10-Q

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


                                    FORM 10-Q

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


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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

                        Commission File Number 333-18723


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



                    DELAWARE                             76-0518669
          (State or other jurisdiction                (I.R.S. Employer
        of incorporation or organization)          Identification Number)

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


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


      Indicate by check mark whether the Registrant (1) has filed 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 |_|

     Number of shares of common stock outstanding at August 12, 2002: 1,000


      REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(A)
AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.

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                                TABLE OF CONTENTS



PART I.  -  FINANCIAL INFORMATION

         Item 1.   Financial Statements:
                   Consolidated Balance Sheet at June 30, 2002 and December 31, 2001
                   Consolidated Statement of Operations for the three and six months ended
                        June 30, 2002 and 2001
                   Consolidated Statement of Cash Flows for the six months ended
                        June 30, 2002 and 2001
                   Condensed Notes to Consolidated Financial Statements

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

         Item 3.   Quantitative and Qualitative Disclosures About Market Risk

PART II.  -  OTHER INFORMATION

         Item 1.   Legal Proceedings
         Item 6.   Exhibits and Reports on Form 8-K
         Signatures

APPENDIX A - GLOSSARY OF DEFINED TERMS





                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

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



                                                                                          JUNE 30,    DECEMBER 31,
                                                                                            2002          2001
                                                                                        ------------- -------------
                                                                                                (UNAUDITED)

                                        ASSETS

Current assets:
   Cash, cash equivalents and restricted cash.......................................... $       39.2  $       66.0
   Marketable securities...............................................................         49.6          53.6
   Receivables:
      Trade............................................................................         13.3          12.5
      Receivables from MAXXAM..........................................................          8.6           8.5
      Other............................................................................          1.5           2.1
   Inventories.........................................................................         33.0          51.4
   Prepaid expenses and other current assets...........................................         19.5          17.5
                                                                                        ------------- -------------
      Total current assets.............................................................        164.7         211.6
Property, plant and equipment, net of accumulated depreciation of $107.2 and
   $100.1, respectively................................................................        221.4         224.9
Timber and timberlands, net of accumulated depletion of $198.5 and
   $193.7, respectively................................................................        232.0         235.0
Note receivable from MAXXAM............................................................        193.2         183.1
Deferred financing costs, net..........................................................         21.5          22.8
Deferred income taxes..................................................................         19.6          13.4
Restricted cash, marketable securities and other investments...........................         58.8          89.8
Other assets...........................................................................          8.9           6.8
                                                                                        ------------- -------------
                                                                                        $      920.1  $      987.4
                                                                                        ============= =============

                         LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
   Accounts payable.................................................................... $        3.5  $        5.7
   Accrued interest....................................................................         28.7          30.5
   Accrued compensation and related benefits...........................................         11.7          12.4
   Deferred income taxes...............................................................          8.4           6.8
   Other accrued liabilities...........................................................          5.8           8.0
   Short-term borrowings and current maturities of long-term debt, excluding $2.4
      and $2.3, respectively, of repurchased Timber Notes held in the SAR Account......         17.7          35.5
                                                                                        ------------- -------------
      Total current liabilities........................................................         75.8          98.9
Long-term debt, less current maturities and excluding $53.5 and $55.4,
   respectively, of repurchased Timber Notes held in the SAR Account...................        920.4         962.7
Deferred income taxes..................................................................         21.7          19.5
Other noncurrent liabilities...........................................................         29.7          28.3
                                                                                        ------------- -------------
      Total liabilities................................................................      1,047.6       1,109.4
                                                                                        ------------- -------------

Contingencies (See Note 7)

Stockholder's deficit:
   Common stock, $1.00 par value; 3,000 shares authorized; 1,000 shares
      issued and outstanding...........................................................            -             -
   Additional capital..................................................................        123.2         123.2
   Accumulated deficit.................................................................       (250.7)       (245.5)
   Accumulated other comprehensive income..............................................            -           0.3
                                                                                        ------------- -------------
      Total stockholder's deficit......................................................       (127.5)       (122.0)
                                                                                        ------------- -------------
                                                                                        $      920.1  $      987.4
                                                                                        ============= =============

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



                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
                            (IN MILLIONS OF DOLLARS)


                                                                     THREE MONTHS ENDED        SIX MONTHS ENDED
                                                                          JUNE 30,                 JUNE 30,
                                                                   -----------------------  -----------------------
                                                                      2002         2001        2002        2001
                                                                   -----------  ----------  ----------  -----------
                                                                                      (UNAUDITED)

Net sales:
   Lumber and logs...............................................  $     50.4   $    47.1   $    94.9   $     84.9
   Real estate...................................................         2.1         0.1         4.3          0.1
   Other.........................................................         3.9         6.1         7.3         13.1
                                                                   -----------  ----------  ----------  -----------
                                                                         56.4        53.3       106.5         98.1
                                                                   -----------  ----------  ----------  -----------

Operating expenses:
   Cost of goods sold............................................        36.1        42.7        71.5         82.7
   Selling, general and administrative expenses..................         4.7         4.4         9.7          8.8
   Depletion and depreciation....................................         7.8         5.3        14.5         10.2
                                                                   -----------  ----------  ----------  -----------
                                                                         48.6        52.4        95.7        101.7
                                                                   -----------  ----------  ----------  -----------

Operating income (loss)..........................................         7.8         0.9        10.8         (3.6)

Other income (expense):
   Equity in earnings (loss) of Kaiser...........................           -       (22.4)          -         19.6
   Investment, interest and other income (expense), net..........         7.3         9.1        15.8         18.4
   Interest expense..............................................       (19.1)      (17.9)      (38.8)       (36.5)
                                                                   -----------  ----------  ----------  -----------
Loss before income taxes and extraordinary item..................        (4.0)      (30.3)      (12.2)        (2.1)
Benefit in lieu of income taxes..................................         1.6        3.5          4.9          9.0
                                                                   -----------  ----------  ----------  -----------

Income (loss) before extraordinary item..........................        (2.4)      (26.8)       (7.3)         6.9
Extraordinary item:
   Gains on repurchases of debt, net of provision in lieu of
      income taxes of $0.1, $0.9, $1.1 and $2.0, respectively....         0.3         1.7         2.1          3.6
                                                                   -----------  ----------  ----------  -----------
Net income (loss)................................................  $     (2.1)  $   (25.1)  $    (5.2)  $     10.5
                                                                   ===========  ==========  ==========  ===========



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




                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN MILLIONS OF DOLLARS)


                                                                                                 SIX MONTHS ENDED
                                                                                                     JUNE 30,
                                                                                               --------------------
                                                                                                 2002       2001
                                                                                               ---------  ---------
                                                                                                    (UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss).......................................................................... $   (5.2)  $   10.5
   Adjustments to reconcile net income (loss) to net cash provided by (used for) operating
      activities:
      Depletion and depreciation..............................................................     14.5       10.2
      Extraordinary gains on repurchases of debt..............................................     (2.1)      (3.6)
      Equity in undistributed earnings of Kaiser..............................................        -      (19.6)
      Amortization of deferred financing costs................................................      1.3        1.1
      Net gain on marketable securities.......................................................     (0.4)      (3.0)
      Net gains on other asset dispositions...................................................     (1.3)       0.2
      Deferral of interest payment on note receivable from MAXXAM ............................    (10.1)      (9.0)
   Increase (decrease) in cash resulting from changes in:
      Receivables.............................................................................     (0.4)      (5.6)
      Inventories, net of depletion...........................................................     16.2        9.5
      Prepaid expenses and other current assets...............................................     (2.3)      (3.1)
      Accounts payable........................................................................     (2.1)      (0.6)
      Accrued interest........................................................................     (1.8)      (2.4)
      Accrued and deferred income taxes.......................................................     (4.9)     (10.3)
      Other liabilities.......................................................................     (2.3)       3.7
      Long-term assets and long-term liabilities..............................................      1.5       (1.9)
                                                                                               ---------  ---------
        Net cash provided by (used for) operating activities..................................      0.6      (23.9)
                                                                                               ---------  ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from dispositions of property and investments.....................................      1.5          -
   Net sales (purchases) of marketable securities.............................................      4.9      (21.2)
   Capital expenditures.......................................................................     (6.0)    (138.6)
                                                                                               ---------  ---------
        Net cash provided by (used for) investing activities..................................      0.4     (159.8)
                                                                                               ---------  ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuances of long-term debt..................................................        -      122.5
   Repayments under revolving credit agreements...............................................    (18.3)     (37.0)
   Redemptions, repurchases of and principal payments on long-term debt.......................    (38.5)     (36.5)
   Restricted cash withdrawals, net...........................................................     29.9        7.8
   Other .....................................................................................     (0.9)      (5.2)
                                                                                               ---------  ---------
        Net cash provided by (used for) financing activities..................................    (27.8)      51.6
                                                                                               ---------  ---------

NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH....................................    (26.8)    (132.1)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF PERIOD.............................     66.0      201.7
                                                                                               ---------  ---------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD................................... $   39.2   $   69.6
                                                                                               =========  =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid, net of capitalized interest................................................. $   39.4   $   37.7
   Tax allocation payments to MAXXAM..........................................................        -        1.3



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



                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    GENERAL

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

      The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary for a fair presentation of the consolidated
financial position of the Company at June 30, 2002, and the consolidated results
of operations for the three and six months ended June 30, 2002 and 2001, and the
consolidated cash flows for the six months ended June 30, 2002 and 2001. The
Company is a wholly owned subsidiary of MAXXAM.

