways in which Palco could operate on a more efficient and cost
effective basis. Based upon the results of these reviews, Palco implemented a
number of changes during the last quarter of 2001 and the first quarter of 2002,
including closing two of its four sawmills, eliminating certain of its
operations, including its company-staffed logging operations (now relying
exclusively on contract loggers) and its soil amendment and concrete block
activities, utilizing more efficient harvesting methods and adopting other cost
saving measures. In connection with these changes, the Company in 2001 recorded
a charge to operating costs of $2.2 million for impaired assets. Palco has
continued to examine ways in which to achieve additional cost savings.
Subsequent to December 31, 2003, Palco opened a new planer facility in Scotia
and began construction on a $25.0 million sawmill project in Scotia. As part of
the project, the equipment from Palco's Carlotta mill will be moved to the new
mill in Scotia. After this equipment is moved, the Carlotta mill will be
permanently closed, and management is considering alternative uses for the
property. The Company does not expect the closure of the Carlotta mill to have a
material effect on its consolidated financial position, results of operations or
liquidity. Further actions may be taken during the next year as a result of
Palco's continuing evaluation process, and additional writedowns of certain
assets may be required.

      As a result of the changes described above, Palco identified machinery and
equipment that it no longer needed for its current or future operations and in
2001 committed to a plan for disposal of these assets during 2002. During 2002,
machinery and equipment with a carrying value of $2.2 million was sold,
resulting in a gain of $1.0 million.

      A $2.6 million restructuring charge was recorded in 2001 reflecting cash
termination benefits associated with the separation of approximately 305
employees as part of an involuntary termination plan. As of June 30, 2002, all
of the affected employees had left Palco, and the entire amount of the related
liability had been paid.

      Additionally, the Company recorded an environmental remediation charge of
$3.4 million in 2001. The environmental accrual represents Palco's estimate of
costs reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and Palco's
assessment of the likely remediation actions to be taken. Palco incurred $0.7
million and $0.5 million of costs related to this remediation liability during
2003 and 2002, respectively. Based on management's best estimates given the
current facts and circumstances, the remaining $2.2 million is expected to be
incurred in 2004 and 2005.

      The forest products segment's operating income (loss) included gains on
sales of timberlands in the Grizzly Creek grove of $16.8 million and $16.7
million in November 2003 and November 2001, respectively.

      Real Estate
      Investment, interest and other income (expense) for the real estate
segment includes equity in earnings from real estate joint ventures of $0.7
million, $2.5 million and $5.5 million for the years ended December 31, 2003,
2002 and 2001, respectively. Investment, interest and other income (expense) for
the real estate segment also includes $0.8 million in 2003 for the gain realized
on the sale of the Company's investment in the Sunridge Canyon real estate joint
venture.

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

      Corporate
      Corporate investment, interest and other income (expense) for 2003
includes $8.0 million of insurance recoveries related to the OTS and FDIC
actions discussed in Note 13.

      During 2002 the Company repurchased $56.6 million principal amount of the
Senior Secured Notes of MGHI (the "MGHI NOTES"), resulting in a gain of $2.4
million (net of tax). The Company redeemed the remaining $31.6 million principal
amount of MGHI Notes in December 2002.

      Aluminum
      The aluminum segment's operating income (loss) for the period from January
1, 2002 to February 11, 2002, and the year ended December 31, 2001, includes the
impact of certain other items as shown in the following table (in millions).
These items are included in cost of sales and operations and in impairment of
assets in the Consolidated Statement of Operations.


                                                                                        PERIOD FROM
                                                                                      JANUARY 1, 2002,
                                                                                            TO           YEAR ENDED
                                                                                       FEBRUARY 11,     DECEMBER 31,
                                                                                           2002             2001
                                                                                      -------------    --------------

Net gains on power sales............................................................. $          -     $       229.2
Restructuring charges................................................................         (1.3)            (35.2)
Contractual labor costs related to smelter curtailments..............................            -             (12.7)
Impairment charge on Trentwood equipment.............................................            -             (17.7)
                                                                                      -------------    --------------
                                                                                      $       (1.3)    $       163.6
                                                                                      =============    ==============

      During 2001, Kaiser launched a performance improvement initiative. The
program resulted in restructuring charges totaling $35.2 million which consisted
of $17.9 million of employee benefit and related costs for elimination of
approximately 355 salaried and hourly positions, an inventory charge of $5.6
million and third party consulting costs of $11.7 million. As of December 31,
2001, approximately 340 of the positions had been eliminated. Approximately $7.7
million of the employee benefit and related costs were cash costs that had
already been incurred or were incurred during the first quarter of 2002. The
balance of the employee benefit and related costs represent increased pension
and post-retirement medical costs that will be funded over longer periods.

      The aluminum segment's income (loss) before income taxes and minority
interests for the period from January 1, 2002 to February 11, 2002, and the year
ended December 31, 2001, includes the net impact of certain non-recurring
amounts included in investment, interest and other income (expense), net, as
shown in the following table (in millions):


                                                                         PERIOD FROM
                                                                       JANUARY 1, 2002,
                                                                             TO           YEAR ENDED
                                                                        FEBRUARY 11,     DECEMBER 31,
                                                                            2002             2001
                                                                       --------------   --------------

Asbestos-related charges.............................................  $          -     $       (57.2)
Gain on sale of real estate..........................................             -               6.9
Mark-to-market gains (losses)........................................          (0.4)             35.6
Adjustment to environmental liabilities..............................             -             (13.5)
All other, net.......................................................           2.2              (2.8)
                                                                       -------------    --------------
                                                                       $        1.8     $       (31.0)
                                                                       =============    ==============

      Product Sales
      The following table presents segment sales by primary products (in
millions).


                                                                                    YEARS ENDED DECEMBER 31,
                                                                             --------------------------------------
                                                                                 2003         2002         2001
                                                                             ------------ -----------  ------------
Forest products:
   Lumber, net of discount.................................................  $     184.0  $    170.4   $     152.2
   Logs....................................................................          6.5        14.4          10.6
   Wood chips..............................................................          3.4         2.3           6.8
   Cogeneration power......................................................         11.4         9.4          11.7
   Other...................................................................          3.2         2.9           4.0
                                                                             ------------ -----------  ------------
      Total forest product sales...........................................  $     208.5  $    199.4   $     185.3
                                                                             ============ ===========  ============

Real estate:
   Real estate and development.............................................  $      49.7  $     24.6   $      48.2
   Resort, commercial and other operations.................................         12.7        15.0          16.5
   Commercial lease properties.............................................         15.9         9.3           4.4
                                                                             ------------ -----------  ------------
      Total real estate sales..............................................  $      78.3  $     48.9   $      69.1
                                                                             ============ ===========  ============

Racing:
   Gross pari-mutuel commissions...........................................  $      39.2  $     42.5   $      42.1
   Other...................................................................         10.6        10.2          10.6
                                                                             ------------ -----------  ------------
      Total racing sales...................................................  $      49.8  $     52.7   $      52.7
                                                                             ============ ===========  ============



                                                                                                       YEAR ENDED
                                                                                                      DECEMBER 31,
                                                                                                    ---------------
                                                                                                          2001
                                                                                                    ---------------
Aluminum: (1)
   Bauxite and alumina............................................................................. $        586.2
   Primary aluminum................................................................................          362.7
   Flat-rolled products............................................................................          308.0
   Engineered products.............................................................................          429.5
   Commodities marketing...........................................................................           22.9
   Minority interests and eliminations.............................................................           23.4
                                                                                                    ---------------
      Total aluminum sales......................................................................... $      1,732.7
                                                                                                    ===============

--------------------
(1)   As a result of the deconsolidation of Kaiser, amounts for the aluminum segment are not presented in this table for the period from
      January 1, 2002, TO February 11, 2002.

       Geographical Information
       The Company's forest products, real estate and racing operations are
located in the United States and Puerto Rico. Kaiser's operations are located in
the United States and several foreign countries. Sales and transfers among
geographic areas are made on a basis intended to reflect the market value of
products. Geographical information for net sales, based on countries of origin
follows (in millions):


                                                       UNITED                                  OTHER
                                       DECEMBER 31,    STATES       JAMAICA       GHANA       FOREIGN      TOTAL
                                       ------------  ----------- ------------- -----------  ----------  -----------

Net sales to unaffiliated customers (1)        2003  $    336.6  $          -  $        -   $       -   $    336.6
                                               2002       301.0             -           -           -        301.0
                                               2001     1,324.4         219.4       221.3       274.7      2,039.8

--------------------
(1)   As a result of the deconsolidation of Kaiser, amounts for the aluminum segment are not presented in this table for the period from
      January 1, 2002, TO February 11, 2002.

      Major Customers and Export Sales
      For the years ended December 31, 2003, 2002 and 2001, sales to any one
customer did not exceed 10% of consolidated revenues. Export sales were less
than 10% of total revenues in 2003, 2002 and 2001.

4.    SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

      MOTEL SIX PROPERTIES
      In December 2002, Motel Assets Holdings LLC ("MOTEL ASSETS"), an indirect
wholly owned subsidiary of the Company, acquired two business trusts which own a
portfolio of sixteen motel properties located in ten different states. These
properties secure certain non-recourse notes (the "MOTEL NOTES") which had an
outstanding principal balance of $49.4 million at December 31, 2002. Upon
closing of the transaction, Motel Assets made a cash payment of $3.5 million.
The Motel Notes have an interest rate of 7.03% with a May 1, 2018, maturity
date. Motel Assets acquired the properties subject to an existing lease
agreement under which the properties are fully leased through April 2019, and
under which all obligations are guaranteed by the parent company of the current
tenant. Motel Assets is accounting for the lease as an operating lease. The
Motel Notes are secured by the lease, the properties, and an $11.2 million
residual value insurance contract.

      COOPER CAMERON BUILDING
      In November 2002, Beltway Assets LLC ("BELTWAY ASSETS"), an indirect
wholly owned subsidiary of the Company, acquired an office building located in
Houston, Texas, for a purchase price of $32.7 million. The transaction was
financed with a cash payment of $3.0 million and proceeds of $29.7 million (net
of $1.3 million of deferred financing costs) from the issuance of non-recourse
notes which have an interest rate of 6.08% and a November 9, 2024 maturity date
(the "BELTWAY NOTES"). At the time of the acquisition, Beltway Assets
simultaneously leased the property back to the seller for a period of 22 years.
Beltway Assets is accounting for the lease as an operating lease. The Beltway
Notes are secured by the building, the lease, and an $11.2 million residual
value insurance contract.

      LAKEPOINTE PLAZA
      In June 2001, Lakepointe Assets Holdings LLC, a limited liability company,
and its subsidiaries, all of which are wholly owned subsidiaries of Salmon Creek
("LAKEPOINTE ASSETS") acquired Lake Pointe Plaza, an office complex located in
Sugar Land, Texas, for a purchase price of $131.3 million. The transaction was
financed with proceeds of $117.3 million, net of $5.2 million in deferred
financing costs, from the issuance of non-recourse notes ($122.5 million
principal amount with a final maturity date of June 8, 2021, and an interest
rate of 7.56%; the "LAKEPOINTE NOTES"), and with a cash payment of $14.0
million. Lakepointe Assets acquired the property subject to two leases to
existing tenants while simultaneously leasing a majority of the premises,
representing all of the remaining space, to an affiliate of the seller. The
office complex is fully leased for a period of 20 years under these three
leases. Lakepointe Assets is accounting for these leases as operating leases.
The Lakepointe Notes are secured by the leases, Lake Pointe Plaza and a $60.0
million residual value insurance contract.

      TIMBERLAND TRANSACTIONS
      In November 2003, Palco and Scotia LLC sold approximately 681 acres of
timberlands within an area known as the Grizzly Creek grove. Palco received
$10.0 million in cash, while Scotia LLC received $8.2 million in cash. The
Company recognized a gain of $16.8 million in 2003 related to this sale. In
November 2001, Palco sold other acreage in the Grizzly Creek grove for $19.8
million, resulting in a gain of $16.7 million.

      KAISER'S ACQUISITIONS AND DISPOSITIONS
      In September 2001, Kaiser sold an approximate 8.3% interest in Queensland
Alumina Limited ("QAL") and recorded a gain of approximately $163.6 million. The
transaction reduced Kaiser's ownership percentage in QAL to 20%. The total value
of the transaction was approximately $189.0 million, consisting of a cash
payment of approximately $159.0 million plus the purchaser's assumption of
approximately $30.0 million of off-balance sheet QAL indebtedness guaranteed by
Kaiser.

      In June 2001, KACC wrote-off its investment of $2.8 million in
MetalSpectrum, LLC, a start-up, e-commerce entity in which Kaiser was a founding
partner in 2000. MetalSpectrum ceased operations during the second quarter of
2001.

      During 2001, Kaiser sold certain non-operating real estate for net
proceeds totaling approximately $7.9 million, resulting in a gain of $6.9
million (included in investment, interest and other income (expense), net; see
Note 3).

5.    CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES AND OTHER INVESTMENTS

      Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less. As of December 31, 2003 and 2002,
carrying amounts of the Company's cash equivalents approximated fair value.

      The fair value of substantially all marketable equity and debt securities
is determined by quoted market prices. The following is a summary of
held-to-maturity and available-for-sale securities (in millions):


                                                                                                DECEMBER 31,
                                                                                         --------------------------
                                                                                             2003          2002
                                                                                         ------------  ------------

Held-to-maturity securities:
   Cost................................................................................. $         -   $      26.3
   Estimated fair value.................................................................           -          26.7

Available-for-sale securities:
   Cost................................................................................. $     106.4   $     111.9
   Estimated fair value.................................................................       109.9         113.9

      During 2003, marketable debt securities classified as held-to-maturity
were sold to generate funds for principal payments on long-term debt and for the
repurchase of Timber Notes. The amortized cost of the securities sold was $22.2
million, and the realized gain on the sale of such securities was $0.1 million.

      At December 31, 2003, management re-evaluated the classification of its
investment securities in accordance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). As a result, marketable
debt securities previously classified as held-to-maturity were transferred to
the available-for-sale category. The amortized cost and fair value of the
transferred securities was $14.3 million and $14.4 million, respectively, at
December 31, 2003.

      Investment, interest and other income (expense), net, includes gross
realized gains and losses on sales of available- for-sale securities for each of
the three years in the period ended December 31, 2003, as follows (in millions):

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2003        2002        2001
                                                                                ----------  ----------  -----------

Gross realized gains .........................................................  $     0.4   $     2.4   $      1.2
Gross realized losses.........................................................          -        (0.1)        (0.2)

      The net adjustment to unrealized holding gains (losses) on
available-for-sale securities included as a separate component of shareholders'
deficit totaled $0.2 million, $(0.7) million, and $0.5 million in 2003, 2002,
and 2001, respectively.

      Available-for-sale securities generally consist of U.S. corporate debt
securities, U.S. treasury obligations, and other debt securities with
contractual maturities ranging from one year to five years. Held-to-maturity
securities consisted of U.S. government agency obligations with contractual
maturities ranging from one year to five years.

      With respect to investments for which there are unrealized losses as of
December 31, 2003, the following table shows the gross unrealized losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position.


                                                                   LESS THAN 12 MONTHS        12 MONTHS OR MORE
                                                               --------------------------- ------------------------
                                                                             UNREALIZED                 UNREALIZED
                  DESCRIPTION OF SECURITIES                     FAIR VALUE     LOSSES      FAIR VALUE     LOSSES
-------------------------------------------------------------- ------------ ------------  -----------  ------------

US Treasury obligations....................................... $       5.9  $         -   $        -   $         -
Corporate bonds...............................................         4.7          0.1            -             -
Other debt securities.........................................         1.1            -            -             -
                                                               ------------ ------------  -----------  ------------
   Total temporarily impaired securities...................... $      11.7  $        0.1  $        -   $         -
                                                               ============ ============  ===========  ============

      For the year ended December 31, 2001, the change in net
unrealized holding gains (losses) on trading securities included in investment,
interest and other income (expense), net, was $(2.2) million.

      RESTRICTED CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES AND OTHER INVESTMENTS
      Cash, marketable securities and other investments include the following
amounts which are restricted (in millions):


                                                                                                 DECEMBER 31,
                                                                                          -------------------------
                                                                                              2003         2002
                                                                                          -----------  ------------
Current assets:
   Restricted cash and cash equivalents.................................................  $      4.0   $       9.9
                                                                                          -----------  ------------

   Marketable securities, restricted:
      Amounts held in SAR Account.......................................................        22.2          19.3
                                                                                          -----------  ------------

Long-term restricted cash, cash equivalents, marketable securities and other
   investments:
   Amounts held in SAR Account..........................................................        87.7         101.6
   Other amounts restricted under the Timber Notes Indenture............................         2.5           2.6
   Other long-term restricted amounts...................................................         8.2          10.7
   Less: Amounts attributable to Timber Notes held in SAR Account.......................       (54.8)        (51.3)
                                                                                          -----------  ------------
                                                                                                43.6          63.6
                                                                                          -----------  ------------

Total restricted cash, cash equivalents, marketable securities and other investments....  $     69.8   $      92.8
                                                                                          ===========  ============

      Amounts in the Scheduled Amortization Reserve Account ("SAR ACCOUNT") are
being held by the trustee under the indenture (the "TIMBER NOTES INDENTURE") to
support principal payments on Scotia LLC's Class A-1, Class A-2 and Class A-3
Timber Collateralized Notes due 2028 (the "TIMBER NOTES"). See Note 9 for
further discussion on the SAR Account.

      OTHER INVESTMENTS
      Cash, cash equivalents, marketable securities and other investments
include interests in several limited partnerships which invest in diversified
portfolios of common stocks and equity securities, in addition to exchange
traded options, futures, forward foreign currency contracts, and other arbitrage
opportunities. The Company's ownership percentages in these partnerships are not
significant. The following table shows the Company's investment in these
partnerships, including restricted amounts held in the SAR Account (in
millions).

                                                                                                   December 31,
                                                                                         -------------------------------
                                                                                              2003              2002
                                                                                         -------------     -------------

   Restricted.......................................................................     $       15.5      $       13.3
   Unrestricted.....................................................................             19.3               5.6
                                                                                         -------------     -------------
                                                                                         $       34.8      $       18.9
                                                                                         =============     =============

      Investment, interest and other income (expense), net, includes income from
the Company's investment in these partnerships for each of the three years in
the period ended December 31, 2003, as follows (in millions):


                                                                                    YEARS ENDED DECEMBER 31,
                                                                            ---------------------------------------
                                                                                2003          2002         2001
                                                                            ------------  -----------  ------------

Earnings from investments in partnerships ................................. $       4.8   $       3.0  $       6.5
                                                                            ============  ===========  ============

6.    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment, including capitalized interest, is stated
at cost, net of accumulated depreciation. Depreciation is computed principally
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets. The carrying value of property, plant
and equipment is assessed when events and circumstances indicate that an
impairment might exist.

      The major classes of property, plant and equipment are as follows (dollar
amounts in millions):


                                                                      ESTIMATED USEFUL           DECEMBER 31,
                                                                                          -------------------------
                                                                            LIVES             2003         2002
                                                                    --------------------  -----------  ------------

Land and improvements.............................................         5 - 30 years   $    128.4   $     123.3
Buildings.........................................................         5 - 40 years        257.3         257.1
Machinery and equipment...........................................         3 - 15 years        132.5         127.9
Construction in progress..........................................                              14.3           7.3
                                                                                          -----------  ------------
                                                                                               532.5         515.6
Less:  accumulated depreciation...................................                            (164.6)       (140.4)
                                                                                          -----------  ------------
                                                                                          $    367.9   $     375.2
                                                                                          ===========  ============

      Depreciation expense for the years ended December 31, 2003, 2002 and 2001
was $26.3 million, $31.7 million, and $103.9 million, respectively.

      As discussed in Note 3, the Company in 2003 recorded a charge of $1.4
million for asset impairments related to real estate operations.

7.    INVESTMENTS IN UNCONSOLIDATED AFFILIATES

      FIREROCK, LLC
      A subsidiary of the Company and Westbrook Firerock, LLC, each hold a 50%
interest in a joint venture ("FIREROCK, LLC") which develops and manages a real
estate project in Arizona. Selected financial information for the FireRock, LLC
joint venture is as follows (in millions):


                                                                            DECEMBER 31,
                                                                     ---------------------------
                                                                         2003          2002
                                                                     ------------  -------------
Assets.............................................................  $      26.7   $       33.0
Liabilities........................................................         13.6           17.1
Equity.............................................................         13.1           15.9


                                                               YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------
                                                         2003             2002          2001
                                                     -------------  -------------  --------------
Net income........................................   $        1.2   $        4.2   $        10.1
                                                     =============  =============  ==============

      SUNRIDGE CANYON LLC
      Since June 1994, a subsidiary of the Company and SunCor Development
Company each held a 50% interest in a joint venture ("SUNRIDGE CANYON LLC")
engaged in management of a real estate project in Arizona. The Company's equity
in losses from Sunridge Canyon LLC were $0.3 million, $0.1 million and $0.1
million for the years ended December 31, 2003, 2002 and 2001, respectively. In
December 2003, the Company sold its interest in Sunridge Canyon LLC for $1.0
million, resulting in a gain of $0.8 million.

8.    SHORT-TERM BORROWINGS

      During 2003 and 2002, the Company had average short-term borrowings
outstanding of $16.1 million and $6.8 million, respectively, under the credit
facilities described below. The weighted average interest rate for these
facilities during 2003 and 2002 was 2.2% and 4.7%, respectively.

      PALCO CREDIT AGREEMENTS
      At December 31, 2003, $0.3 million of letters of credit and no borrowings
were outstanding under Palco's prior credit agreement. Unused availability was
limited to $24.4 million at December 31, 2003. On January 23, 2004, Palco
entered into a new $35.0 million asset-based credit agreement with a bank (the
"PALCO CREDIT AGREEMENT"). The Palco Credit Agreement provides revolving credit
for three years after which Palco may request a one-year extension. Borrowings
under the agreement bear interest at rates based upon (and at variable margins
above) LIBOR or the prime rate, and are secured by the substantial portion of
Palco's assets. At February 29, 2004, $12.0 million was outstanding under the
Palco Credit Agreement. In accordance with the agreement, Palco is required to
maintain borrowings of $12.0 million through February 12, 2005. Palco had $6.4
million of unused availability at February 29, 2004. Palco anticipates that with
respect to the first quarter of 2004, it will not meet certain quarterly
earnings thresholds required under the Palco Credit Agreement, and is therefore
seeking a waiver from the lender. The lender has preliminarily indicated that it
will grant such a waiver; however, there can be no assurance that this will be
the case.

      SCOTIA LLC LINE OF CREDIT
      Scotia LLC has entered into an agreement (the "SCOTIA LLC LINE OF CREDIT")
with a group of banks pursuant to which Scotia LLC may borrow to pay interest on
the Timber Notes. The maximum amount Scotia LLC may borrow is equal to one
year's interest on the aggregate outstanding principal balance of the Timber
Notes (the "REQUIRED LIQUIDITY AMOUNT"). On June 20, 2003, the Scotia LLC Line
of Credit was extended to July 7, 2006. At or near the completion of such
extension, Scotia LLC will request that the Scotia LLC Line of Credit be
extended for an additional period of not less than 364 days. If not extended,
Scotia LLC may draw upon the full amount available. The amount drawn would be
repayable in 12 semiannual installments on each note payment date (after the
payment of certain other items, including the Aggregate Minimum Principal
Amortization Amount, as defined, then due), commencing approximately two and
one-half years following the date of the draw. Borrowings under the Scotia LLC
Line of Credit generally bear interest at the Base Rate (as defined in the
agreement) plus 0.25% or at LIBOR plus 1.0% (at any time the borrowings have not
been continually outstanding for more than six months). At December 31, 2003,
Scotia LLC could have borrowed a maximum of $58.5 million under the Scotia LLC
Line of Credit, and had no borrowings outstanding under the Scotia LLC Line of
Credit.

9.    LONG-TERM DEBT

      Principal amounts of long-term debt consist of the following (in
millions):


                                                                                                 DECEMBER 31,
                                                                                          -------------------------
                                                                                              2003         2002
                                                                                          -----------  ------------

6.55% Scotia LLC Class A-1 Timber Notes due July 20, 2028...............................  $     83.9   $     103.2
7.11% Scotia LLC Class A-2 Timber Notes due July 20, 2028...............................       243.2         243.2
7.71% Scotia LLC Class A-3 Timber Notes due July 20, 2028...............................       463.3         463.3
7.56% Lakepointe Notes due June 8, 2021.................................................       117.2         119.5
7.03% Motel Notes due May 1, 2018.......................................................        48.5          49.4
6.08% Beltway Notes due November 9, 2024................................................        30.4          30.9
7.12% Palmas Notes due December 20, 2030................................................        30.0          30.0
Other notes and contracts, primarily secured by receivables, buildings, real estate
   and equipment........................................................................        24.4          28.7
                                                                                          -----------  ------------
                                                                                             1,040.9       1,068.2
Less: current maturities................................................................       (28.5)        (30.5)
   Timber Notes held in SAR Account.....................................................       (58.9)        (55.4)
                                                                                          -----------  ------------
                                                                                          $    953.5   $     982.3
                                                                                          ===========  ============

      The amount attributable to the Timber Notes held in the SAR Account of
$54.8 million at December 31, 2003, reflected in Note 5 represents the amount
paid to acquire $58.9 million principal amount of Timber Notes.

      On March 5, 2002, Scotia LLC notified the trustee for the Timber Notes
that it had met all of the requirements of the SAR Reduction Date, as defined in
the Timber Notes Indenture (i.e., certain harvest, THP inventory and Scotia LLC
Line of Credit requirements). Accordingly, on March 20, 2002, Scotia LLC
released $29.4 million from the SAR Account and distributed this amount to
Pacific Lumber.

      The Company's publicly traded debt instruments are thinly traded financial
instruments; accordingly, their market prices at any balance sheet date may not
be representative of the prices which would be derived from a more active
market. The fair value of publicly traded debt is determined based on quoted
market prices. The fair value of debt which is not publicly traded is estimated
using cash flows discounted at current borrowing rates. At December 31, 2003,
the estimated fair value of current and long-term debt was $801.2 million. At
December 31, 2002, the estimated fair value of the Company's current and
long-term debt was $791.3 million.

      SCOTIA LLC TIMBER NOTES
      Scotia LLC issued $867.2 million aggregate principal amount of Timber
Notes on July 20, 1998. The Timber Notes and the Scotia LLC Line of Credit are
secured by a lien on (i) Scotia LLC's timber, timberlands and timber rights and
(ii) substantially all of Scotia LLC's other property. The Timber Notes
Indenture permits Scotia LLC to have outstanding up to $75.0 million of
non-recourse indebtedness to acquire additional timberlands, as well as to issue
additional timber notes provided certain conditions are met (including repayment
or redemption of the remaining $83.9 million of Class A-1 Timber Notes and that
the remaining Timber Notes meet certain ratings standards).

      The Timber Notes were structured to link, to the extent of cash available,
the deemed depletion of Scotia LLC's timber (through the harvest and sale of
logs) to the required amortization of the Timber Notes. The required amount of
amortization on any Timber Notes payment date is determined by various
mathematical formulas set forth in the Timber Notes Indenture. Principal and
interest are payable semi-annually, generally on January 20 and July 20 of each
year. The minimum amount of principal which Scotia LLC must pay (on a cumulative
basis and subject to available cash) through any Timber Notes payment date is
referred to as Minimum Principal Amortization. If the Timber Notes were
amortized in accordance with Minimum Principal Amortization, the final
installment of principal would be paid on July 20, 2028. The minimum amount of
principal which Scotia LLC must pay (on a cumulative basis) through any Timber
Notes payment date in order to avoid payment of prepayment or deficiency
premiums is referred to as "SCHEDULED AMORTIZATION." If all payments of
principal are made in accordance with Scheduled Amortization, the payment date
on which Scotia LLC will pay the final installment of principal is January 20,
2014. Such final installment would include a single bullet principal payment of
$463.3 million related to the Class A-3 Timber Notes.