      LIQUIDITY AND CASH RESOURCES
      Pacific Lumber's 2001 cash flows from operations were adversely affected
by operating inefficiencies, lower lumber prices, an inadequate supply of logs
and a related slowdown in lumber production. During 2001, comprehensive external
and internal reviews were conducted of Pacific Lumber's business operations.
These reviews were conducted in an effort to identify ways in which Pacific
Lumber could operate on a more efficient and cost effective basis. Based upon
the results of these reviews, Pacific Lumber, among other things, closed two of
its four sawmills, eliminated certain of its operations, including its soil
amendment and concrete block activities, began utilizing more efficient
harvesting methods and adopted certain other cost saving measures. Most of these
changes were implemented by Pacific Lumber in the last quarter of 2001, or the
first quarter of 2002. Pacific Lumber also ended its internal logging operations
(which historically performed approximately half of its logging operations) as
of March 31, 2002, and will rely exclusively on third party contract loggers to
conduct these activities in the future. In connection with these changes, the
Company recorded an impairment charge to operating costs of $2.2 million in the
fourth quarter of 2001.

      The $29.4 million release from the SAR Account discussed in Note 3
improved Pacific Lumber's liquidity. However, Pacific Lumber may require funds
available under the Pacific Lumber Credit Agreement, additional repayments by
MGI of an intercompany loan and/or capital contributions from MGI to enable it
to meet its working capital and capital expenditure requirements for the next
year.

      Scotia LLC's cash flows from operations are significantly impacted by
harvest volumes and SBE prices. On June 19, 2002, the State Board of
Equalization adopted the new Harvest Value Schedule for the second half of 2002.
The SBE Prices published in this schedule reflect an approximate 16% decline for
small redwood logs and no price change for small Douglas fir logs. This decline
in SBE Prices will have an adverse impact on Scotia LLC's net sales and
liquidity for the second half of 2002. With respect to short-term liquidity,
Scotia LLC believes that existing cash available for principal payments from the
SAR Account, and funds available under the Scotia LLC Line of Credit, together
with cash flows from operations, should provide sufficient funds to meet its
working capital, capital expenditures and required debt service obligations
through 2003. However, cash flows from operations may be insufficient to allow
Scotia LLC to service its debt in the long-term if Scotia LLC does not
experience improvements in SBE Prices.

      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 Pacific Lumber has adequate cash flows from
operations and/or dividends from Scotia LLC and SBE Prices improve, there can be
no assurance that this will be the case.

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


                                                                    THREE MONTHS ENDED       SIX MONTHS ENDED
                                                                         JUNE 30,                JUNE 30,
                                                                  ----------------------- -----------------------
                                                                     2002        2001        2002         2001
                                                                  ----------  ----------- -----------  ----------

Net income (loss)...............................................  $    (2.1)  $    (25.1) $     (5.2)  $    10.5
Cumulative effect of accounting change, net of income tax
   provision of $0.2............................................          -         (0.1)          -         0.6
Unrealized losses, net of income tax benefit of $0.8 and $1.5,
   respectively, on derivative instruments arising during the             -         (1.4)          -        (2.5)
   period.......................................................
Less reclassification adjustment for realized net gains, net
   of income tax (provision) benefit of $(2.1) and $0.3,
   respectively, on derivative instruments included in
   net income...................................................          -          3.1           -        (0.9)
Change in value of available-for-sale investments, net of income
   tax (provision) benefit of $(0.2), $-, $0.2 and $(0.2),
   respectively.................................................        0.3         (0.1)       (0.3)        0.2
                                                                  ----------  ----------- -----------  ----------
Comprehensive income (loss).....................................  $    (1.8)  $    (23.6) $     (5.5)  $     7.9
                                                                  ==========  =========== ===========  ==========

      INVESTMENT IN KAISER
      The Company's investment in Kaiser consists of a 34.6% equity interest at
June 30, 2002. As of December 31, 2001, the Company's investment in Kaiser was
accounted for under the equity method. On February 12, 2002, Kaiser filed a
voluntary petition under Chapter 11 of the Code. As a result of such filing, the
Company began reporting its investment in Kaiser under the cost method with no
further recognition of equity in earnings or losses until such time as the
shares are disposed of or a plan of reorganization is implemented. See Note 5
for further discussion of the Company's investment in Kaiser.

      NEW ACCOUNTING STANDARDS
      In June 2001, the FASB issued SFAS No. 143 which addresses accounting and
reporting standards for obligations associated with the retirement of tangible
long-lived assets and the related asset retirement costs. The Company is
required to adopt SFAS No. 143 beginning on January 1, 2003. In general, SFAS
No. 143 requires the recognition of a liability resulting from anticipated asset
retirement obligations, offset by an increase in the value of the associated
productive asset for such anticipated costs. Over the life of the asset,
depreciation expense is to include the ratable expensing of the retirement cost
included with the asset value. The statement applies to all legal obligations
associated with the retirement of a tangible long-lived asset that results from
the acquisition, construction, or development and /or the normal operation of a
long-lived asset, except for certain lease obligations. Excluded from this
statement are obligations arising solely from a plan to dispose of a long-lived
asset and obligations that result from the improper operation of an asset (i.e.,
certain types of environmental obligations). The Company is continuing its
evaluation of SFAS No. 143. However, the Company does not currently expect the
adoption of SFAS No. 143 to have a material impact on its future financial
statements.

      In August 2001, the FASB issued SFAS No. 144 which sets forth new guidance
for accounting and reporting for impairment or disposal of long-lived assets.
The provisions of SFAS No. 144 were effective for the Company beginning on
January 1, 2002. Based on presently available estimates, the new impairment and
disposal rules did not result in the recognition of material impairment losses
in 2002 beyond those reported as of December 31, 2001 (see Note 2). In addition
to the new guidance on impairments, SFAS No. 144 broadens the applicability of
the provisions of Accounting Principles Board Opinion 30 for the presentation of
discontinued operations in the income statement to include a component of an
entity (rather than a segment of a business). A component of an entity comprises
operations and cash flows that can be clearly distinguished, operationally and
for financial reporting purposes, from the rest of the entity. Effective after
December 31, 2001, when the Company commits to a plan of sale of a component of
an entity, such component will be presented as a discontinued operation if the
operations and cash flows of the component will be eliminated from the ongoing
operations of the entity and the entity will not have any significant continuing
involvement in the operations of the component. Although this provision will not
affect the total amount reported for net income, the income statements of prior
periods will be reclassified to report the results of operations of the
component separately when a component of an entity is reported as a discontinued
operation. The Company does not currently expect the adoption of SFAS No. 144 to
have a material impact on its financial statements.

      In April 2002, the FASB issued SFAS No. 145 which rescinds the previous
guidance for debt extinguishments. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe applicability under changed conditions. SFAS No. 145
eliminates the requirement that gains and losses from extinguishment of debt be
aggregated and, if material, classified as an extraordinary item, net of related
income tax effect. However, transactions would not be prohibited from
extraordinary item classification if they meet the criteria in APB Opinion 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." Applying the provisions of APB 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual or infrequent or that meet the criteria for classification as an
extraordinary item. This statement is effective for fiscal years beginning after
May 15, 2002. The Company does not expect the adoption of SFAS No. 145 to have a
material impact on its financial statements.

      In July 2002, the FASB issued SFAS No. 146. The standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Costs covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. This statement is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002.

2.    SEGMENT INFORMATION

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


                                                              FOREST          REAL       CORPORATE    CONSOLIDATED
                                                             PRODUCTS        ESTATE      AND OTHER        TOTAL
                                                           -------------  ------------  ------------  -------------
Net sales for the three months ended:
      June 30, 2002....................................... $       54.3   $       2.1   $         -   $       56.4
      June 30, 2001.......................................         53.2           0.1             -           53.3

Operating income (loss) for the three months ended:
      June 30, 2002.......................................          7.1           0.8          (0.1)           7.8
      June 30, 2001.......................................          1.0           0.1          (0.2)           0.9

Other income (expense), net for the three months ended:
      June 30, 2002.......................................        (12.7)         (2.3)          3.2          (11.8)
      June 30, 2001.......................................        (12.0)         (0.1)        (19.1)         (31.2)

Net sales for the six months ended:
      June 30, 2002.......................................        102.2           4.3             -          106.5
      June 30, 2001.......................................         98.0           0.1             -           98.1

Operating income (loss) for the six months ended:
      June 30, 2002.......................................          9.6           1.6          (0.4)          10.8
      June 30, 2001.......................................         (3.5)          0.1          (0.2)          (3.6)

Other income (expense), net for the six months ended:
      June 30, 2002.......................................        (24.5)         (4.7)          6.2          (23.0)
      June 30, 2001.......................................        (23.3)         (0.1)         24.9            1.5

Total assets as of:
      June 30, 2002.......................................        727.5         130.8          61.8          920.1
      December 31, 2001...................................        610.8         133.7         242.9          987.4

      The column entitled "Corporate and Other" includes the results of the
parent company and the investment in Kaiser, and also serves to reconcile the
total of the reportable segments' amounts to the total in the Company's
consolidated financial statements.

      SPECIAL ITEMS
      In connection with the operational changes described in Note 1, the
Company 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 the six months ended June 30, 2002, machinery
and equipment with a carrying value of $1.0 million was sold, resulting in a
gain of $1.3 million.

      A $2.6 million restructuring charge was recorded in the fourth quarter of
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 the Company and the entire
amount of the related liability had been paid.


3.    Cash, Marketable Securities and Other Investments

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


                                                                                         JUNE 30,     DECEMBER 31,
                                                                                           2002           2001
                                                                                       ------------- --------------

Current assets:
   Restricted cash and cash equivalents..............................................  $       12.8  $        35.4
                                                                                       ------------- --------------

   Marketable securities, restricted:
      Amounts held in SAR Account....................................................          17.7           17.1
                                                                                       ------------- --------------

Long-term restricted cash, marketable securities and other investments:
   Amounts held in SAR Account.......................................................         105.5          137.8
   Other amounts restricted under the Timber Notes Indenture.........................           2.7            2.8
   Other long-term restricted cash...................................................           2.3            2.2
   Less: Amounts attributable to Timber Notes held in SAR Account....................         (51.7)         (53.0)
                                                                                       ------------- --------------
                                                                                               58.8           89.8
                                                                                       ------------- --------------

Total restricted cash, marketable securities and other investments...................  $       89.3  $       142.3
                                                                                       ============= ==============

      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 (e.g., 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.

      OTHER INVESTMENTS
      Cash, marketable securities and other investments include a limited
partnership interest in the Equity Fund Partnership, which invests in a
diversified portfolio of common stocks and other equity securities whose issuers
are involved in merger, tender offer, spin-off or recapitalization transactions.
This investment is not consolidated, but is accounted for under the equity
method. The following table shows the Company's investment in the Equity Fund
Partnership, including restricted amounts held in the SAR Account, and the
ownership interest (dollars in millions).


                                                                                          JUNE 30,       DECEMBER 31,
                                                                                            2002             2001
                                                                                        -------------   --------------

Investment in Equity Fund Partnership:
   Restricted........................................................................   $        7.8    $        10.6
   Unrestricted......................................................................           13.2             36.5
                                                                                        -------------   --------------
                                                                                        $       21.0    $        47.1
                                                                                        =============   ==============

Percentage of ownership held.........................................................            6.6%            13.7%
                                                                                        =============   ==============

       As of June 30, 2002 and December 31, 2001, long-term restricted cash,
marketable securities, and other investments also included $5.6 million and $5.1
million, respectively, related to an investment in a limited partnership which
invests in, among other things, debt and equity securities associated with
developed and emerging markets.

4.    INVENTORIES

      Inventories consist of the following (in millions):


                                                                                        JUNE 30,      DECEMBER 31,
                                                                                          2002            2001
                                                                                     --------------  --------------
Lumber.............................................................................  $        26.2   $        29.3
Logs...............................................................................            6.8            22.1
                                                                                     --------------  --------------
                                                                                     $        33.0   $        51.4
                                                                                     ==============  ==============

      Substantially all product inventories are stated at last-in, first-out
(LIFO) cost, not in excess of market.

5.    INVESTMENT IN KAISER

      As of August 12, 2002, the Company has 27,938,250 shares of the common
stock of Kaiser, of which 20,338,509 shares are pledged as collateral for the
MGHI Notes. Kaiser operates in several principal aspects of the aluminum
industry--the mining of bauxite into alumina, (the major aluminum-bearing ore),
the refining of bauxite into alumina (the intermediate material), the production
of primary aluminum and the manufacture of fabricated and semi-fabricated
aluminum products. Kaiser's common stock is publicly traded on the OTC Bulletin
Board under the trading symbol "KLUCQ."

      On February 12, 2002, Kaiser filed a voluntary petition for reorganization
under Chapter 11 of the Code. The necessity for filing the Cases was
attributable to the liquidity and cash flow problems of Kaiser 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 the 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 flow, resulting in lower credit
ratings and an inability to access the capital markets.

      For 2001 and prior years, the Company accounted for its investment in
Kaiser using the equity method. As a result of the Cases, the Company began
reporting its investment in Kaiser under the cost method with no further
recognition of equity in earnings or losses until such time as the shares are
disposed of or a plan of reorganization is implemented. No assurances can be
given that the Company's ownership interest in Kaiser will not be significantly
diluted or cancelled. When and if Kaiser emerges from the jurisdiction of the
Court, the subsequent accounting will be determined based upon the facts and
circumstances at the time, including the terms of any plan of reorganization.

      On April 12, 2002, Kaiser filed with the Court a motion seeking an order
of the Court prohibiting the Company (or MAXXAM), without first seeking Court
relief, from making any disposition of its stock of Kaiser, including any sale,
transfer, or exchange of such stock or treating any of its Kaiser stock as
worthless for federal income tax purposes. Kaiser indicated in its 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. On July 22, 2002, the Company
agreed with Kaiser that it would not dispose of any of its Kaiser shares prior
to a hearing on the April 12, 2002 motion. The Company and Kaiser also agreed
that the Company may upon 10 days written notice to Kaiser (a) request the Court
to hear the matter at a special hearing or (b) have the matter heard at one of
Kaiser's scheduled monthly bankruptcy hearings.

      The market value for the Kaiser Shares based on the price per share quoted
at the close of business on August 12, 2002, was $1.4 million. There can be
no assurance that such value would be realized should the Company dispose of the
Kaiser Shares. The following tables contain summarized financial information for
Kaiser (in millions).


                                                                                         JUNE 30,     DECEMBER 31,
                                                                                           2002           2001
                                                                                       ------------  --------------

Current assets.......................................................................  $     677.6   $       759.2
Property, plant and equipment, net...................................................      1,173.8         1,215.4
Other assets.........................................................................        773.5           769.1
                                                                                       ------------  --------------
           Total assets..............................................................  $   2,624.9   $     2,743.7
                                                                                       ============  ==============

Liabilities not subject to compromise:
   Current liabilities...............................................................  $     368.5   $       803.4
   Long-term debt, less current maturities...........................................         42.9           700.8
   Other liabilities.................................................................        102.2         1,562.1
Liabilities subject to compromise....................................................      2,573.9               -
Minority interests...................................................................        119.4           118.5
Stockholders' deficit................................................................       (582.0)         (441.1)
                                                                                       ------------  --------------
            Total liabilities and stockholders' deficit..............................  $   2,624.9   $     2,743.7
                                                                                       ============  ==============




                                                                    THREE MONTHS ENDED         SIX  MONTHS ENDED
                                                                         JUNE 30,                  JUNE 30,
                                                                --------------------------  -----------------------
                                                                    2002          2001         2002        2001
                                                                ------------- ------------  ----------  -----------

Net sales...................................................... $      386.3  $     446.8   $   756.9   $    927.1
Costs and expenses.............................................       (423.0)      (474.4)     (830.3)      (739.3)
Other income (expenses), net...................................         (8.7)       (78.8)      (29.6)       (99.4)
                                                                ------------- ------------  ----------  -----------
Income (loss) before income taxes and minority interests.......        (45.4)      (106.4)     (103.0)        88.4
Benefit (provision) for income taxes ..........................         (6.4)        41.5       (14.4)       (34.5)
Minority interests.............................................          1.4          0.8         2.9          1.6
                                                                ------------- ------------  ----------  -----------
Net income (loss).............................................. $      (50.4) $     (64.1)  $  (114.5)  $     55.5
                                                                ============= ============  ==========  ===========
Equity in earnings (loss) of Kaiser............................ $          -  $     (22.4)  $       -   $     19.6
                                                                ============= ============  ==========  ===========

6.    DEBT


      Long-term and short-term debt consists of the following (in millions):


                                                                                      JUNE 30,       DECEMBER 31,
                                                                                        2002             2001
                                                                                   ---------------  ---------------

12% MGHI Notes due August 1, 2003................................................. $         59.3   $         88.2
Pacific Lumber Credit Agreement...................................................              -             17.7
6.55% Scotia LLC Timber Notes due July 20, 2028...................................          106.9            120.3
7.11% Scotia LLC Timber Notes due July 20, 2028...................................          243.2            243.2
7.71% Scotia LLC Timber Notes due July 20, 2028...................................          463.3            463.3
7.56% Lakepointe Notes due June 8, 2021...........................................          120.6            121.7
Other.............................................................................            0.7              1.5
                                                                                   ---------------  ---------------
                                                                                            994.0          1,055.9
Less: current maturities..........................................................          (17.7)           (35.5)
      Timber Notes held in SAR Account............................................          (55.9)           (57.7)
                                                                                   ---------------  ---------------
                                                                                   $        920.4   $        962.7
                                                                                   ===============  ===============


      The amount attributable to the Timber Notes held in the SAR Account of
$51.7 million as of June 30, 2002, reflected in Note 3 above represents the
amount paid to acquire $55.9 million of principal amount of Timber Notes.