      In November 1999, $169.0 million of funds from the sale of 5,600 acres of
timberlands (the "HEADWATERS TIMBERLANDS") were contributed to Scotia LLC and
set aside in the SAR Account. Amounts in the SAR Account are part of the
collateral securing the Timber Notes and are used to make principal payments to
the extent that cash flows from operations are insufficient to pay Scheduled
Amortization on the Class A-1 and Class A-2 Timber Notes. In addition, during
the six years beginning January 20, 2014, any amounts then remaining in the SAR
Account would be used to amortize the Class A-3 Timber Notes. Funds may from
time to time be released to Scotia LLC from the SAR Account if the amount in the
account at that time exceeds the Required Scheduled Amortization Reserve Balance
(as defined and set forth in the Timber Notes Indenture). If the balance in the
SAR Account falls below the Required Scheduled Amortization Reserve Balance, up
to 50% of any Remaining Funds (funds that could otherwise be released to Scotia
LLC free of the lien securing the Timber Notes) are required to be used on each
monthly deposit date to replenish the SAR Account. As of December 31, 2003, the
Required Scheduled Amortization Reserve Balance exceeded the amount held in the
SAR Account by approximately $11.2 million.

      On the note payment date in January 2003, Scotia LLC had $5.6 million set
aside in the note payment account to pay the $27.9 million of interest due (net
of to $1.9 million of additional interest due in respect of Timber Notes held by
Scotia LLC). The funds available under the Scotia LLC Line of Credit were used
to pay the remaining amount of interest due. Scotia LLC repaid $12.1 million of
principal on the Timber Notes (an amount equal to Scheduled Amortization) using
funds held in the SAR Account.

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

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

      In 2003, $5.4 million of funds from the SAR Account were used to
repurchase $6.4 million principal amount of Timber Notes, as permitted under the
Timber Notes Indenture, resulting in gains of $0.7 million (net of unamortized
deferred financing costs) on extinguishment of debt. In March 2004, $3.6 million
of funds from the SAR Account were used to repurchase $3.8 million principal
amount of Timber Notes, resulting in a small gain (net of unamortized deferred
financing costs) on extinguishment of debt.

      LAKEPOINTE NOTES
      In June 2001, the purchase of Lake Pointe Plaza was financed with proceeds
from the issuance of the Lakepointe Notes (see Note 4). The Lakepointe Notes
consist of $117.2 million principal amount (at December 31, 2003) of 7.56% notes
due June 8, 2021. The Lakepointe Notes are secured by the Lake Pointe Plaza
operating leases, Lake Pointe Plaza and a $60.0 million residual value insurance
contract.

      MOTEL NOTES
      In December 2002, Motel Assets acquired two business trusts which owned
sixteen motel properties and which properties secured the Motel Notes (see Note
4). The Motel Notes consist of $48.5 million principal amount (at December 31,
2003) of 7.03% notes due May 1, 2018. The Motel Notes are also secured by the
lease of the properties, and an $11.2 million residual value insurance contract.

      BELTWAY NOTES
      In November 2002, Beltway Assets financed the purchase of an office
building located in Houston, Texas, with proceeds from the Beltway Notes (see
Note 4). The Beltway Notes consist of $30.4 million principal amount (at
December 31, 2003) of 6.08% notes due November 9, 2004. The Beltway Notes are
secured by the lease, the building, and an $11.2 million residual value
insurance contract.

      PALMAS COUNTRY CLUB, INC. NOTES
      In October 2000, Palmas Country Club, Inc., which owns two golf courses
and other related assets, financed the construction and refurbishment of these
assets with $30.0 million principal amount of 7.12% notes due December 20, 2030
(the "PALMAS NOTES"). The Palmas Notes are secured by the country club assets
and a letter of credit.

      MATURITIES
      Scheduled maturities of long-term debt outstanding at December 31, 2003,
are as follows (in millions):


                                                                YEARS ENDING DECEMBER 31,
                                     ------------------------------------------------------------------------------
                                         2004         2005         2006         2007          2008      THEREAFTER
                                     -----------  -----------  ------------ ------------  -----------  ------------

Timber Notes.......................  $     17.6   $     19.9   $      23.2  $      27.8   $     25.0   $     618.0
Lakepointe Notes...................         1.4          1.0           1.3          1.7          1.8         110.0
Motel Notes........................         1.2          1.3           1.3          1.4          1.8          41.5
Beltway Notes......................         0.6          0.6           0.6          0.7          0.7          27.2
Palmas Notes.......................         0.4          0.4           0.5          0.5          0.5          27.7
Other..............................         7.3          5.5           6.6          0.5          0.3           4.2
                                     -----------  -----------  ------------ ------------  -----------  ------------
                                     $     28.5   $     28.7   $      33.5  $      32.6   $     30.1   $     828.6
                                     ===========  ===========  ============ ============  ===========  ============

      The scheduled maturities for the Timber Notes reflected in the table above
are based on Scheduled Amortization (subject to available cash).

      CAPITALIZED INTEREST
      Interest capitalized during the years ended December 31, 2003, 2002 and
2001 was $0.1 million, $0.9 million and $4.0 million, respectively.

      LOAN COVENANTS
      Certain debt instruments restrict the ability of the Company's
subsidiaries to transfer assets, make loans and advances or pay dividends to the
Company, and maintain a minimum net worth.

10.   INCOME TAXES

      The Company files consolidated federal income tax returns together with
its domestic subsidiaries, other than Kaiser and its subsidiaries. Kaiser and
its domestic subsidiaries are members of a separate consolidated return group
that files its own consolidated federal income tax returns.

      Income (loss) before income taxes and minority interests by geographic
area is as follows (in millions):


                                                                                     YEARS ENDED DECEMBER 31,
                                                                              -------------------------------------
                                                                                  2003        2002         2001
                                                                              ------------ ----------  ------------

Domestic....................................................................  $     (10.6) $   (97.8)  $    (162.1)
Foreign.....................................................................            -        2.5         203.7
                                                                              ------------ ----------  ------------
                                                                              $     (10.6) $   (95.3)  $      41.6
                                                                              ============ ==========  ============

      Income taxes are classified as either domestic or foreign based on whether
payment is made or due to the United States or a foreign country. Certain income
classified as foreign is subject to domestic income taxes.

      The benefit (provision) for income taxes on income (loss) before income
taxes and minority interests consists of the following (in millions):

                                                                                    YEARS ENDED DECEMBER 31,
                                                                           ----------------------------------------
                                                                                2003         2002          2001
                                                                           ------------  ------------  ------------
Current:
   Federal................................................................ $         -   $         -   $      (1.1)
   State and local........................................................           -          (0.1)         (0.2)
   Foreign................................................................           -          (4.5)        (40.6)
                                                                           ------------  ------------  ------------
                                                                                     -          (4.6)        (41.9)
                                                                           ------------  ------------  ------------
Deferred:
   Federal................................................................           -           4.6        (468.9)
   State and local........................................................        (1.0)         10.4         (25.4)
   Foreign................................................................           -             -           0.5
                                                                           ------------  ------------  ------------
                                                                                  (1.0)         15.0        (493.8)
                                                                           ------------  ------------  ------------
                                                                           $      (1.0)  $      10.4   $    (535.7)
                                                                           ============  ============  ============

      A reconciliation between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate to income before
income taxes and minority interests is as follows (in millions):


                                                                                    YEARS ENDED DECEMBER 31,
                                                                             --------------------------------------
                                                                                2003          2002         2001
                                                                            ------------  -----------  ------------
Income (loss) before income taxes and minority interests................... $     (10.6)  $    (95.3)  $      41.6
                                                                            ============  ===========  ============

Amount of federal income tax (provision) benefit based upon the statutory
   rate.................................................................... $       3.7   $     33.4   $     (14.6)
Changes in valuation allowances and revision of prior years' tax
   estimates...............................................................        (4.9)       (23.9)       (515.2)
Percentage depletion.......................................................           -            -           4.9
Foreign taxes, net of federal tax benefit..................................           -         (4.5)         (9.6)
State and local taxes, net of federal tax effect...........................         0.5          8.1          (0.3)
Adjustments due to deconsolidation of Kaiser...............................           -         (3.1)            -
Other......................................................................        (0.3)         0.4          (0.9)
                                                                            ------------  -----------  ------------
                                                                            $      (1.0)  $     10.4   $    (535.7)
                                                                            ============  ===========  ============

      Changes in valuation allowances and revision of prior years' tax
estimates, as shown in the table above, include changes in valuation allowances
with respect to deferred income tax assets, amounts for the reversal of reserves
which the Company no longer believes are necessary, and other changes in prior
years' tax estimates. Changes in valuation allowances and revision of prior
years' tax estimates includes $15.8 million and $530.4 million for 2002 and
2001, respectively, which are attributable to additional valuation allowances on
Kaiser's loss and credit carryforwards (see "--Kaiser's Income Taxes" below).
Generally, the other reversal of reserves relates to the expiration of the
relevant statute of limitations with respect to certain income tax returns or
the resolution of specific income tax matters with the relevant tax authorities.

      The components of the Company's net deferred income tax assets
(liabilities) are as follows (in millions):


                                                                                               DECEMBER 31,
                                                                                      -----------------------------
                                                                                           2003           2002
                                                                                      -------------- --------------
Deferred income tax assets:
   Postretirement benefits other than pensions......................................  $         5.0  $         4.5
   Loss and credit carryforwards....................................................          136.0          146.7
   Other liabilities................................................................           21.4           34.1
   Real estate......................................................................           20.2           18.7
   Timber and timberlands...........................................................            9.5           23.5
   Other............................................................................           33.0           29.9
   Valuation allowances.............................................................          (67.5)         (64.4)
                                                                                      -------------- --------------
      Total deferred income tax assets, net.........................................          157.6          193.0
                                                                                      -------------- --------------
Deferred income tax liabilities:
   Property, plant and equipment....................................................          (57.4)         (61.6)
   Deferred gains on sales of timber and timberlands................................           (6.6)         (32.7)
   Other............................................................................          (11.2)         (14.9)
                                                                                      -------------- --------------
      Total deferred income tax liabilities.........................................          (75.2)        (109.2)
                                                                                      -------------- --------------
Net deferred income tax assets......................................................  $        82.4  $        83.8
                                                                                      ============== ==============

      The Company evaluated all appropriate factors in determining the
realizability of the $136.0 million in deferred tax assets attributable to loss
and credit carryforwards. These factors included any limitations on the use of
loss and credit carryforwards, results of operations for 2003 and prior years,
the reversal of deferred gains, other temporary differences, the year the
carryforwards expire and the levels of taxable income necessary for utilization.
The Company also considered the potential recognition of the deferred gains on
sales of timber and timberlands. Based on this evaluation, the Company provided
valuation allowances of $5.0 million and $48.3 million in 2003 and 2002,
respectively. With respect to the $77.8 million of deferred tax assets
attributable to loss and credit carryforwards for which a valuation allowance
has not been provided, the Company believes that it is more likely than not that
it will realize the benefit for these carryforwards.

      The net deferred income tax assets in the above table do not include any
potential tax benefit attributable to the Company's investment in its Kaiser
shares. For federal tax purposes, the Company's basis is estimated to be $379.3
million (as compared to $(516.2) million reflected in these financial
statements), which would result in a federal tax benefit at current federal
statutory income tax rates of approximately $132.8 million. Should the Company
dispose of its investment in Kaiser or should the Company's investment in Kaiser
be determined to be worthless, the Company can give no assurance that any tax
benefit could be realized from the losses due to limitations imposed under the
Internal Revenue Code relating to capital losses.

      As of December 31, 2003 and 2002, $0.1 million and $8.9 million,
respectively, of the net deferred income tax assets listed above are included in
prepaid expenses and other current assets. Certain other portions of the
deferred income tax liabilities listed above are included in other accrued
liabilities and other noncurrent liabilities.

      The following table presents the estimated tax attributes for federal
income tax purposes at December 31, 2003, attributable to the Company (in
millions). The utilization of certain of these tax attributes is subject to
limitations.



                                                                                                        EXPIRING
                                                                                                       -----------
Regular tax attribute carryforwards:
   Current year net operating loss........................................................  $   10.6         2023
   Prior year net operating losses........................................................     341.6    2006-2022
   Alternative minimum tax credits........................................................       1.8   Indefinite

Alternative minimum tax attribute carryforwards:
   Current year net operating loss........................................................  $   11.2         2023
   Prior year net operating losses........................................................     360.3    2006-2022

      KAISER'S INCOME TAXES
      In light of the Cases, Kaiser provided additional valuation allowances of
$530.4 million in 2001, of which $505.4 million was recorded in provision for
income taxes in the Consolidated Statement of Operations, and $25.0 million was
recorded in other comprehensive income (loss) in the Consolidated Balance Sheet.
The additional valuation allowances were provided as Kaiser no longer believed
that the "more likely than not" recognition criteria were appropriate given a
combination of factors including: (a) the expiration date of its loss and credit
carryforwards; (b) the possibility that all or a substantial portion of the loss
and credit carryforwards and the tax basis of assets could be reduced to the
extent cancellation of indebtedness occurs as a part of a reorganization plan;
(c) the possibility that all or a substantial portion of the loss and credit
carryforwards could become limited if a change of ownership occurs as a result
of the Debtors' reorganization; and (d) due to updated expectations regarding
near-term taxable income. In prior periods, Kaiser had concluded that a
substantial portion of these items would more likely than not be realized (to
the extent not covered by valuation allowances) based on the cyclical nature of
its business, its history of operating earnings, and its then-existing
expectations for future years.

      Kaiser and its domestic subsidiaries are members of a separate
consolidated return group which files its own consolidated federal income tax
return. During the period from October 28, 1988, through June 30, 1993, Kaiser
and its domestic subsidiaries were included in the consolidated federal income
tax returns of the Company. The tax allocation agreements of Kaiser and KACC
with the Company terminated pursuant to their terms, effective for taxable
periods beginning after June 30, 1993. However, payments or refunds for periods
prior to July 1, 1993 related to certain jurisdictions could still have been
required pursuant to Kaiser's and KACC's respective tax allocation agreements
with the Company. In January 2003, the Company and Kaiser entered into a
settlement agreement providing that no payments would be due by either party to
the other party under the tax allocation agreements. On February 24, 2003, the
Bankruptcy Court approved this agreement. The Company had a reserve of $35.3
million related to the tax allocation agreements which was reversed in 2002
since this matter was resolved with no payment to Kaiser. See Note 12.

11.   EMPLOYEE BENEFIT AND INCENTIVE PLANS

      PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
      The Company has various retirement plans which cover essentially all
employees. Most of the Company's employees are covered by defined benefit plans.
The benefits are determined under formulas based on the employee's years of
service, age and compensation.

      The Company has unfunded postretirement medical benefit plans which cover
most of its employees. Under the plans, employees are eligible for health care
benefits upon retirement. Retirees make contributions for a portion of the cost
of their health care benefits. The expected costs of postretirement medical
benefits are accrued over the period the employees provide services to the date
of their full eligibility for such benefits. Postretirement medical benefits are
generally provided through a self-insured arrangement. The Company has not
funded the liability for these benefits, which are expected to be paid out of
cash generated by operations.

      The funded status of the Company's pension and other postretirement
benefit plans and the accrued benefit liability included in other long-term
liabilities as of December 31, 2003 and 2002, respectively, were as follows (in
millions):


                                                                    PENSION BENEFITS        MEDICAL/LIFE BENEFITS
                                                               -------------------------  -------------------------
                                                                             YEARS ENDED DECEMBER 31,
                                                               ----------------------------------------------------
                                                                   2003         2002          2003         2002
                                                               ------------ ------------  -----------  ------------
Change in projected benefit obligation:
   Projected benefit obligation at beginning of year.........  $      74.6  $      64.5   $     10.0   $       9.4

   Service cost..............................................          2.7          2.5          0.4           0.4
   Interest cost.............................................          5.1          4.8          0.6           0.7
   Plan participants' contributions..........................            -            -          1.4           1.3
   Actuarial (gain) loss.....................................          5.3          5.3          2.4           1.4
   Curtailments, settlements and amendments..................         (1.1)        (0.2)        (1.3)         (1.4)
   Benefits paid.............................................         (2.4)        (2.3)        (2.1)         (1.8)
                                                               ------------ ------------  -----------  ------------
      Projected benefit obligation at end of year                     84.2         74.6         11.4          10.0
                                                               ------------ ------------  -----------  ------------

Change in plan assets:
   Fair value of plan assets at beginning of year............         43.2         50.4            -             -
   Actual return on assets...................................         11.3         (5.6)           -             -
   Employer contributions....................................          4.6          0.7          0.8           0.4
   Plan participants' contributions..........................            -            -          1.3           1.3
   Benefits paid.............................................         (2.3)        (2.3)        (2.1)         (1.7)
                                                               ------------ ------------  -----------  ------------
   Fair value of plan assets at end of year..................         56.8         43.2            -             -
                                                               ------------ ------------  -----------  ------------

Funded status and amounts recognized in the consolidated
   balance sheet:
   Projected benefit obligation in excess of plan assets.....        (27.5)       (31.4)       (11.4)        (10.0)
   Unrecognized actuarial loss (gain)........................         12.6         14.3          2.1             -
   Unrecognized prior service costs..........................         (0.2)         0.8         (2.1)         (1.0)
                                                               ------------ ------------  -----------  ------------
      Accrued benefit liability..............................        (15.1)       (16.3)       (11.4)        (11.0)
   Additional minimum liability..............................         (6.3)        (8.2)           -             -
   Intangible asset..........................................            -          0.8            -             -
   Accumulated other comprehensive income....................          6.3          7.4            -             -
                                                               ------------ ------------  -----------  ------------
      Net amount recognized..................................  $     (15.1) $     (16.3)  $    (11.4)  $     (11.0)
                                                               ============ ============  ===========  ============

      A minimum pension liability adjustment is required when the actuarial
present value of the accumulated benefit obligation exceeds the fair value of
plan assets and accrued pension liability. In 2003, the partial reversal of a
minimum liability pre-tax adjustment of $1.9 million was recorded as a reduction
of the accrued benefit liability with an offsetting reduction of stockholders'
deficit as a component of other comprehensive income (loss). In 2002, a minimum
liability pre-tax adjustment of $8.2 million was reflected as an increase in
accrued benefit liability with an offsetting pre-tax charge to stockholders'
deficit of $7.4 million recorded as a component of other comprehensive income
(loss).

      The aggregate accumulated benefit obligation and fair value of plan assets
for pension plans with accumulated benefit obligations in excess of plan assets
were $78.2 million and $56.8 million, respectively, as of December 31, 2003, and
$67.8 million and $43.2 million, respectively, as of December 31, 2002.

      The components of pension and other postretirement medical benefits
expense for the three years ended December 31, 2003, were as follows (in
millions):


                                                           PENSION BENEFITS              MEDICAL/LIFE BENEFITS
                                                   -------------------------------  -------------------------------
                                                                       YEARS ENDED DECEMBER 31,
                                                   ----------------------------------------------------------------
                                                      2003  (1)  2002   (1) 2001       2003  (1)  2002  (1)  2001
                                                   ---------  ----------  --------  ---------  ---------  ---------
Components of net periodic benefit costs:
   Service cost..................................  $    2.7   $     2.5   $  41.3   $    0.4   $    0.4   $   12.5
   Interest cost.................................       5.1         4.8      68.0        0.6        0.7       49.4
   Expected return on assets.....................      (4.6)       (4.5)    (75.3)         -          -          -
   Amortization of prior service costs...........       0.1         0.1       5.6       (0.2)         -      (15.1)
   Recognized net actuarial (gain) loss..........         -        (0.1)     (1.0)         -       (0.1)      (0.1)
                                                   ---------  ----------  --------  ---------  ---------  ---------
   Net periodic benefit costs....................       3.3         2.8      38.6        0.8        1.0       46.7
   Curtailments, settlements and other...........       0.1         0.2      (0.4)       0.3       (0.5)      (0.1)
                                                   ---------  ----------  --------  ---------  ---------  ---------
      Adjusted net periodic benefit costs(2).....  $    3.4   $     3.0   $  38.2   $    1.1   $    0.5   $   46.6
                                                   =========  ==========  ========  =========  =========  =========

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

(1)   As a result of the deconsolidation of Kaiser, the aluminum segment's
      information is not included in this table for 2003 and 2002.
(2)   Approximately $24.5 million of the $38.2 million adjusted net periodic
      benefit costs in 2001 related to pension accruals that were provided in
      respect to headcount reductions at Kaiser.

      The net periodic pension cost attributable to Kaiser's plans was $36.3
million for the year ended December 31, 2001. Included in the net periodic
postretirement medical/life benefit cost is $45.7 million for the year ended
December 31, 2001, attributable to Kaiser's plans.

      The measurement date used for the Company's pension and postretirement
benefit plans was December 31, 2003. The underlying assumptions of the Company's
pension and other postretirement benefit plans for the three years ended
December 31, 2003, were as follows:


                                                                    PENSION BENEFITS        MEDICAL/LIFE BENEFITS
                                                                ------------------------  -------------------------
                                                                             YEARS ENDED DECEMBER 31,
                                                                ---------------------------------------------------
                                                                 2003    2002     2001     2003     2002     2001
                                                                ------- -------  -------  -------  -------  -------
Weighted-average assumptions:
   Discount rate..............................................    6.25%   6.75%    7.25%    6.25%   6.75%     7.25%
   Expected return on plan assets.............................    8.00%   8.00%    9.50%       -        -        -
   Rate of compensation increase..............................    4.20%   5.00%    4.00%       -        -     4.00%

      The average annual assumed rate of increase in the per capita cost of
covered benefits (i.e. health care cost trend rate) from 2004 through 2005 is
10.0% for all participants. The rate of increase is assumed to decline gradually
to 5.0% in 2010 for all participants and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates as of December 31, 2003 would have the following
effects (in millions):


                                                                                  1-PERCENTAGE-     1-PERCENTAGE-
                                                                                  POINT INCREASE    POINT DECREASE
                                                                                 ----------------  ----------------
Effect on total of service and interest cost components......................... $      0.1        $    (0.1)
Effect on the postretirement benefit obligations................................        1.3             (1.1)

      The plans' investments are held under a trust agreement with an
independent trustee. The plans' Investment Committees establish the investment
policies for the plans' assets and have selected certain investment funds
maintained by the trustee for investment of plan assets. The Investment
Committees also determine the portion of plan assets to be invested in such
funds. The trustee selects third party investment managers for these funds and
the portion of each fund to be managed by the respective investment managers.
The investment managers in turn determine in which equity, debt and/or other
securities the assets under their direction will be invested. Actual investment
results achieved by the investment funds are reviewed by the Investment
Committees on a regular basis. As of December 31, 2003, the Investment
Committees' target asset allocations were 70% for equity securities and 30% for
fixed income securities.

      The weighted-average asset allocations for the Company's pension plans at
December 31, 2003 and 2002, by asset category are as follows:


                                                                                           YEARS ENDED DECEMBER 31,
                                                                                           ------------------------
                                                                                             2003         2002
                                                                                           ----------  ------------

Asset Category:
   Equity securities.....................................................................        70%           70%
   Debt securities.......................................................................        30            30
                                                                                           ----------  ------------
      Total                                                                                     100%          100%
                                                                                           ==========  ============

      The expected rate of return on plan assets assumption, used in the
determination of net periodic pension cost, will be increased from 8.0% to 8.5%
for 2004. The Company's expected rate of return assumption is based on
historical returns on plan assets and the expected long-term returns for the
asset allocation targets in place at December 31, 2003.

      The Company's funding policy is to make annual contributions to the plans
which equal or exceed the minimum funding requirements of ERISA. The Company is
in compliance with this policy. An assumed annual rate of return on plan assets
of 8.0% was used in the determination of the ERISA minimum funding requirements
for the plan years ended December 31, 2003 and 2002. Expected funding
requirements for pension benefits for 2004 range from $1.6 million to $6.8
million. Such funding requirements are uncertain due to legislation currently
pending in Congress.

      SAVINGS AND INCENTIVE PLANS
      The Company has various defined contribution savings plans designed to
enhance the existing retirement programs of participating employees. Expenses
incurred by the Company for all of these plans were $0.7 million, $0.5 million
and $6.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively.

12.     INVESTMENT IN KAISER

      Reorganization Proceedings
      Kaiser, its wholly owned subsidiary, Kaiser Aluminum and Chemical
Corporation ("KACC"), and 24 of KACC's subsidiaries have filed separate
voluntary petitions in the United States Bankruptcy Court for the District of
Delaware (the "BANKRUPTCY COURT") for reorganization under Chapter 11 of the
United States Bankruptcy Code (the "CODE"). Kaiser, KACC and the 15 subsidiaries
of KACC that filed petitions on February 12, 2002, are collectively referred to
herein as the "ORIGINAL DEBTORS." Additional subsidiaries of KACC filed
petitions in the first quarter of 2003. The Original Debtors and the additional
debtors are collectively referred to herein as the "DEBTORS," and the Chapter 11
proceedings of these entities are collectively referred to herein as the
"CASES." For purposes of these financial statements, the term "FILING DATE"
means, with respect to any particular Debtor, the date on which such Debtor
filed its Case. The Cases are being jointly administered. The Debtors are
managing their businesses in the ordinary course as debtors-in-possession
subject to the control and administration of the Bankruptcy Court.

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

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

      As provided by the Code, the Debtors had the exclusive right to propose a
plan of reorganization for 120 days following the initial Filing Date. The
Bankruptcy Court has subsequently approved several extensions of the exclusivity
period for all Debtors, the most recent of which was set to expire February 29,
2004. A motion to extend the exclusivity period for certain Debtors through
April 30, 2004, and for the remaining Debtors through June 30, 2004, was filed
by Kaiser in February 2004, and the Debtors believe that it is likely that the
exclusivity period for all Debtors will be extended through at least April 30,
2004. Kaiser has related that additional extensions may be sought. However, no
assurance can be given that any future extension requests will be granted by the
Bankruptcy Court. If the Debtors fail to file a plan of reorganization during
the exclusivity period, or if such plan is not accepted by the requisite number
of creditors and equity holders entitled to vote on the plan, other parties in
interest in the Cases may be permitted to propose their own plan(s) of
reorganization for the Debtors.

      In March 2002, the Company filed a suit requesting the Bankruptcy Court to
find that it has no further obligations to the Debtors under certain tax
allocation agreements. The Company's suit was based on the assertion that the
agreements are personal contracts and financial accommodations which cannot be
assumed under the Code. Kaiser and the Company subsequently settled this suit,
which settlement was approved by the Bankruptcy Court on February 24, 2003.
Pursuant to the settlement, the parties agreed to release each other from all
present and future claims or obligations under the tax allocation agreements.
The Company had a reserve of $35.3 million related to the tax allocation
agreements which was reversed in 2002 since this matter was resolved with no
payment to Kaiser.

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

      Kaiser's common stock is publicly traded on the OTC Bulletin Board under
the trading symbol "KLUCQ." The market value for the 50,000,000 Kaiser Shares,
based on the price per share quoted at the close of business on March 19, 2004,
was $6.0 million. There can be no assurance that such value would be realized
should the Kaiser Shares be sold.