      During the six months ended June 30, 2002, the Company repurchased $28.9
million of the MGHI Notes, resulting in an extraordinary gain of $2.1 million
(net of tax). Subsequent to June 30, 2002, the Company repurchased $5.0 million
of the MGHI Notes, resulting in a small gain.

      With respect to the MAXXAM Note which is pledged to secure the MGHI Notes,
the Company expects MAXXAM to pay the amount of the MAXXAM Note necessary to
retire the MGHI Notes.

      At June 30, 2002, $14.0 million of letters of credit and no borrowings
were outstanding under the Pacific Lumber Credit Agreement. Unused availability
was limited to $21.0 million at June 30, 2002. On July 24, 2002, a letter
agreement was signed extending the maturity date of the Pacific Lumber Credit
Agreement from August 14, 2003, to August 13, 2004, subject to certain
conditions such as completion of a new credit agreement. In connection with such
extension, the facility commitment amount was reduced from $50.0 million to
$45.0 million.

      The Scotia LLC Line of Credit allows Scotia LLC to borrow up to one year's
interest on the Timber Notes. On May 31, 2002, the Scotia LLC Line of Credit was
extended for an additional year to July 11, 2003. Annually, Scotia LLC will
request that the Scotia LLC Line of Credit be extended for a 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 June 30, 2002, Scotia LLC could have borrowed a maximum
of $60.0 million under the Scotia LLC Line of Credit, and there were no
borrowings outstanding under the Scotia LLC Line of Credit. On the note payment
date in July 2002, Scotia LLC borrowed $13.9 million under the Scotia LLC Line
of Credit to pay interest on the Timber Notes.

7.    CONTINGENCIES

      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 and SYP, dealing with
timber harvesting practices, threatened and endangered species and habitat for
such species, and air and water quality.

      The SYP complies 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 harvest level during the last decade
of the 100-year planning period. The SYP is effective for 10 years (subject to
review after five years) and may be amended by Pacific Lumber, subject to
approval by the CDF. Revised SYPs will be prepared every decade that address the
harvest level based upon assessment of changes in the resource base and other
factors. The HCP and the Permits related to the HCP allow incidental "take" of
certain species located on the Company's timberlands which species have been
listed as endangered or threatened under the ESA and/or the CESA 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 SYP is also
subject to certain of these provisions. The HCP and related Permits have a term
of 50 years.

      In late May 2002, the Company completed its timber cruise, its first since
1986. The results of the timber cruise provided the Company with an estimate of
the volume of merchantable timber on the Company's 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), with an increase
in young growth timber volume almost equal to the decrease in old growth timber
volume. This shift in timber volume between classifications decreased the
overall timber volume reported in Mbfe by 0.2 million to 2.9 million. The new
cruise data indicates that there is significantly less old growth timber
available for harvest than estimated as of December 31, 2001, using the 1986
cruise data. This change in mix could potentially result in a decrease in the
Company's revenue. However, because there are many variables that affect
revenues and profitability, the Company cannot quantify the effect of the above
changes on current and future cash flows. The new timber volumes are now being
utilized in various aspects of the Company's operations, including estimating
volumes on THPs and determining depletion expense.

      Under the CWA, the EPA is required to establish TMDLs in water courses
that have been declared to be "water quality impaired." The EPA and the North
Coast Water Board are in the process of establishing TMDLs for 17 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. 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. However, in a September 2000 report,
the staff of the North Coast Water Board proposed various actions for certain
water courses on the Company's timberlands, including restrictions on harvesting
beyond those required under the HCP. The North Coast Water Board has begun the
process of establishing the TMDL requirements applicable to two other water
courses on the Company's timberlands in addition to the two covered by the EPA's
December 1999 report. This will be a lengthy process, and 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.

      A California statute, which becomes effective December 31, 2002,
eliminates a waiver previously granted to timber companies. This waiver had been
in effect for a number of years and waived the requirement under California
water quality regulations for timber companies to follow certain waste discharge
requirements in connection with their timber harvesting and related operations.
The new statute provides, however, that regional water boards such as the North
Coast Water Board are authorized to renew the waiver. If a regional water board
decides not to renew the waiver by January 1, 2003, it may notify a company that
the board will require such company to follow certain waste discharge
requirements in order to conduct harvesting operations on a THP. The waste
discharge requirements may include aquatic protection measures that are
different from or in addition to those provided for in the THP approved by the
CDF. If the Company were to be so notified, harvesting activities could be
delayed and/or adversely affected, as a separate, additional regulatory process
would be required for THPs.

      On August 7, 2002, the North Coast Water Board issued the Company an order
requiring reports of waste discharge in connection with the Company's winter
operations in the Elk River basin to be conducted under THPs approved by CDF.
This order impacts an estimated 15,100 Mbfe of timber covered by a number of
THPs. This order prohibits winter operations in the watershed until the reports
are submitted by the Company and a determination is made by the North Coast
Water Board regarding what, if any, waste discharge requirements would be
imposed. This process could result in a significant delay or reduction in
harvest. The Company is considering how to respond to this order.

      Since the consummation of the Headwaters Agreement in March 1999, there
has been a significant amount of work required in connection with the
implementation of the Environmental Plans, and this work is expected to continue
for several more years. During the implementation period, government agencies
had until recently failed to approve THPs in a timely manner. The rate of
approvals of THPs during 2001 improved over that for the prior year, and further
improvements have been experienced thus far in 2002. Although delays in the
approvals of THPs may from time to time continue to impact the Company's ability
to meet its harvesting goals, the Company anticipates that once the
Environmental Plans are fully implemented, the process of preparing THPs will
become more streamlined, and the time to obtain approval of THPs will
potentially be shortened (subject to the matters discussed in the previous
paragraphs).

      Lawsuits are pending and threatened which seek to prevent the Company from
implementing the HCP and/or the SYP, implementing certain of the Company's
approved THPs, or carrying out certain other operations.

      On April 3, 2002, the Environmental Protection Information Association
filed a 60-day notice letter threatening suit against the Company and certain
federal agencies under the ESA. The threatened suit would seek to require the
federal agencies to consider new information obtained since the approval of the
HCP concerning marbled murrelets and salmon and to require a cessation of
certain harvesting operations. No suit has yet been filed. The Company believes
that it has strong factual and legal defenses with respect to this matter;
however, there can be no assurance that such a suit would not have a material
adverse effect on the Company's financial position, results of operations, or
liquidity.

      On January 28, 1997, the ERF lawsuit was filed against Pacific Lumber.
This action alleges that Pacific Lumber has discharged pollutants into federal
waterways, and seeks to enjoin these activities, remediation, civil penalties of
up to $25,000 per day for each violation, and other damages. This case was
dismissed by the District Court on August 19, 1999, but the dismissal was
reversed by the U.S. Ninth Circuit Court of Appeals on October 30, 2000, and the
case was remanded to the District Court. On June 5, 2002, the Company settled
this lawsuit for $0.5 million.

      On December 2, 1997, the Wrigley lawsuit was filed. This action alleges,
among other things, that the defendants' logging practices have contributed to
an increase in flooding and damage to domestic water systems in a portion of the
Elk River watershed. The trial date is set for November 12, 2002. The Company
believes that it has strong factual and legal defenses with respect to the
Wrigley lawsuit; however, there can be no assurance that it will not have a
material adverse effect on the Company's financial position, results of
operations, or liquidity.