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

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


                                                                                          DECEMBER 31,
                                                                                --------------------------------
                                                                                      2003             2002
                                                                                ---------------  ---------------

Current assets................................................................  $        426.0   $        516.6
Investments in and advances to unconsolidated affiliates......................            57.0             69.7
Property, plant and equipment, net............................................           612.6          1,009.9
Other assets..................................................................           527.9            629.2
                                                                                ---------------  ---------------
                                                                                $      1,623.5   $      2,225.4
                                                                                ===============  ===============

Current liabilities...........................................................  $        321.1   $        333.6
Other long-term liabilities...................................................            75.1             86.9
Long-term debt................................................................            24.2             42.7
Liabilities subject to compromise.............................................         2,820.0          2,726.0
Minority interests............................................................           121.8            121.8
Stockholders' deficit.........................................................        (1,738.7)        (1,085.6)
                                                                                ---------------  ---------------
                                                                                $      1,623.5   $      2,225.4
                                                                                ===============  ===============

                                                                                   YEARS ENDED DECEMBER 31,
                                                                         ------------------------------------------
                                                                             2003            2002         2001
                                                                         -----------  -------------- --------------

Net sales............................................................... $  1,365.3   $     1,469.6  $     1,732.7
Costs and expenses......................................................   (2,104.4)       (1,875.6)      (1,667.8)
                                                                         -----------  -------------- --------------
Operating income (loss).................................................     (739.1)         (406.0)          64.9
Interest expense........................................................      (10.7)          (20.7)        (109.0)
Other income (expense), net.............................................      (33.5)          (32.9)         130.8
Provision for income taxes..............................................      (14.2)          (14.9)        (550.2)
Minority interests......................................................        9.2             5.8            4.1
                                                                         -----------  -------------- --------------
Net loss................................................................ $   (788.3)  $      (468.7) $      (459.4)
                                                                         ===========  ============== ==============

13.   COMMITMENTS AND CONTINGENCIES

      COMMITMENTS
      The Company leases certain facilities and equipment under operating
leases. Minimum rental commitments under operating leases at December 31, 2003,
are as follows:


YEARS ENDED DECEMBER 31,                     (IN MILLIONS)
------------------------------------------  --------------

2004......................................  $         4.3
2005......................................            3.3
2006......................................            2.9
2007......................................            2.5
2008......................................            1.9
Thereafter................................            1.1
                                            --------------
Total minimum lease payments..............  $        16.0
                                            ==============

      Future minimum rentals receivable under subleases at December 31, 2003,
were $0.1 million. Rental expense for operating leases was $4.3 million, $5.1
million and $46.9 million for the years ended December 31, 2003, 2002 and 2001,
respectively.

      The Company owns certain commercial properties which are leased to tenants
under operating leases. Lease terms average 20 years. Minimum rentals on
operating leases are contractually due as follows:


YEARS ENDED DECEMBER 31,                             (IN MILLIONS)
--------------------------------------------------  --------------

2004..............................................  $        17.4
2005..............................................           17.0
2006..............................................           17.3
2007..............................................           17.5
2008..............................................           17.8
Thereafter........................................          226.1
                                                    --------------
Total minimum rentals.............................  $       313.1
                                                    ==============

      CONTINGENCIES

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

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

      The HCP and related incidental take permits issued by the federal
government pursuant to the HCP ("FEDERAL PERMITS") allow incidental "take" of
certain species located on the Company's timberlands which species have been
listed by the federal government under the federal Endangered Species Act
("ESA") so long as there is no "jeopardy" to the continued existence of such
species. The HCP identifies the measures to be instituted in order to minimize
and mitigate the anticipated level of take to the greatest extent practicable.
The HCP and Federal Permits have a term of 50 years. Since the consummation of
the Headwaters Agreement in March 1999, there has been a significant amount of
work required in connection with the implementation of the HCP and SYP
(together, the "ENVIRONMENTAL PLANS"), and this work could continue for several
more years.

      Water Quality
      Laws and regulations dealing with water quality are impacting the Company
primarily in three areas: efforts by the Environmental Protection Agency ("EPA")
to establish the total maximum daily load limits ("TMDLS") in water courses that
have been declared to be water quality impaired; actions by the North Coast
Regional Water Quality Control Board ("NORTH COAST WATER BOARD") to impose waste
discharge reporting requirements in respect of watersheds on the Company's
timberlands and in some cases, clean-up or prevention measures; and other
actions by the North Coast Water Board during the THP approval process which
impose certain operational requirements on individual THPs.

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

      Since the 2002-2003 winter operating period, Palco has been required to
submit "Reports of Waste Discharge" to the North Coast Water Board each year in
order to conduct winter harvesting activities in the Elk River and Freshwater
watersheds. After consideration of these reports, the North Coast Water Board
imposed requirements on Palco to implement additional mitigation and erosion
control practices in these watersheds for the last two winter operating periods.
In addition, the North Coast Water Board has extended the requirements for
certain mitigation and erosion control practices to the Bear, Jordon and Stitz
watersheds. Reporting and mitigation requirements imposed by the North Coast
Water Board have modestly increased operating costs and may in the future
further increase costs, cause delays in THP approvals or lower harvest levels.
In addition, the North Coast Water Board has issued a clean up and abatement
order (the "ELK RIVER ORDER") for the Elk River watershed which is aimed at
addressing existing sediment production sites through clean up actions. The
North Coast Water Board has also initiated the process which could result in
similar orders for the Freshwater and Bear Creek watersheds, and are
contemplating similar actions for the Jordon and Stitz Creek watersheds. The Elk
River Order, as well as additional orders in the other watersheds (should they
be issued), could result in significant costs to Palco beginning in 2004 and
extending over a number of years. Palco's appeal of the Elk River Order to the
State Water Resources Control Board (the "STATE WATER BOARD") was denied. Palco
is in the process of appealing the decision of the State Water Board in state
court. Palco is not able to readily move its harvesting activities between
watersheds due to, among other things historic harvest patterns, adjacency
restrictions, and the age classes of trees.

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

      Litigation
      A California state court has invalidated the SYP in connection with two
lawsuits filed against Palco as described below, which decision has been
appealed. Other actions are pending which seek to prevent the Company from
implementing the HCP, implementing certain of the Company's approved THPs, or
carrying out certain other operations.

      In March 1999, 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. (the
"EPIC-SYP/PERMITS LAWSUIT") was filed. This action alleged, among other things,
various violations of the California Endangered Species Act ("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
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 (the "USWA
LAWSUIT") was filed challenging the validity and legality of the SYP. The
EPIC-SYP/Permits and USWA lawsuits were consolidated for trial. On October 31,
2003, the Court entered a judgment invalidating the SYP and the California
Permits due to several deficiencies in agency procedures and the failure of
Palco to submit a complete and comprehensible SYP. The Court's decision,
however, allowed for harvesting on THPs which rely on the SYP and were approved
prior to July 23, 2003. The short-term effect of the ruling was to preclude
approval, under the SYP, of a small number of THPs which were under review but
had not been approved, and a minor reduction in 2003 harvesting that had been
expected from these specific THPs. As a result of this case, Palco has since
October 2002 been obtaining review and approval of new THPs under a procedure
provided for in the forest practice rules that does not depend upon the SYP and
the California Permits and expects to follow this procedure for the foreseeable
future. On November 19, 2003, Palco appealed the October 31, 2003, decision. On
January 29, 2004, the plaintiffs in these lawsuits filed claims against the
defendants totaling $5.8 million for reimbursement of attorneys fees and other
expenses incurred in connection with these matters.

      In July 2001, an action entitled Environmental Protection Information
Center v. The Pacific Lumber Company, Scotia Pacific Company LLC (the "BEAR
CREEK LAWSUIT") was filed and later amended to add the EPA as a defendant. The
lawsuit alleges that Palco's harvesting and other forestry activities under
certain of its approved THPs will result in discharges of pollutants in
violation of the CWA. The plaintiff asserts that the CWA requires the defendants
to obtain a permit from the North Coast Water Board before beginning timber
harvesting and road construction activities and is seeking to enjoin these
activities until such permit has been obtained. The plaintiff also seeks civil
penalties of up to $27,500 per day for the defendant's alleged continued
violation of the CWA. On October 14, 2003, in connection with certain motions
that had been filed, the Court upheld the validity of an EPA regulation which
exempts harvesting and other forestry activities from certain discharge
requirements. Both state and federal agencies, along with Palco and other timber
companies, have relied upon this regulation for more than 25 years. However, the
Court interpreted the regulation in such a way as to narrow the forestry
operations which are exempted, thereby limiting the regulation's applicability
and subjecting culverts and ditches to permit requirements. This ruling has
widespread implications for the timber industry in the United States. The case
is not yet final as the trial has not yet been held, and there are many
unresolved issues involving interpretation of the Court's decision and its
application to actual operations. Should the decision ultimately become final
and held to apply to Palco's timber operations, it may have some or all of the
following effects: impose additional permitting requirements, delay approvals of
THPs, increase harvesting costs, and add water protection measures beyond those
contained in the HCP. Nonetheless, it is not likely that civil penalties will be
awarded for operations that occurred prior to the Court's decision due to the
historical reliance by timber companies on the regulation and the Company's
belief that the requirements under the HCP are adequate to ensure that sediment
and pollutants from its harvesting activities will not reach levels harmful to
the environment. While the impact of a conclusion to this case that upholds the
October 14, 2003, ruling may be adverse, the Company does not believe that such
an outcome would have a material adverse impact on the Company's consolidated
financial condition, results of operations or liquidity. Nevertheless, due to
the numerous ways in which the Court's interpretation of the regulation could be
applied to actual operations, there can be no assurance that this will be the
case. Palco has filed a motion requesting that the Court permit an intermediate
appeal of its October 14 ruling.

      On November 20, 2002, an action entitled Humboldt Watershed Council, et al
v. North Coast Regional Water Quality Control Board, et al. (the "HWC 2002
LAWSUIT"), naming Palco as a real party in interest, was filed. The suit sought
to enjoin timber operations in the Elk River and Freshwater watersheds until and
unless the regional and state water boards imposed on those operations waste
discharge requirements that met standards demanded by the plaintiff. In August
2003, this case was dismissed by the Court at the request of the plaintiff.

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

      On February 25, 2003, the District Attorney of Humboldt County filed a
civil suit entitled The People of the State of California v. The Pacific Lumber
Company, Scotia Pacific Holding Company and Salmon Creek Corporation (the
"HUMBOLDT DA ACTION"). The suit was filed under California's unfair competition
law and alleges that Pacific Lumber, Scotia LLC and Salmon Creek used certain
unfair business practices in connection with completion of the March 1999
agreement consummated by Palco, Scotia LLC and Salmon Creek with the United
States and California (the "HEADWATERS AGREEMENT"), and that this resulted in
the ability to harvest significantly more trees under the Environmental Plans
than would have otherwise been the case. The suit seeks a variety of remedies
including a civil penalty of $2,500 for each additional tree that has been or
will be harvested due to this alleged increase in harvest, as well as
restitution and an injunction in respect of the additional timber harvesting
allegedly being conducted. A hearing on Palco's motions for sanctions and
dismissal of the case was held on July 28, 2003, and Palco is awaiting the
Court's decision. The Company believes that this suit is without merit; however,
there can be no assurance that Palco will prevail or that an adverse outcome
would not be material to the Company's consolidated financial position, results
of operations and/or liquidity.

      On December 17, 2003, an action entitled Humboldt Watershed Council, et
al. v. North Coast Regional Water Quality Board, et al. (the "HWC 2003
LAWSUIT"), naming Palco as a real party in interest, was filed. The plaintiffs
allege that the North Coast Water Board should have required waste discharge
reports in respect of all timber harvesting activities in the Freshwater and Elk
River watersheds, and are seeking to have this requirement imposed on Palco. The
Company does not believe that the resolution of this action should result in a
material adverse effect on its financial condition, results of operations or
liquidity.

      On November 16 2001, Palco filed a case entitled The Pacific Lumber
Company, et al. v. California State Water Resources Control Board (the "THP NO.
520 LAWSUIT") alleging that the State Water Board had no legal authority to
impose mitigation measures that were requested by the staff of the North Coast
Water Board during the THP review process and rejected by the CDF. When the
staff of the North Coast Water Board attempted to impose these mitigation
measures in spite of the CDF's decision, Palco appealed to the State Water
Board, which imposed certain of the requested mitigation measures and rejected
others. Palco filed the THP No. 520 lawsuit challenging the State Water Board's
decision, and in January 2003, the Superior Court granted Palco's request for an
order invalidating the imposition of these additional measures. The State Water
Board appealed this decision and on March 18, 2004 the appellate court reversed
the decision of the Superior Court. The appellate court's decision could result
in increased demands by the regional and state water boards and their staffs to
impose controls and limitations upon Palco's timber harvesting beyond those
provided for by the Environmental Plans or could provide additional regulatory
powers to the regional and state water boards and their staffs beyond those
provided in Senate Bill 810. Palco intends to seek review of the appellate
court's decision by the California Supreme Court.

      OTS Contingency and Related Matters
      On December 26, 1995, the United States Department of Treasury's Office of
Thrift Supervision (the "OTS") initiated a formal administrative proceeding (the
"OTS ACTION") against the Company and others alleging, among other things,
misconduct by the Company and certain of its affiliated persons (collectively,
the "RESPONDENTS") and others with respect to the failure of United Savings
Association of Texas ("USAT"). The OTS sought damages ranging from $326.6
million to $821.3 million under various theories. On October 17, 2002, the OTS
action was settled for $0.2 million and with no admission of wrongdoing on the
part of the Respondents.

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

      On May 31, 2000, the Respondents filed a counterclaim to the FDIC action.
On November 8, 2002, the Respondents filed an amended counterclaim and an
amended motion for sanctions (collectively, the "SANCTIONS MOTION"). The
Sanctions Motion states that the FDIC illegally paid the OTS to bring claims
against the Respondents and that the FDIC illegally sued for an improper
purpose. The Respondents are seeking as a sanction to be made whole for the
attorneys' fees they have paid (plus interest) in connection with the OTS and
FDIC actions. As of December 31, 2003, such fees were in excess of $40.0
million. The Respondents are pursuing this claim vigorously.

      In September 1997, the Company filed suit against a group of its insurers
after unsuccessful negotiations with certain of the insurers regarding coverage,
under the terms of certain directors and officers liability policies, of
expenses incurred in connection with the OTS and FDIC actions. The insurers
requested arbitration, and as a result the lawsuit was dismissed in April 1998.
Following binding arbitration, the arbitration panel in February 2003 awarded
the Company $6.5 million plus interest. The matter was subsequently settled for
$8.0 million, and such amount is reflected in investment, interest and other
income (expense) in 2003.

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

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

      Other Matters
      On January 21, 2004, the owner of the Candelero Hotel located at Palmas
filed a lawsuit against Palmas del Mar Properties, Inc. ("PDMPI"), a subsidiary
of the Company, claiming an easement on property owned by PDMPI. The Company
does not believe that the resolution of this matter will result in a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.

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

14.   STOCKHOLDERS' DEFICIT

      PREFERRED STOCK
      The holders of the Company's Class A Preferred Stock are entitled to
receive, if and when declared, preferential cash dividends at the rate of $0.05
per share per annum and participate thereafter on a share for share basis with
the holders of Common Stock in any cash dividends, other than cash dividends on
the Common Stock in any fiscal year to the extent not exceeding $0.05 per share.
Stock dividends declared on the Common Stock would result in the holders of the
Class A Preferred Stock receiving an identical stock dividend payable in shares
of Class A Preferred Stock. At the option of the holder, the Class A Preferred
Stock is convertible at any time into shares of Common Stock at the rate of one
share of Common Stock for each share of Class A Preferred Stock. Each holder of
Class A Preferred Stock is generally entitled to ten votes per share on all
matters presented to a vote of the Company's stockholders.

      STOCK OPTION PLANS
      In 2002, the Company adopted the MAXXAM 2002 Omnibus Employee Incentive
Plan (the "2002 OMNIBUS PLAN"). Up to 700,000 shares of common stock and 70,000
shares of Class A Preferred Stock were reserved for awards pursuant to the 2002
Omnibus Plan, of which 307,910 and 70,000 shares, respectively, were available
to be awarded at December 31, 2003. The 2002 Omnibus Plan replaced the MAXXAM
1994 Omnibus Plan (the "1994 OMNIBUS PLAN"). Any shares which were not yet the
subject of grants under the 1994 Omnibus Plan no longer remain outstanding.

      The options (or rights, as applicable) granted in 2003, 2002 and 2001
generally vest at the rate of 20% per year commencing one year from the date of
grant. The following table summarizes the options or rights outstanding and
exercisable relating to the Company's stock option plans. The prices shown are
the weighted average price per share for the respective number of underlying
shares.


                                           2003                        2002                        2001
                                --------------------------  --------------------------- ---------------------------
                                   SHARES         PRICE        SHARES         PRICE        SHARES         PRICE
                                ------------  ------------  ------------  ------------- ------------- -------------
Outstanding at beginning of
   year.......................      992,650   $     25.58       800,100   $      30.12       601,200  $      34.96
Granted.......................      176,240         19.72       215,850           9.40       233,600         18.09
Exercised.....................            -             -             -              -             -             -
Expired or forfeited..........      (23,500)        51.12       (23,300)         31.40       (34,700)        33.02
                                ------------                ------------                -------------
Outstanding at end of year....    1,145,390         24.16       992,650          25.58       800,100         30.12
                                ============                ============                =============

Exercisable at end of year....      570,890   $     31.74       431,620   $      36.15       312,120  $      39.32
                                ============                ============                =============

      The following table summarizes information about stock options outstanding
as of December 31, 2003:


                                   WEIGHTED AVERAGE
   RANGE OF                            REMAINING         WEIGHTED AVERAGE          OPTIONS       WEIGHTED AVERAGE
EXERCISE PRICES       SHARES       CONTRACTUAL LIFE       EXERCISE PRICE          EXERCISABLE     EXERCISE PRICE
---------------    ------------    -----------------     -----------------        ---------      -----------------

   $9.40-$15.88       332,050            8.26                $  11.67               112,890          $   13.40
  $16.38-$19.72       470,040            8.55                   18.46               130,600              17.57
  $30.38-$45.50       204,300            3.15                   39.03               196,900              38.79
  $46.80-$56.00       139,000            3.93                   51.40               130,500              51.16
                   ----------                                                     ---------
                    1,145,390            6.94                   24.16               570,890              31.74
                   ==========                                                     =========

      In addition to the options reflected in the table above, 256,808 shares of
restricted Common Stock granted under the 1994 Omnibus Plan are outstanding.
These shares are subject to certain restrictions that lapse in 2014.

      Concurrent with the adoption of the 1994 Omnibus Plan, the Company adopted
the MAXXAM 1994 Non- Employee Director Plan (the "1994 DIRECTOR PLAN"). Up to
35,000 shares of Common Stock are reserved for awards under the 1994 Director
Plan. Options were granted to non-employee directors to purchase 2,400 shares of
common stock in 2003, 2002 and 2001, respectively. The weighted average exercise
prices of these options are $12.15, $11.00 and $17.02 per share, respectively,
based on the quoted market price at the date of grant. The options vest at the
rate of 25% per year commencing one year from the date of grant. At December 31,
2003, options for 18,200 shares were outstanding, 12,225 of which were
exercisable.

      SHARES RESERVED FOR ISSUANCE
      At December 31, 2003, the Company had 2,249,995 common shares and 160,000
Class A Preferred shares reserved for future issuances in connection with
various options, convertible securities and other rights as described above.

      RIGHTS
      On December 15, 1999, the Board of Directors of the Company declared a
dividend to its stockholders consisting of (i) one Series A Preferred Stock
Purchase Right (the "SERIES A RIGHT") for each outstanding share of the
Company's Class A Preferred Stock and (ii) one Series B Preferred Stock Purchase
Right (the "SERIES B RIGHT") for each outstanding share of the Common Stock. The
Series A Rights and the Series B Rights are collectively referred to herein as
the "RIGHTS". The Rights are exercisable only if a person or group of affiliated
or associated persons (an "ACQUIRING PERSON") acquires beneficial ownership, or
the right to acquire beneficial ownership, of 15% or more of the Company's
Common Stock, or announces a tender offer that would result in beneficial
ownership of 15% or more of the outstanding Common Stock. Any person or group of
affiliated or associated persons who, as of December 15, 1999, was the
beneficial owner of at least 15% of the outstanding Common Stock will not be
deemed to be an Acquiring Person unless such person or group acquires beneficial
ownership of additional shares of Common Stock (subject to certain exceptions).
Each Series A Right, when exercisable, entitles the registered holder to
purchase from the Company one share of Class A Preferred Stock at an exercise
price of $165.00. Each Series B Right, when exercisable, entitles the registered
holder to purchase from the Company one one-hundredth of a share of the
Company's new Class B Junior Participating Preferred Stock, with a par value of
$0.50 per share (the "JUNIOR PREFERRED STOCK"), at an exercise price of $165.00
per one-hundredth of a share. The Junior Preferred Stock has a variety of rights
and preferences, including a liquidation preference of $75.00 per share and
voting, dividend and distribution rights which make each one-hundredth of a
share of Junior Preferred Stock equivalent to one share of Common Stock.

      Under certain circumstances, including if any person becomes an Acquiring
Person other than through certain offers for all outstanding shares of stock of
the Company, or if an Acquiring Person engages in certain "self-dealing"
transactions, each Series A Right would enable its holder to buy Class A
Preferred Stock (or, under certain circumstances, preferred stock of an
acquiring company) having a value equal to two times the exercise price of the
Series A Right, and each Series B Right shall enable its holder to buy Common
Stock of the Company (or, under certain circumstances, common stock of an
acquiring company) having a value equal to two times the exercise price of the
Series B Right. Under certain circumstances, Rights held by an Acquiring Person
will be null and void. In addition, under certain circumstances, the Board is
authorized to exchange all outstanding and exercisable Rights for stock, in the
ratio of one share of Class A Preferred Stock per Series A Right and one share
of Common Stock per Series B Right. The Rights, which do not have voting
privileges, expire on December 11, 2009, but may be redeemed by action of the
Board prior to that time for $0.01 per right, subject to certain restrictions.

      VOTING CONTROL
      As of December 31, 2003, Mr. Charles E. Hurwitz beneficially owned
(exclusive of securities acquirable upon exercise of stock options but inclusive
of securities as to which Mr. Hurwitz disclaims beneficial ownership) directly
and through various entities (principally Gilda Investments, LLC, a wholly owned
subsidiary of Giddeon Holdings, Inc.) an aggregate of 99.1% of the Company's
Class A Preferred Stock and 47.9% of the Company's Common Stock (resulting in
combined voting control of approximately 74.9% of the Company). Mr. Hurwitz is
the Chairman of the Board and Chief Executive Officer of the Company and
President and Director of Giddeon Holdings, Inc. Giddeon Holdings, Inc. is
wholly owned by Mr. Hurwitz, members of his immediate family and trusts for the
benefit thereof.

15.   SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2003        2002        2001
                                                                                ----------  ----------  -----------
                                                                                           (In millions)
Supplemental information on non-cash investing and financing activities:
   Transfer of marketable debt securities from held-to-maturity to
      available-for-sale......................................................  $    14.4   $       -   $        -
   Repurchases of debt using restricted cash and marketable securities........        5.4           -            -

Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized interest.................................  $    75.0   $    83.3   $    186.9
   Income taxes paid, net.....................................................        0.4         0.2         52.2

16.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

      Summary quarterly financial information for the years ended December 31,
2003 and 2002 is as follows (in millions, except share information):


                                                                              THREE MONTHS ENDED
                                                          ---------------------------------------------------------
                                                           MARCH 31 (1)    JUNE 30     SEPTEMBER 30    DECEMBER 31
                                                          -----------  -------------  -------------- --------------
2003:
   Net sales............................................  $     74.8   $       78.6   $        89.4  $        93.8
   Income (loss) before income taxes and minority
      interests                                                (10.5)          (8.1)           (6.3)          14.3
   Net income (loss)....................................       (10.5)          (8.1)           (6.3)          13.3

   Basic earnings (loss) per common and common
      equivalent share..................................  $    (1.61)  $      (1.24)  $       (0.96) $        1.91
                                                          ===========  =============  ============== ==============
   Diluted earnings (loss) per common and common
      equivalent share..................................  $    (1.61)  $      (1.24)  $       (0.96) $        1.88
                                                          ===========  =============  ============== ==============

2002:
   Net sales............................................  $    246.8   $       73.0   $        79.2  $        69.5
   Loss before income taxes and minority interests......       (53.4)         (12.3)          (12.0)         (17.6)
   Net loss.............................................       (54.2)          (7.8)           (7.4)         (14.6)

   Basic and diluted loss per common and common
      equivalent share..................................  $    (8.30)  $      (1.20)  $       (1.14) $       (2.23)
                                                          ===========  =============  ============== ==============
---------------------

(1)   Information for the quarter ended March 31, 2002, includes Kaiser's
      results for the period from January 1, 2002, to February 11, 2002.



ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE

      None.


ITEM 9A.        CONTROLS AND PROCEDURES

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

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

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


                                    PART III

      Certain information required under Part III (Items 10 through 14) has been
omitted from this Report since the Company intends to file with the Securities
and Exchange Commission, not later than 120 days after the close of its fiscal
year, a definitive proxy statement pursuant to Regulation 14A which involves the
election of directors.


                                     PART IV

ITEM 15.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K


(A)   INDEX TO FINANCIAL STATEMENTS

      1.   FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):

           Independent Auditors' Report
           Report of Independent Public Accountants
           Consolidated Balance Sheet at December 31, 2003 and 2002
           Consolidated Statement of Operations for the Years Ended December 31, 2003,
                2002 and 2001
           Consolidated Statement of Cash Flows for the Years Ended December 31, 2003,
                2002 and 2001
           Consolidated Statement of Stockholders' Deficit for the Years Ended
                December 31, 2003, 2002 and 2001
           Notes to Consolidated Financial Statements

      2.   FINANCIAL STATEMENT SCHEDULES:

           Schedule I - Condensed Financial Information of Registrant at
              December 31, 2003 and 2002 and for the Years Ended December 31,
              2003, 2002 and 2001

           All other schedules are inapplicable or the required information is
              included in the Consolidated Financial Statements or the Notes
              thereto.

(B)   REPORTS ON FORM 8-K

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

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

      February 20, 2004 - report under Item 5 regarding a new mill project and
the completion of a high speed planer in respect of the Company's forest product
operations.

(C)   EXHIBITS

      Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 85), which index is incorporated herein by
reference.

     See notes to consolidated financial statements and accompanying notes.





           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                   MAXXAM INC.

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


                                                                                                DECEMBER 31,
                                                                                        ---------------------------
                                                                                             2003          2002
                                                                                        -------------  ------------
ASSETS

Current assets:
   Cash and cash equivalents..........................................................  $        9.1   $       7.9
   Marketable securities and other investments........................................          79.7          67.0
   Other current assets...............................................................           7.3          15.7
                                                                                        -------------  ------------
      Total current assets............................................................          96.1          90.6
Deferred income taxes.................................................................          61.2          54.5
Investment in subsidiaries............................................................             -           2.2
Other assets..........................................................................           1.0           1.3
                                                                                        -------------  ------------
                                                                                        $      158.3   $     148.6
                                                                                        =============  ============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
   Accounts payable and other accrued liabilities.....................................  $        4.5   $       9.8
                                                                                        -------------  ------------
      Total current liabilities.......................................................           4.5           9.8
Payables to subsidiaries, net of receivables and advances.............................         188.9         184.0
Losses recognized in excess of investment in Kaiser...................................         516.2         516.2
Losses recognized in excess of investments in subsidiaries............................          25.9             -
Other noncurrent liabilities..........................................................          24.7          21.1
                                                                                        -------------  ------------
      Total liabilities...............................................................         760.2         731.1
                                                                                        -------------  ------------

Stockholders' deficit:
   Preferred stock, $0.5 par value; $0.75 liquidation preference; 12,500,000
      shares authorized; Class A $0.05 Non-Cumulative Participating Convertible
      Preferred Stock; 669,040 shares issued; 668,194 shares outstanding..............           0.3           0.3
   Common stock, $0.50 par value; 28,000,000 shares authorized; 10,063,359
      shares issued; 5,976,467 and 6,527,671 shares outstanding, respectively.........           5.0           5.0
   Additional capital.................................................................         225.3         225.3
   Accumulated deficit................................................................        (619.8)       (608.2)
   Accumulated other comprehensive loss...............................................         (88.0)        (89.2)
   Treasury stock, at cost (shares held: preferred - 845; common - 4,086,893 and
      3,535,688, respectively)........................................................        (124.7)       (115.7)
                                                                                        -------------  ------------
      Total stockholders' deficit.....................................................        (601.9)       (582.5)
                                                                                        -------------  ------------
                                                                                        $      158.3   $     148.6
                                                                                        =============  ============

     See notes to consolidated financial statements and accompanying notes.