      On March 31, 1999, the EPIC-SYP/Permits lawsuit was filed alleging, among
other things, various violations of the CESA and the California Environmental
Quality Act, and challenging, among other things, the validity and legality of
the SYP and the Permits issued by California. On March 31, 1999, the USWA
lawsuit was filed also challenging the validity and legality of the SYP. The
previously set trial dates for these matters have been postponed, and new trial
dates have not been set. The Company believes that appropriate procedures were
followed throughout the public review and approval process concerning the HCP
and the SYP, and the Company is working with the relevant government agencies to
defend these challenges. Although uncertainties are inherent in the final
outcome of the EPIC-SYP/Permits lawsuit and the USWA lawsuit, the Company
believes that the resolution of these matters should not result in a material
adverse effect on its financial condition, results of operations or the ability
to harvest timber.

      On July 24, 2001, the Bear Creek lawsuit was filed. The lawsuit alleges
that Pacific Lumber's harvesting and other activities under certain of its
approved and proposed 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 in the Bear Creek watershed, and is seeking to
enjoin these activities until such permit has been obtained. The plaintiff also
seeks civil penalties of up to $27,000 per day for the defendant's alleged
continued violation of the CWA. The EPA has been joined as a defendant in this
case. The Company believes 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. Furthermore, EPA regulations
specifically provide that such activities are not subject to CWA permitting
requirements. The Company believes that it has strong legal defenses in this
matter; however, there can be no assurance that this lawsuit will not have a
material adverse effect on its consolidated financial condition or results of
operations.

      While the Company expects environmentally focused objections and lawsuits
to continue, it believes that the HCP, the SYP and the Permits should enhance
its position in connection with these continuing challenges and, over time,
reduce or minimize such challenges.

8.    PENSION PLAN MATTERS

      The assets of the Company sponsored pension plan, like numerous other
companies' plans, are, to a substantial degree, invested in equity trust funds
which are managed by a third party. Given the year-to-date performance of the
capital markets, it is likely that, barring a material improvement during the
remainder of 2002, the Company may be required to reflect an increase in its
minimum pension liability in its year-end financial statements as a result of a
decline in the value of the assets held by the Company's pension plan. Such an
increase in the minimum pension liability would be a non-cash adjustment that
would be reflected as an increase in pension liability with an offsetting charge
to stockholders' deficit (net of income tax) through comprehensive income
(rather than net income). The ultimate amount of such additional adjustment
cannot be determined until year-end 2002. However, such amount could be
material.

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

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

      This Quarterly Report on Form 10-Q contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places in
this section and in Part II. Item 1. "Legal Proceedings." Such statements can be
identified by the use of forward- looking terminology such as "believes,"
"expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Readers are cautioned that any such forward-looking
statements are not guarantees of future performance and involve significant
risks and uncertainties, and that actual results may vary materially from the
forward-looking statements as a result of various factors. These factors include
the effectiveness of management's strategies and decisions, general economic and
business conditions, developments in technology, new or modified statutory or
regulatory requirements and changing prices and market conditions. This Form
10-Q and the Form 10-K identify other factors that could cause such differences
between the forward-looking statements and actual results. No assurance can be
given that these are all of the factors that could cause actual results to vary
materially from the forward-looking statements.

RESULTS OF OPERATIONS

      The Company's wholly owned subsidiary, MGI, and its operating
subsidiaries, Pacific Lumber and Britt, are engaged primarily in forest products
operations. In addition, the Company added real estate operations to its
business with the June 2001 acquisition of Lake Pointe Plaza, an office complex
located in Sugar Land, Texas. The Company's forest products 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 this segment's revenues and cash flows will continue to be somewhat
seasonal. Accordingly, the segment's results for any one quarter are not
necessarily indicative of results to be expected for the full year. Real estate
operations do not have any seasonality elements impacting the quarterly results.

      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 Factors" of the Form 10-K and Note 7 to
the Condensed Consolidated Financial Statements for a discussion of these
matters. Regulatory compliance and related litigation have caused delays in
obtaining approvals of THPs and delays in harvesting on THPs once they are
approved. This has resulted in a decline in harvest, an increase in the cost of
logging operations, and lower net sales.

      Since the consummation of the Headwaters Agreement in March 1999, there
has been a significant amount of work required in connection with the
implementation of the Environmental Plans, and this work is expected to continue
for several more years. During the implementation period, government agencies
had until recently failed to approve THPs in a timely manner. The rate of
approvals of THPs during 2001 improved over that for the prior year, and further
improvements have been experienced thus far in 2002. Although delays in the
approvals of THPs may from time to time continue to impact the Company's ability
to meet its harvesting goals, the Company anticipates that once the
Environmental Plans are fully implemented, the process of preparing THPs will
become more streamlined, and the time to obtain approval of THPs will
potentially be shortened. As discussed in Note 7 to the Condensed Consolidated
Financial Statements, the North Coast Water Board is requiring the Company to
apply certain waste discharge reuiqrements to approved THPs covering winter
harvesting operations in the Elk River basin, and the North Coast Water Board
could beginning in 2003 require the Company to follow waste discharge
requirements before harvesting operations are conducted on THPs in other
watersheds. This requirement could cause further delays in obtaining regulatory
approval for THPs.

      While the Company experienced improvements in the THP approval process
during 2001 and 2002, there can be no assurance that Pacific Lumber will not in
the future have difficulties in receiving approvals of its THPs similar to those
experienced prior to 2001. Furthermore, there can be no assurance that certain
pending legal, regulatory and environmental matters or future governmental
regulations, legislation or judicial or administrative decisions, adverse
weather conditions or low selling prices, will not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
See Part II. Item 1. "Legal Proceedings" and Note 7 to the Condensed
Consolidated Financial Statements for further information regarding regulatory
and legal proceedings affecting the Company's operations.

      During 2001, comprehensive external and internal reviews were conducted of
Pacific Lumber's business operations. These reviews were conducted in an effort
to identify ways in which Pacific Lumber could operate on a more efficient and
cost effective basis. Based upon the results of these reviews, Pacific Lumber,
among other things, closed two of its four sawmills, eliminated certain of its
operations, including its soil amendment and concrete block activities, began
utilizing more efficient harvesting methods and adopted certain other cost
saving measures. Most of these changes were implemented by Pacific Lumber in the
last quarter of 2001, or the first quarter of 2002. Pacific Lumber also ended
its internal logging operations (which historically performed approximately half
of its logging operations) as of March 31, 2002, and will rely exclusively on
third party contract loggers to conduct these activities in the future. Results
for the six months ended June 30, 2002, met management's expectations.
Nevertheless, management is continuing to review operations, and additional
restructuring charges may be necessary.

      Timber Cruise. In late May 2002, the Company completed its timber cruise,
its first since 1986. The results of the timber cruise provided the Company with
an estimate of the volume of merchantable timber on the Company's 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),
with an increase in young growth timber volume almost equal to the decrease in
old growth timber volume. This shift in timber volume between classifications
decreased the overall timber volume reported in Mbfe by 0.2 million to 2.9
million. The new cruise data indicates that there is significantly less old
growth timber available for harvest than estimated as of December 31, 2001,
using the 1986 cruise data. This change in mix could potentially result in a
decrease in the Company's revenue. However, because there are many variables
that affect revenues and profitability, the Company cannot quantify the effect
of the above changes on current and future cash flows. The new timber volumes
are now being utilized in various aspects of the Company's operations, including
estimating volumes on THPs and determining depletion expense.

      The Company owns 27,938,250 shares of Kaiser common stock, representing a
34.6% interest in Kaiser on a fully diluted basis as of June 30, 2002. For 2001
and prior years, the Company's investment in Kaiser was accounted for under the
equity method. On February 12, 2002, Kaiser filed a voluntary petition for
reorganization under Chapter 11 of the Code in the Court. As a result of such
filing, the Company began reporting its investment in Kaiser under the cost
method with no further recognition of equity in earnings or losses until such
time as the shares are disposed of or a plan of reorganization is implemented.
See Notes 1 and 5 of the Condensed Consolidated Notes to the Financial
Statements for further information, including summarized financial information
of Kaiser.

      The following table presents selected operational and financial
information for the three and six months ended June 30, 2002 and 2001.


                                                                     THREE MONTHS ENDED        SIX MONTHS ENDED
                                                                          JUNE 30,                 JUNE 30,
                                                                   -----------------------  -----------------------
                                                                      2002         2001        2002        2001
                                                                   -----------  ----------  ----------  -----------
                                                                   (IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES)
Shipments:
   Lumber: (1)
      Redwood upper grades.......................................         6.9         4.4        13.5          8.5
      Redwood common grades......................................        64.8        44.8       117.6         82.0
      Douglas-fir upper grades...................................         1.3         2.6         2.6          4.6
      Douglas-fir common grades..................................         3.3        19.9         5.7         32.9
      Other......................................................           -         2.1           -          2.6
                                                                   -----------  ----------  ----------  -----------
             Total lumber........................................        76.3        73.8       139.4        130.6
                                                                   ===========  ==========  ==========  ===========
   Wood chips (2)................................................        17.2        34.1        32.5         60.7
                                                                   ===========  ==========  ==========  ===========

Average sales price:
   Lumber: (3)
      Redwood upper grades.......................................  $    1,328   $   1,775   $   1,346   $    1,809
      Redwood common grades......................................         546         602         539          607
      Douglas-fir upper grades...................................       1,296       1,350       1,281        1,365
      Douglas-fir common grades..................................         330         349         335          338
   Wood chips (4)................................................          34          68          34           69

Net sales:
   Lumber, net of discount.......................................  $     46.9   $    45.5   $    86.1   $     82.7
   Logs..........................................................         3.5         1.5         8.9          2.2
   Wood chips....................................................         0.6         2.3         1.1          4.2
   Cogeneration power............................................         2.4         3.0         4.7          7.4
   Other.........................................................         0.9         0.9         1.4          1.5
                                                                   -----------  ----------  ----------  -----------
      Total forest products......................................        54.3        53.2       102.2         98.0
   Real estate...................................................         2.1         0.1         4.3          0.1
                                                                   -----------  ----------  ----------  -----------
      Total net sales............................................  $     56.4   $    53.3   $   106.5   $     98.1
                                                                   ===========  ==========  ==========  ===========
Operating income (loss)..........................................  $      7.8   $     0.9   $    10.8   $     (3.6)
                                                                   ===========  ==========  ==========  ===========
Operating cash flow (5)..........................................  $     15.6   $     6.2   $    25.2   $      6.6
                                                                   ===========  ==========  ==========  ===========
Loss before income taxes and extraordinary item..................  $     (4.0)  $   (30.3)  $   (12.2)  $     (2.1)
                                                                   ===========  ==========  ==========  ===========
Net income (loss) (6)............................................  $     (2.1)  $   (25.1)  $    (5.2)  $     10.5
                                                                   ===========  ==========  ==========  ===========

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

(1)   Lumber shipments are expressed in millions of board feet.
(2)   Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds.
(3)   Dollars per thousand board feet.
(4)   Dollars per bone dry unit.
(5)   Operating income before depletion and depreciation, also referred to as "EBITDA."
(6)   Results for the three and six months ended June 30, 2002, include
      after-tax extraordinary gains of $0.3 million and $2.1 million,
      respectively, on the repurchase of MGHI Notes. Results for the three and
      six months ended June 30, 2001, include after-tax extraordinary gains of
      $1.7 million and $3.6 million, respectively, on the repurchase of MGHI
      Notes.

      Net Sales
      Net sales for the second quarter and first six months of 2002 increased
from the same periods of 2001, primarily reflecting increased shipments of
common grade redwood lumber. This improvement more than offset the impact from
lower shipments of Douglas-fir lumber and the decline in average sales prices
for all categories of lumber. Net sales also increased as a result of rental
income from the Lake Pointe Plaza office complex, which was acquired in June
2001.

      Operating Income (Loss)
      Operating results improved for both the second quarter and first six
months of 2002 compared to the year-ago periods. In addition to the increases in
net sales discussed above, the segment continues to realize the benefits of cost
saving measures taken in late 2001 and early 2002.

      Loss Before Income Taxes and Extraordinary Items
      The loss before income taxes and extraordinary items for the second
quarter of 2002 decreased from the loss before income taxes and extraordinary
items for the second quarter of 2001. In addition to the impact of the increase
in operating income discussed above, the Company recognized no earnings or
losses with respect to its investment in Kaiser during the 2002 period, whereas
the second quarter of 2001 included equity in loss from Kaiser of $(22.4)
million. The loss before income taxes and extraordinary items for the six months
ended June 30, 2002, increased primarily due to the absence of equity in
earnings from Kaiser for the 2002 period, versus equity in earnings from Kaiser
of $19.6 million for the 2001 period.

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See above for cautionary information with respect to such
forward-looking statements.

      Note 8 to the Consolidated Financial Statements in the Form 10-K contains
additional information concerning the Company's indebtedness and information
concerning certain restrictive debt covenants. "MGHI 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.


                                                                                           MGI,
                                                                                        LAKEPOINTE
                                                              SCOTIA        PACIFIC     ASSETS AND      MGHI
                                                               LLC          LUMBER        OTHER        PARENT       TOTAL
                                                           ------------    ---------    ----------    --------    ---------
                                                                             (IN MILLIONS OF DOLLARS)

Debt and credit facilities (excluding intercompany notes)
Short-term borrowings and current maturities of long-term
   debt:
   June 30, 2002........................................   $      15.4     $    0.1 (1) $     2.2     $     -     $   17.7
   December 31, 2001....................................          14.9         17.8           2.8           -         35.5

Long-term debt, excluding current maturities:
   June 30, 2002........................................   $     742.3 (2) $    0.4     $   118.4     $  59.3 (2) $  920.4
   December 31, 2001....................................         754.5          0.5         119.5        88.2        962.7

Revolving credit facilities:
   June 30, 2002:
      Facility commitment amounts.......................   $      60.0     $   50.0     $     2.5     $     -     $  112.5
      Borrowings........................................             -            -             -           -            -
      Letters of credit.................................             -         14.0             -           -         14.0
      Unused and available credit.......................          60.0         21.0           2.5           -         83.5

Cash, cash equivalents, marketable
   securities and other investments
June 30, 2002:
   Current amounts restricted for debt service..........   $      30.4     $      -     $     0.1     $     -     $   30.5
   Other current amounts................................           2.2         19.8          32.0         4.3         58.3
                                                           ------------    ---------    ----------    --------    ---------
                                                                  32.6         19.8          32.1         4.3         88.8
                                                           ------------    ---------    ----------    --------    ---------

   Long-term amounts restricted for debt service........          56.5            -             -            -        56.5
   Other long-term restricted amounts...................             -            -           2.3            -         2.3
                                                           ------------    ---------    ----------    --------    ---------
                                                                  56.5            -           2.3            -        58.8
                                                           ------------    ---------    ----------    --------    ---------
                                                           $      89.1     $   19.8     $    34.4     $   4.3     $  147.6
                                                           ============    =========    ==========    ========    =========

December 31, 2001:
   Current amounts restricted for debt service..........   $      52.4     $     -      $     0.1     $     -     $   52.5
   Other current amounts................................           2.5          2.3          26.6        35.7         67.1
                                                           ------------    ---------    ----------    --------    ---------
                                                                  54.9          2.3          26.7        35.7        119.6
                                                           ------------    ---------    ----------    --------    ---------

   Long-term amounts restricted for debt service........          87.6            -             -           -         87.6
   Other long-term restricted amounts...................            -             -           2.2           -          2.2
                                                           ------------    ---------    ----------    --------    ---------
                                                                  87.6            -           2.2           -         89.8
                                                           ------------    ---------    ----------    --------    ---------
                                                           $     142.5     $    2.3     $    28.9     $  35.7     $  209.4
                                                           ============    =========    ==========    ========    =========

- ---------------------
Table and Notes continued on next page



                                                                                           MGI,
                                                                                        LAKEPOINTE
                                                              SCOTIA        PACIFIC     ASSETS AND      MGHI
                                                               LLC          LUMBER        OTHER        PARENT       TOTAL
                                                           ------------    ---------    ----------    --------    ---------
                                                                             (IN MILLIONS OF DOLLARS)

Changes in cash and cash equivalents for the six month
   periods
Capital expenditures:
   June 30, 2002........................................   $       3.3     $    2.3     $     0.4     $     -     $    6.0
   June 30, 2001........................................           2.9          3.6         132.1 (3)       -        138.6

Net proceeds from dispositions of property and investments:
   June 30, 2002........................................   $         -     $    1.5     $       -     $     -     $    1.5
   June 30, 2001........................................             -            -             -           -            -

Borrowings (repayments) of debt and credit facilities,
   net of financing costs:
   June 30, 2002........................................   $     (11.7)    $  (17.7)    $    (1.7)    $ (25.7)    $  (56.8)
   June 30, 2001........................................         (11.4)       (37.0)        117.3 (3)   (25.1)        43.8

Dividends and advances received (paid):
   June 30, 2002........................................   $     (29.4)(1) $   29.4 (1)$        -     $     -     $      -
   June 30, 2001........................................         (73.1)(4)     73.1 (4)     (17.1)       17.1            -


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

(1)     In March 2002, Scotia LLC released $29.4 million from the SAR Account
        and distributed this amount to Pacific Lumber. Pacific Lumber used these
        funds to repay the borrowings outstanding under the Pacific Lumber
        Credit Agreement.
(2)     The decrease in Scotia LLC's long-term debt between December 31, 2001,
        and June 30, 2002, was the result of principal payments on the Timber
        Notes of $11.6 million during the six months ended June 30, 2002. The
        decrease in MGHI Parent's long-term debt between December 31, 2001 and
        June 30, 2002, was the result of repurchases of debt.
(3)     Capital expenditures and borrowings for MGI, Lakepointe Assets and Other
        as of and for the period ended June 30, 2001, reflect the purchase of
        the Lake Pointe Plaza office complex.
(4)     For the six months ended June 30, 2001, $73.1 million of dividends were
        paid by Scotia LLC to Pacific Lumber using proceeds from the sale of its
        Owl Creek grove.