     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                                   MAXXAM INC.

                    STATEMENT OF OPERATIONS (UNCONSOLIDATED)
                            (IN MILLIONS OF DOLLARS)


                                                                                     YEARS ENDED DECEMBER 31,
                                                                              -------------------------------------
                                                                                  2003        2002         2001
                                                                              ----------- -----------  ------------

Investment, interest and other income (expense), net........................  $     13.4  $      4.1   $       7.2
Intercompany interest income (expense), net.................................       (16.1)      (26.9)        (25.0)
Interest expense............................................................           -        (0.3)         (1.0)
General and administrative expenses.........................................        (8.4)       (9.4)         (9.1)
Equity in losses of subsidiaries............................................        (8.9)      (56.4)       (454.9)
                                                                              ----------- -----------  ------------
Loss before income taxes....................................................       (20.0)      (88.9)       (482.8)
Credit for income taxes.....................................................         8.4         4.9          26.8
                                                                              ----------- -----------  ------------
Net loss....................................................................  $    (11.6) $    (84.0)  $    (456.0)
                                                                              =========== ===========  ============

     See notes to consolidated financial statements and accompanying notes.






     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                                   MAXXAM INC.

                    STATEMENT OF CASH FLOWS (UNCONSOLIDATED)
                            (IN MILLIONS OF DOLLARS)


                                                                                    YEARS ENDED DECEMBER 31,
                                                                            ---------------------------------------
                                                                                2003          2002         2001
                                                                            ------------  -----------  ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss...............................................................  $     (11.6)  $    (84.0)  $    (456.0)
   Adjustments to reconcile net income (loss) to net cash provided
      by (used for) operating activities:
      Equity in losses of subsidiaries....................................          8.9         56.4         454.9
      Net (gains) losses on marketable securities and other investments...         (5.2)         2.2          (1.7)
      Decrease in payable to affiliates...................................            -        (35.3)            -
      Decrease in receivables, prepaids and other assets..................         10.9          1.2           1.7
      Decrease (increase) in deferred income tax assets...................         (8.1)        30.3         (11.2)
      Decrease in accounts payable and other liabilities..................         (1.5)        (2.2)         (0.6)
                                                                            ------------  -----------  ------------
        Net cash used for operating activities............................         (6.6)       (31.4)        (12.9)
                                                                            ------------  -----------  ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net sales (purchases) of marketable securities and other investments...         (7.0)        30.0         (81.8)
   Dividends received from subsidiaries...................................          4.3            -           8.0
   Investments in and net advances from (to) subsidiaries.................         19.6        (19.7)         33.1
   Capital expenditures...................................................         (0.1)        (0.1)         (0.6)
                                                                            ------------  -----------  ------------
        Net cash provided by (used for) investing activities..............         16.8         10.2         (41.3)
                                                                            ------------  -----------  ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayment of short-term borrowings.....................................            -            -         (13.4)
   Treasury stock repurchases.............................................         (9.0)           -          (2.9)
                                                                            ------------  -----------  ------------
        Net cash used for financing activities............................         (9.0)           -         (16.3)
                                                                            ------------  -----------  ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................          1.2        (21.2)        (70.5)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................          7.9         29.1          99.6
                                                                            ------------  -----------  ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR..................................  $       9.1   $      7.9   $      29.1
                                                                            ============  ===========  ============

SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   Deferral of interest payment on intercompany note payable..............  $      11.4   $     20.7   $      18.6
   Distribution of assets from subsidiaries...............................            -          1.0             -
   Non-cash dividends received from subsidiaries..........................         14.7         60.0             -
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid..........................................................  $       0.4   $      7.0   $       0.8


     See notes to consolidated financial statements and accompanying notes.




     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                                   MAXXAM INC.

                          NOTES TO FINANCIAL STATEMENTS


1.    INVESTMENT IN KAISER

      On February 12, 2002, Kaiser Aluminum Corporation ("KAISER") and certain
of its subsidiaries (the "DEBTORS") filed for reorganization under Chapter 11 of
the United States Bankruptcy Code. As a result, Kaiser's financial results were
deconsolidated beginning February 12, 2002, and MAXXAM Inc. (the "COMPANY")
began reporting its investment in Kaiser using the cost method. Since Kaiser's
results are no longer consolidated and the Company believes that it is not
probable that it will be obligated to fund losses related to its investment in
Kaiser, any adjustments made in Kaiser's financial statements subsequent to
February 12, 2002 (relating to the recoverability and classification of recorded
asset amounts and classification of liabilities or the effects on existing
stockholders' deficit as well as adjustments made to Kaiser's financial
information for loss contingencies and other matters discussed in the notes to
the Consolidated Financial Statements) are not expected to impact the Company's
financial results. While valuation of the Debtors' assets and pre-filing date
claims at this stage of the bankruptcy cases is subject to inherent
uncertainties, Kaiser has indicated that the Debtors believe that it is likely
that their liabilities will be found to exceed the fair value of their assets.
The Debtors therefore believe that it is likely that pre-filing date claims will
be settled at less than 100% of their face value and the equity of Kaiser's
stockholders, including the Company, will be cancelled without consideration.

2.    DEFERRED INCOME TAXES

      The deferred income tax assets and liabilities reported in the
accompanying unconsolidated balance sheet are determined by computing such
amounts on a consolidated basis for the Company and members of its consolidated
federal income tax return group, and then reducing such consolidated amounts by
the amounts recorded by the Company's subsidiaries pursuant to their respective
tax allocation agreements with the Company. The Company's net deferred income
tax assets relate primarily to loss and credit carryforwards, net of valuation
allowances. The Company evaluated all appropriate factors to determine the
proper valuation allowances for these carryforwards, including any limitations
concerning their use, the year the carryforwards expire and the levels of
taxable income necessary for utilization. Based on this evaluation, the Company
has concluded that it is more likely than not that it will realize the benefit
of the carryforwards for which valuation allowances were not provided.

3.    NOTES PAYABLE TO SUBSIDIARIES, NET OF NOTES RECEIVABLE AND ADVANCES

      The Company's indebtedness to its subsidiaries, which includes accrued
interest, consists of the following (in millions):


                                                                                                 DECEMBER 31,
                                                                                         --------------------------
                                                                                              2003         2002
                                                                                         ------------  ------------

Note payable to MAXXAM Group Holdings Inc. ("MGHI")..................................... $     170.9   $     159.6
Net advances............................................................................        18.0          24.4
                                                                                         ------------  ------------
                                                                                         $     188.9   $     184.0
                                                                                         ============  ============




                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) 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.


                                                                              MAXXAM INC.


Date:   March 29, 2004                           By:                        PAUL N. SCHWARTZ
                                                     --------------------------------------------------------------
                                                                            Paul N. Schwartz
                                                                               President

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



Date:   March 29, 2004                           By:                       CHARLES E. HURWITZ
                                                     --------------------------------------------------------------
                                                                           Charles E. Hurwitz
                                                           Chairman of the Board and Chief Executive Officer


Date:   March 29, 2004                           By:                        J. KENT FRIEDMAN
                                                     --------------------------------------------------------------
                                                                            J. Kent Friedman
                                                                     Vice Chairman of the Board and
                                                                            General Counsel


Date:   March 29, 2004                           By:                      ROBERT J. CRUIKSHANK>
                                                     --------------------------------------------------------------
                                                                          Robert J. Cruikshank
                                                                                Director


Date:   March 29, 2004                           By:                         EZRA G. LEVIN
                                                     --------------------------------------------------------------
                                                                             Ezra G. Levin
                                                                                Director


Date:   March 29, 2004                           By:                      STANLEY D. ROSENBERG
                                                     --------------------------------------------------------------
                                                                          Stanley D. Rosenberg
                                                                                Director


Date:   March 29, 2004                           By:                      MICHAEL J. ROSENTHAL
                                                     --------------------------------------------------------------
                                                                          Michael J. Rosenthal
                                                                                Director


Date:   March 29, 2004                           By:                        PAUL N. SCHWARTZ
                                                     --------------------------------------------------------------
                                                                            Paul N. Schwartz
                                                            President, Chief Financial Officer and Director
                                                                     (Principal Financial Officer)


Date:   March 29, 2004                           By:                      ELIZABETH D. BRUMLEY
                                                     --------------------------------------------------------------
                                                                          Elizabeth D. Brumley
                                                                     Vice President and Controller
                                                                     (Principal Accounting Officer)





                                INDEX OF EXHIBITS


EXHIBIT
NUMBER                                 DESCRIPTION
-------  -----------------------------------------------------------------------

3.1      Restated Certificate of Incorporation of the Company dated April 10,
         1989 (incorporated herein by reference to Exhibit 3.1 to the Company's
         Annual Report on Form 10-K for the year ended December 31, 1989)

3.2      Certificate of Powers, Designations, Preferences and Relative,
         Participating, Optional and Other Rights of the Company's Class B
         Junior Participating Preferred Stock (incorporated herein by reference
         to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year
         ended December 31, 1989)

3.3      Certificate of Designations of Class A $.05 Non-Cumulative
         Participating Convertible Preferred Stock of the Company, dated as of
         December 15, 1999 (incorporated by reference to Exhibit 3.3 to the
         Company's Annual Report on Form 10-K for the year ended December 31,
         1999; the "COMPANY 1999 FORM 10-K")

3.4      Amended and Restated By-laws of the Company dated as of March 30, 2000
         (incorporated herein by reference to Exhibit 3.1 to the Company's
         Quarterly Report on Form 10-Q for the quarter ended March 31, 2000)

4.1      Rights Agreement dated as of December 15, 1999, by and between the
         Company and American Stock Transfer & Trust Company (incorporated
         herein by reference to Exhibit 4.1 to the Company's Form 8-K dated
         December 15, 1999)

*4.2     Credit Agreement dated January 23, 2004, among Palco, Britt, Bank of
         America, N.A., as Agent, and the Lenders from time to time party
         thereto

4.3      Timber Notes Indenture, dated as of July 20, 1998, between Scotia LLC
         and State Street Bank and Trust Company regarding Scotia LLC's Class
         A-1, Class A-2 and Class A-3 Timber Collateralized Notes (incorporated
         herein by reference to Exhibit 4.1 to Scotia LLC's Registration
         Statement on Form S-4; Registration No. 333-63825)

4.4      First Supplemental Indenture, dated as of July 16, 1999, to the Timber
         Notes Indenture (incorporated herein by reference to Exhibit 4.1 to
         Scotia LLC's Quarterly Report on Form 10-Q for the quarter ended June
         30, 1999; File No. 333-63825; the "SCOTIA LLC JUNE 1999 FORM 10-Q")

4.5      Second Supplemental Indenture, dated as of November 18, 1999, to the
         Timber Notes Indenture (incorporated herein by reference to Exhibit
         99.3 to Scotia LLC's Report on Form 8-K dated November 19, 1999; File
         No. 333-63825)

4.6      Deed of Trust, Security Agreement, Financing Statement, Fixture Filing
         and Assignment of Proceeds, dated as of July 20, 1998, securing Scotia
         LLC's obligations under the Timber Notes Indenture (incorporated herein
         by reference to Exhibit 4.2 to the Company's Quarterly Report on Form
         10-Q for the quarter ended June 30, 1998; the "COMPANY JUNE 1998 FORM
         10-Q")

4.7      Credit Agreement (the "SCOTIA LLC LINE OF CREDIT"), dated as of July
         20, 1998, among Scotia LLC, the financial institutions party thereto
         and Bank of America, N.A., as Agent, evidencing the Scotia LLC Line of
         Credit (incorporated herein by reference to Exhibit 4.3 to the Company
         June 1998 Form 10-Q)

4.8      First Amendment, dated as of July 16, 1999, to the Scotia LLC Line of
         Credit (incorporated herein by reference to Exhibit 4.2 to the Scotia
         LLC June 1999 Form 10-Q)

4.9      Second Amendment, dated June 15, 2001, to the Scotia LLC Line of Credit
         (incorporated herein by reference to Exhibit 4.1 to Scotia LLC's Form
         10-Q for the quarter ended June 30, 2001; File No. 333- 63825)

4.10     Third Amendment, dated June 30, 2003, to the Scotia LLC Line of Credit
         (incorporated herein by reference to Exhibit 4.1 to Scotia LLC's Form
         10-Q for the quarter ended June 30, 2003; File No. 333- 63825)

4.11     Loan Agreement, dated as of June 28, 2001, between Lakepointe Assets
         LLC and Legg Mason Real Estate Services, Inc. (incorporated herein by
         reference to Exhibit 4.2 to MGHI's Quarterly Report on Form 10-Q for
         the quarter ended June 30, 2001; File No. 333-18723; the "MGHI JUNE
         2001 FORM 10- Q")

4.12     Promissory Note, dated as of June 28, 2001, between Lakepointe Assets
         LLC and Legg Mason Real Estate Services, Inc. (incorporated herein by
         reference to Exhibit 4.3 to the MGHI June 2001 Form 10- Q)

4.13     Lease Agreement, dated as of June 28, 2001, between Lakepointe Assets
         LLC and Fluor Enterprises Inc. (incorporated herein by reference to
         Exhibit 10.1 to the MGHI June 2001 Form 10-Q)