      During the six months ended June 30, 2002, the Company repurchased $28.9
million of the MGHI Notes, resulting in an extraordinary gain of $2.1 million
(net of tax). Subsequent to June 30, 2002, the Company repurchased $5.0 million
of the MGHI Notes, resulting in a small gain. MGHI expects that interest
payments on the remaining $54.3 million of MGHI Notes will be made using funds
from payments by MAXXAM Parent on the MAXXAM Note.

      MGHI owns 27,938,250 shares of the common stock of Kaiser, representing a
34.6% interest. As a result of the Cases, the value of Kaiser common stock has
declined substantially. The market value of the Kaiser shares owned by MGHI
based on the price per share quoted at the close of business on August 12,
2002, was $1.4 million. It is possible that MGHI's interest may be diluted or
cancelled as a part of a plan of reorganization.

      At June 30, 2002, $14.0 million of letters of credit and no borrowings
were outstanding under the Pacific Lumber Credit Agreement. Unused availability
was limited to $21.0 million at June 30, 2002. On July 24, 2002, a letter
agreement was signed extending the maturity date of the Pacific Lumber Credit
Agreement from August 14, 2003, to August 13, 2004, subject to certain
conditions such as completion of a new credit agreement. In connection with such
extension, the facility commitment amount was reduced from $50.0 million to
$45.0 million.

      The Scotia LLC Line of Credit allows Scotia LLC to borrow up to one year's
interest on the Timber Notes. On May 31, 2002, the Scotia LLC Line of Credit was
extended for an additional year to July 11, 2003. Annually, Scotia LLC will
request that the Scotia LLC Line of Credit be extended for a 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 June 30, 2002, Scotia LLC could have borrowed a maximum of $60.0 million
under the Scotia LLC Line of Credit, and there were no borrowings outstanding
under the Scotia LLC Line of Credit.

      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 (e.g., 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.

      On the note payment date in January 2002, Scotia LLC had $33.9 million set
aside in the note payment account to pay the $28.4 million of interest due as
well as $5.5 million of principal. Scotia LLC repaid an additional $6.1 million
of principal on the Timber Notes using funds held in the SAR Account, resulting
in a total principal payment of $11.6 million, an amount equal to Scheduled
Amortization (as defined in the Timber Notes Indenture).

      On the note payment date in July 2002, Scotia LLC had $15.1 million set
aside in the note payment account and borrowed $13.0 million (net of $0.9
million for Timber Notes held by Scotia LLC) from the Scotia LLC Line of Credit
to pay the $28.1 million of interest due. Scotia LLC repaid $3.2 million of
principal on the Timber Notes (an amount equal to Scheduled Amortization) using
funds held in the SAR Account.

      MGHI Parent believes that its existing resources and payments on the
MAXXAM Note will be sufficient to fund its debt service and working capital
requirements for the next year. With respect to its long-term liquidity, MGHI
Parent believes that its existing cash and cash resources, together with
payments on the MAXXAM Note, should be sufficient to meet its debt service and
working capital requirements, although there can be no assurance that this will
be the case. MGHI Parent expects MAXXAM to pay the amount of the MAXXAM Note
necessary to retire the MGHI Notes which are due in 2003. The regulatory and
environmental matters described under "--Results of Operations" above have
adversely affected cash available from subsidiaries, and in turn the amount of
distributions to MGHI Parent. Distributions from subsidiaries may continue to be
minimal, if any, over the next year.

      Due to its highly leveraged condition, MGI is more sensitive than less
leveraged companies to factors affecting its operations, including governmental
regulation and litigation affecting its timber harvesting practices (see
"--Results of Operations" above and Note 7 to the Condensed Consolidated
Financial Statements), increased competition from other lumber producers or
alternative building products and general economic conditions.

      Pacific Lumber's 2001 cash flows from operations were adversely affected
by operating inefficiencies, lower lumber prices, an inadequate supply of logs
and a related slowdown in lumber production. During 2001, comprehensive external
and internal reviews were conducted of Pacific Lumber's business operations.
These reviews were conducted in an effort to identify ways in which Pacific
Lumber could operate on a more efficient and cost effective basis. Based upon
the results of these reviews, Pacific Lumber, among other things, closed two of
its four sawmills, eliminated certain of its operations, including its soil
amendment and concrete block activities, began utilizing more efficient
harvesting methods and adopted certain other cost saving measures. Most of these
changes were implemented by Pacific Lumber in the last quarter of 2001, or the
first quarter of 2002. Pacific Lumber also ended its internal logging operations
(which historically performed approximately half of its logging operations) as
of March 31, 2002, and will rely exclusively on third party contract loggers to
conduct these activities in the future.

     The $29.4 million release from the SAR Account discussed above improved
Pacific Lumber's liquidity during the six months ended June 30, 2002, and
operating results for the period met management's expectations. However, Pacific
Lumber's cash flows from operations may be adversely affected by the
availability of logs, including old growth logs. See "Results of Operations"
above as well as Note 7 to the Condensed Consolidated Financial Statements for
further discussion on the regulatory and environmental factors affecting harvest
levels and the results of the timber cruise completed in 2002. Pacific Lumber
may require funds available under the Pacific Lumber Credit Agreement,
additional repayments by MGI of an intercompany loan and/or capital
contributions from MGI to enable it to meet its working capital and capital
expenditure requirements for the next year.

      Scotia LLC's cash flows from operations are significantly impacted by
harvest volumes and SBE prices. On June 19, 2002, the State Board of
Equalization adopted the new Harvest Value Schedule for the second half of 2002.
The SBE Prices published in this schedule reflect an approximate 16% decline for
small redwood logs and no price change for small Douglas fir logs. This decline
in SBE Prices will have an adverse impact on Scotia LLC's net sales and
liquidity for the second half of 2002. With respect to short-term liquidity,
Scotia LLC believes that existing cash available for principal payments from the
SAR Account, and funds available under the Scotia LLC Line of Credit, together
with cash flows from operations, should provide sufficient funds to meet its
working capital, capital expenditures and required debt service obligations
through 2003. However, cash flows from operations may be insufficient to allow
Scotia LLC to service its debt in the long-term if Scotia LLC does not
experience improvements in SBE Prices. In addition, cash flows from operations
may continue to be adversely affected if harvest levels decline as a result of
the factors discussed in "--Results of Operations" above and Note 7 to the
Condensed Consolidated Financial Statements.

      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 Pacific Lumber has adequate cash flows from
operations and/or dividends from Scotia LLC and SBE Prices improve, there can be
no assurance that this will be the case.

CRITICAL ACCOUNTING POLICIES

      The Company recently completed its timber cruise which resulted in new and
updated timber volume information (see also Note 7 to the Condensed Consolidated
Financial Statements). Accordingly, the Company revised its estimated depletion
rates beginning April 1, 2002. There was relatively no impact on depletion
expense for the six months ended June 30, 2002, as a result of using the updated
timber volume information.

      See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Critical Accounting Policies" of the Form 10-K for
additional discussion of the Company's critical accounting policies.

NEW ACCOUNTING PRONOUNCEMENTS

      See Note 1 to the Condensed Consolidated Financial Statements for a
discussion of new accounting pronouncements and their potential impact on the
Company.


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      This item is not applicable to the Company and its subsidiaries.


                           PART II. OTHER INFORMATION

ITEM 1.         LEGAL PROCEEDINGS

      Reference is made to Item 3 of the Form 10-K for information concerning
material legal proceedings with respect to the Company. The following material
developments have occurred with respect to such legal proceedings subsequent to
the filing of the Form 10-K.

      TIMBER HARVESTING LITIGATION

      On April 3, 2002, the Environmental Protection Information Association
filed a 60-day notice letter threatening suit against the Company and certain
federal agencies under the ESA. The threatened suit would seek to require the
federal agencies to consider new information obtained since the approval of the
HCP concerning marbled murrelets and salmon and to require a cessation of
certain harvesting operations. No suit has yet been filed. The Company believes
that it has strong factual and legal defenses with respect to this matter;
however, there can be no assurance that such a suit would not have a material
adverse effect on the Company's financial position, results of operations, or
liquidity.