4.14     Guarantee of Lease dated as of June 28, 2001, between Fluor Corporation
         and Lakepointe Assets LLC (incorporated herein by reference to Exhibit
         10.2 to the MGHI June 2001 Form 10-Q)

         Note: Pursuant to Regulation ss. 229.601, Item 601(b)(4)(iii) of
         Regulation S-K, upon request of the Securities and Exchange Commission,
         the Company hereby agrees to furnish a copy of any unfiled instrument
         which defines the rights of holders of long-term debt of the Company
         and its consolidated subsidiaries (and for any of its unconsolidated
         subsidiaries for which financial statements are required to be filed)
         wherein the total amount of securities authorized thereunder does not
         exceed 10 percent of the total consolidated assets of the Company

10.1     Tax Allocation Agreement ("MGHI TAX ALLOCATION AGREEMENT"), dated as of
         December 23, 1996, between the Company and MGHI (incorporated herein by
         reference to Exhibit 10.1 to MGHI's Registration Statement on Form S-4;
         Registration No. 333-18723)

10.2     Amendment of MGHI Tax Allocation Agreement, dated as of December 31,
         2001 (incorporated herein by reference to Exhibit 10.2 to MGHI's Form
         10-K for the year ended December 31, 2001; File No. 333- 18723; the
         "MGHI 2001 FORM 10-K")

10.3     Tax Allocation Agreement ("MGI TAX ALLOCATION AGREEMENT"), dated as of
         August 4, 1993, between the Company and MGI (incorporated herein by
         reference to Exhibit 10.6 to Amendment No. 2 to MGI's Registration
         Statement on Form S-2; Registration No. 33-56332)

10.4     Amendment of MGI Tax Allocation Agreement, dated as of December 31,
         2001, between the Company and MGI (incorporated herein by reference to
         Exhibit 10.4 to the MGHI 2001 Form 10-K)

10.5     Tax Allocation Agreement, dated as of May 21, 1988, among the Company,
         MGI, Palco and the corporations signatory thereto (incorporated herein
         by reference to Exhibit 10.8 to Palco's Annual Report on Form 10-K for
         the year ended December 31, 1988; File No. 1-9204)

10.6     Tax Allocation Agreement ("PALCO TAX ALLOCATION AGREEMENT"), dated as
         of March 23, 1993, among Palco, Scotia Pacific Holding Company, Salmon
         Creek Corporation and the Company (incorporated herein by reference to
         Exhibit 10.1 to Amendment No. 3 to SPHC's Registration Statement on
         Form S-1; Registration No. 33-55538)

10.7     Amendment of Palco Tax Allocation Agreement, dated as of December 31,
         2001 (incorporated herein by reference to Exhibit 10.7 to the MGHI 2001
         Form 10-K)

*10.8    Tax Allocation Agreement, dated as of February 9, 2004, among Britt,
         Palco, MGI and the Company

10.9     New Master Purchase Agreement, dated as of July 20, 1998, between
         Scotia LLC and Palco (incorporated herein by reference to Exhibit 10.1
         to MGHI's Quarterly Report on Form 10-Q for the quarter ended June 30,
         1998; File No. 333-18723; the "MGHI JUNE 1998 FORM 10-Q")

10.10    New Services Agreement, dated as of July 20, 1998, between Palco and
         Scotia LLC (incorporated herein by reference to Exhibit 10.2 to the
         MGHI June 1998 Form 10-Q)

10.11    New Additional Services Agreement, dated as of July 20, 1998, between
         Scotia LLC and Palco (incorporated herein by reference to Exhibit 10.3
         to the MGHI June 1998 Form 10-Q)

10.12    New Reciprocal Rights Agreement, dated as of July 20, 1998, among
         Palco, Scotia LLC and Salmon Creek Corporation (incorporated herein by
         reference to Exhibit 10.4 to the MGHI June 1998 Form 10- Q)

10.13    New Environmental Indemnification Agreement, dated as of July 20, 1998,
         between Palco and Scotia LLC (incorporated herein by reference to
         Exhibit 10.5 to the MGHI June 1998 Form 10-Q)

10.14    Implementation Agreement with Regard to Habitat Conservation Plan for
         the Properties of Palco, Scotia LLC and Salmon Creek Corporation dated
         as of February 1999 by and among The United States Fish and Wildlife
         Service, the National Marine Fisheries Service, the California
         Department of Fish and Game ("CDF&G"), the CDF and Palco, Salmon Creek
         Corporation and Scotia LLC (incorporated herein by reference to Exhibit
         99.3 to Scotia LLC's Form 8-K dated March 19, 1999; File No. 333-
         63825; the "SCOTIA LLC MARCH 19, 1999 FORM 8-K")

10.15    Agreement Relating to Enforcement of AB 1986 dated as of February 25,
         1999 by and among The California Resources Agency, CDF&G, CDF, The
         California Wildlife Conservation Board, Palco, Salmon Creek Corporation
         and Scotia LLC (incorporated herein by reference to Exhibit 99.4 to the
         Scotia LLC March 19, 1999 Form 8-K)

10.16    Habitat Conservation Plan dated February 1999 for the Properties of
         Palco, Scotia LLC and Salmon Creek Corporation (incorporated herein by
         reference to Exhibit 99.5 to the Scotia LLC March 19, 1999 Form 8-K)

10.17    Letter dated February 25, 1999 from the CDF to Palco (incorporated
         herein by reference to Exhibit 99.8 to the Scotia LLC March 19, 1999
         Form 8-K)

10.18    Letter dated March 1, 1999 from the CDF to Palco (incorporated herein
         by reference to Exhibit 99.9 to the Scotia LLC March 19, 1999 Form 8-K)

10.19    Letter dated March 1, 1999 from the U.S. Department of the Interior
         Fish and Wildlife Service and the U.S. Department of Commerce National
         Oceanic and Atmospheric Administration to Palco, Salmon Creek
         Corporation and Scotia LLC (incorporated herein by reference to Exhibit
         99.10 to the Scotia LLC March 19, 1999 Form 8-K)

10.20    [Reserved]

                  Executive Compensation Plans and Arrangements
                  ---------------------------------------------

10.21    MAXXAM 2002 Omnibus Employee Incentive Plan (incorporated hereby
         reference to Exhibit 99 to the Company's Proxy Statement dated April
         30, 2002)

10.22    Form of Stock Option Agreement under the MAXXAM 2002 Omnibus Employee
         Incentive Plan (incorporated herein by reference to Exhibit 10.22 to
         the Company's Annual Report on Form 10-K for the year ended December
         31, 2002)

10.23    MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein by
         reference to Exhibit 99 to the Company's Proxy Statement dated April
         29, 1994; the "COMPANY 1994 PROXY STATEMENT")

10.24    Form of Stock Option Agreement under the MAXXAM 1994 Omnibus Employee
         Incentive Plan (incorporated herein by reference to Exhibit 10.30 to
         the Company's Annual Report on Form 10-K for the year ended December
         31, 1994; the "COMPANY 1994 FORM 10-K")

10.25    MAXXAM 1994 Non-Employee Director Stock Plan (incorporated herein by
         reference to Exhibit 99 to the Company 1994 Proxy Statement)

10.26    Amendment No. 1 to the MAXXAM 1994 Non-Employee Director Stock Plan
         (incorporated herein by reference to Exhibit 10.22 to the Company 's
         Annual Report on Form 10-K for the year ended December 31, 1997)

10.27    Form of Stock Option Agreement under the MAXXAM 1994 Non-Employee
         Director Plan (incorporated herein by reference to Exhibit 10.32 to the
         Company 1994 Form 10-K)

10.28    Form of Deferred Fee Agreement under the MAXXAM 1994 Non-Employee
         Director Plan (incorporated herein by reference to Exhibit 10.26 to the
         Company's Annual Report on Form 10-K for the fiscal year ended December
         31, 1996)

10.29    MAXXAM 1994 Executive Bonus Plan (incorporated herein by reference to
         Exhibit 99 to the Company 1994 Proxy Statement)

10.30    MAXXAM Revised Capital Accumulation Plan of 1988, as amended December
         12, 1988 (incorporated herein by reference to Exhibit 10.1 to the
         Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
         1995)

10.31    MAXXAM Supplemental Executive Retirement Plan (incorporated herein by
         reference to Exhibit 10(ii) to MGI's Registration Statement on Form S-4
         on Form S-2; Registration No. 33-42300)

10.32    Form of Company Deferred Compensation Agreement (incorporated herein by
         reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K
         for the year ended December 31, 1995)

10.33    Executive Employment Agreement between the Company and J. Kent Friedman
         dated as of November 29, 1999 (incorporated herein by reference to
         Exhibit 10.52 to the Company 1999 Form 10-K)

10.34    Restricted Stock Agreement ("RESTRICTED STOCK AGREEMENT") between the
         Company and Charles E. Hurwitz effective as of December 13, 1999
         (incorporated herein by reference to Exhibit 10.53 to the Company 1999
         Form 10-K)

*10.35   Amendment, dated December 16, 2003, to the Restricted Stock Agreement

*21.1    List of the Company's Subsidiaries

*23.1    Consent of Deloitte & Touche LLP

23.2     Notice Regarding Arthur Andersen Consent (incorporated herein by
         reference to Exhibit 23.2 to the Company's Annual Report on Form 10-K
         for the year ended December 31, 2002)

*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



                            GLOSSARY OF DEFINED TERMS

      Set forth below is a list of all terms used and defined in this Report
(other than the Exhibit Index) and the Consolidated Financial Statements

1994 Director Plan: The MAXXAM 1994 Non-Employee Director Plan

1994 Omnibus Plan: The MAXXAM 1994 Employee Incentive Omnibus Plan

2002 Omnibus Plan: The MAXXAM 2002 Employee Incentive Omnibus Plan

Acquiring Person: A person or group of affiliated or associated persons who
acquire beneficial ownership, or the right to acquire beneficial ownership, of
15% or more of the Company's Common Stock (or announces a tender offer which
would have this result)

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

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

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

Beltway Assets: Beltway Assets LLC, an indirect wholly owned subsidiary of the
Company

Beltway Notes: The 6.08% notes of Beltway Assets due in November 2024

BOF: California Board of Forestry and Fire Protection

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

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

Cases:  The Chapter 11 proceedings of the Debtors

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

CDF:  California Department of Forestry and Fire Protection

CEQA: California Environmental Quality Act

CESA:  California Endangered Species Act

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

Code:  The United States Bankruptcy Code

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

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

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

CWA:  Federal Clean Water Act

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

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

Environmental Plans:  The HCP and the SYP

EPA:  Environmental Protection Agency

EPIC-SYP/Permits lawsuit: An action entitled Environmental Protection
Information Association, Sierra Club v. California Department of Forestry and
Fire Protection, California Department of Fish and Game, The Pacific Lumber
Company, Scotia Pacific Company LLC, Salmon Creek Corporation, et al. pending in
the Superior Court of Humboldt County, California (No. CV990452)

ESA:  The federal Endangered Species Act

FASB:  Financial Accounting Standards Board

FDIC:  Federal Deposit Insurance Corporation

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

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

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

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

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

FIN 46R: FASB Interpretation No. 46, Revised December 2003

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

Forest Practice Act: The California Forest Practice Act

GIS:  Geographical information system

GPS:   Global Positioning System

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

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

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

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

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

HWC 2002 lawsuit: An action entitled Humboldt County Watershed Council, et al.
v. North Coast Regional Water Quality Control Board, et al. (No. CV03-0438),
naming Palco as real party in interest, which had been pending in the Superior
Court of Humboldt County, California

HWC 2003 lawsuit: An action entitled Humboldt County Watershed Council, et al.
v. North Coast Regional Water Quality Control Board, et al. (No. CV03096),
naming Palco as real party in interest, pending in the Superior Court of
Humboldt County, California

Junior Preferred Stock: $0.50 par value Class B Junior Participating Preferred
Stock of the Company

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

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

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

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

Lakepointe Assets: Lakepointe Assets Holdings LLC, an indirect wholly owned
subsidiary of the Company

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

LIBOR:  London Inter Bank Offering Rate

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

MAXXAM Parent: MAXXAM Inc., excluding its subsidiaries

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

MGHI Notes: 12% Senior Secured Notes of MGHI

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

Motel Assets: Motel Assets Holdings LLC, an indirect wholly owned subsidiary of
the Company

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

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

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

Old growth: Trees which have been growing for approximately 200 years or longer

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

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

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

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

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

Palco Credit Agreement: January 2004 revolving credit facility between Palco and
a bank which provides for borrowings up to $35.0 million

Palco Timberlands: The Scotia LLC Timberlands and the timberlands owned by Palco

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

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

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

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

PSLRA:  Private Securities Litigation Reform Act of 1995

QAL:  Queensland Alumina Limited, a 20% owned equity investee of Kaiser

Racing Act: Texas Racing Act and related regulations

Racing Commission: Texas Racing Commission

Required Liquidity Amount: One year's interest on the aggregate outstanding
balance of the Timber Notes

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

Rights: The Series A and B Rights

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

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

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

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

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

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

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

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

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

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

Series A Right: The Company's Series A Preferred Stock Purchase Right

Series B Right: The Company's Series B Preferred Stock Purchase Right

Services Agreement: The agreement between Palco and Scotia LLC regarding
services to be provided to Scotia LLC by Palco

SFAS: Statement of Financial Accounting Standards

SFAS No. 66: SFAS No. 66, "Accounting for Sales of Real Estate"

SFAS No. 115: SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities"

SFAS No. 132 (revised 2003): SFAS No. 132 (Revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
FASB Statements No. 87, 88, and 106"

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

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

State Water Board: California State Water Resources Control Board

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

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

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

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

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

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

Timber Notes Indenture:  The indenture governing the Timber Notes

TMDLs:  Total maximum daily load limits

USAT:  United Savings Association of Texas

USWA lawsuit: An action entitled United Steelworkers of America, AFL-CIO, CLC,
and Donald Kegley v. California Department of Forestry and Fire Protection, The
Pacific Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation
(No. 99CS00626) pending in the Superior Court of Sacramento County, California

young growth: Trees which have been growing for less than 200 years`