      With respect to the ERF lawsuit, a settlement was reached on June 5, 2002,
for $0.5 million. The parties also agreed to continue monitoring discharge into
certain waterways.

      With respect to the Wrigley lawsuit, the trial date is set for November
12.

      With respect to both the EPIC-SYP/Permits lawsuit and the USWA lawsuit,
the previously set trial dates have been postponed, and new trial dates have not
been set.


ITEM 6.         EXHIBITS AND REPORTS ON FORM 8-K

A.    EXHIBITS:

      10.1 Letter agreement, dated July 24, 2002, between Pacific Lumber and
Bank of America, N.A..

B.      REPORTS ON FORM 8-K:

      On May 2, 2002, the Company filed a current report on Form 8-K dated as of
April 30, 2002 (under Item 4), related to the change of Registrant's certifying
accountant.


                                   SIGNATURES


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




                                   MAXXAM GROUP HOLDINGS INC.





Date: August 13, 2002              By:                /S/    PAUL N. SCHWARTZ
                                         ----------------------------------------------------
                                                           Paul N. Schwartz
                                         Vice President, Chief Financial Officer and Director
                                                   (Principal Financial Officer)




Date: August 13, 2002              By:              /S/    ELIZABETH D. BRUMLEY
                                         ----------------------------------------------------
                                                        Elizabeth D. Brumley
                                                             Controller
                                                   (Principal Accounting Officer)



                                                                      APPENDIX A


                            GLOSSARY OF DEFINED TERMS


Bear Creek lawsuit: An action entitled Environmental Protection Information
Association v. Pacific Lumber, Scotia Pacific Company LLC (No. C01-2821), filed
July 24, 2001, in the U.S. District Court in the Northern District of California

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

Cases: The Chapter 11 proceedings of Kaiser and 16 of its subsidiaries

CDF:  California Department of Forestry and Fire Protection

CESA:  California Endangered Species Act

Code: The United States Bankruptcy Code

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

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

CWA:  Federal Clean Water Act

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. (No.
99CS00639) filed March 31, 1999 in the Superior Court of Sacramento County

Equity Fund Partnership: A partnership investing in equity securities in which
the Company holds a limited partnership interest

ERF lawsuit: An action entitled Ecological Rights Foundation, Mateel
Environmental v. Pacific Lumber (No. 97-0292) which was filed in the U.S.
District Court in the Northern District of California on January 28, 1997

ESA:  The federal Endangered Species Act

FASB: Financial Accounting Standards Board

Form 10-K: The Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 2001

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

HCP: The habitat conservation plan covering multiple species approved on March
1, 1999, in connection with the consummation of the Headwaters Agreement

Headwaters Agreement: The September 28, 1996, agreement between Pacific Lumber,
Scotia LLC, Salmon Creek Corporation, 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 Pacific Lumber 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 on March 1, 1999

Kaiser: Kaiser Aluminum Corporation, an equity investee of the Company engaged
in aluminum operations

Kaiser Shares: 27,938,250 shares of the common stock of Kaiser, of which
20,553,418 shares are pledged as collateral for the MGHI Notes as of the date
hereof

Lakepointe Assets: Lakepointe Assets Holdings LLC, a limited liability company,
and its subsidiaries, all of which are indirect wholly owned subsidiaries of the
Company

Lakepointe Notes: The 7.56% notes of Lakepointe Assets due June 8, 2021

MAXXAM:  MAXXAM Inc.

MAXXAM Note: Intercompany note issued by MAXXAM to the Company for an initial
principal amount of $125.0 million

MBF: One thousand board feet

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

MGHI Notes:  12% Senior Secured Notes of the Company due August 1, 2003

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

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

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

Pacific Lumber Credit Agreement: The revolving credit agreement between Pacific
Lumber and a bank which provides for borrowings of up to $50.0 million

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

Salmon Creek:  Salmon Creek LLC, a wholly owned subsidiary of Pacific Lumber

SAR Account: Funds held in a reserve account 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 Pacific Lumber

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

SFAS No. 143: Statement of Financial Accounting Standards No. 143, "Accounting
for Asset Retirement Obligations"

SFAS No. 144: Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-lived Assets"

SFAS No. 145: Statement of Financial Accounting Standards No. 145, "Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections"

SFAS No. 146: Statement of Financial Accounting Standard No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities"

SYP: The sustained yield plan approved on March 1, 1999, in connection with the
consummation of the Headwaters Agreement

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

Timber Notes: Scotia LLC's $867.2 million original aggregate principal amount of
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

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) filed March 31, 1999 in the Superior Court of Sacramento County

Wrigley lawsuit: An action entitled Kristi Wrigley, et al. v. Charles Hurwitz,
John Campbell, Pacific Lumber, MAXXAM Group Holdings Inc., Scotia Pacific
Holding Company, MAXXAM Group Inc., MAXXAM Inc., Scotia Pacific Company LLC and
Federated Development Company (No. 9700399) filed December 2, 1997 in the
Superior Court of Humboldt County

EX-10

July 24, 2002

The Pacific Lumber Company
125 Main Street
Scotia, California 95565

Attention:        Gary L. Clark,
                  Vice President--Finance and Administration

         Re:      Existing Credit Agreement referred to below

Ladies and Gentlemen:

This letter is delivered to you in connection with the Amended and Restated
Credit Agreement, dated as of August 14, 2001 (as amended, the "Existing Credit
Agreement"), between The Pacific Lumber Company (the "Company") and Bank of
America, N.A. ("Bank of America"). All capitalized terms used but not otherwise
defined herein shall have the meanings assigned to such terms in the Existing
Credit Agreement.

You have advised us that you desire to extend the maturity date of the Existing
Credit Agreement for one year from August 14, 2003 to August 13, 2004. Bank of
America is pleased to advise you of its willingness to extend the maturity date
for one year as requested (the "Extension"). Our agreement to the Extension will
be subject to the satisfaction of the following conditions precedent in a manner
acceptable to Bank of America in its sole discretion:

1.    the Commitment under the Existing Credit Agreement shall be reduced to
      $45,000,000 on August 14, 2002;

2.    the Extension Fee (as such term is defined below) shall have been paid in
      full. The Arrangement Fee to be paid on each anniversary date after the
      Closing Date as provided in Section 2.10(b)(2) of the Existing Credit
      Agreement shall be superceded by the Extension Fee;

3.    the negotiation, execution and delivery of a new credit agreement ("New
      Credit Agreement"), security agreement and other loan documents
      (collectively, the "New Documents") to replace the Existing Credit
      Agreement, the Company Security Agreement and the other Loan Documents.
      The New Documents shall contain the same interest rates as in the Existing
      Credit Agreement and, except as set forth in paragraphs numbered 1 and 2
      above, shall contain other terms, agreements and conditions substantially
      similar to those contained in the Existing Credit Agreement and the Loan
      Documents, subject, however, to modifications Bank of America deems
      necessary or desirable, and shall include other provisions that Bank of
      America deems necessary or desirable, including, without limitation,
      provisions necessary for Bank of America and/or any of its affiliates to
      syndicate the credit facility evidenced by the Existing Credit Agreement
      and the other Loan Documents (the "Senior Credit Facility"). The date of
      signing and closing of the New Documents to occur on or before Monday,
      September 16, 2002 (the "Signing Date");

4.    the outstanding principal amount of all Loans under the Existing Credit
      Agreement, together with any accrued interest thereunder, immediately
      prior to the Signing Date of the New Documents shall have been repaid in
      full (which amounts may be paid by the Company out of the initial
      borrowing under the New Credit Agreement), and any existing lending or
      financing commitments under the Existing Credit Agreement shall have been
      canceled, concurrently with the Signing Date. All letters of credit issued
      under the Existing Credit Agreement that are outstanding thereunder on the
      Signing Date shall be deemed to have been issued and outstanding under the
      New Credit Agreement;

5.    all reasonable out-of-pocket fees and expenses (including, but not limited
      to, the reasonable fees, disbursements and expenses of outside counsel to
      Bank of America and all allocated costs of internal counsel to Bank of
      America) incurred by Bank of America before and/or after the date hereof
      in connection with this letter, the Extension and any documentation
      thereof and the New Documents and the syndication of the Senior Credit
      Facility and by any affiliate of Bank of America in connection with the
      syndication of the Senior Credit Facility, in any case whether or not any
      or such transactions are consummated or the closing of the New Documents
      occurs (collectively, the "Extension Expenses"); and

6.    no change, occurrence or development that could, in our opinion, have a
      material adverse effect on the business, assets, liabilities (actual or
      contingent), operations, condition (financial or otherwise) or prospects
      of the Company and its subsidiaries taken as a whole shall have occurred
      or become known to us.

In connection with, and in consideration of Bank of America agreeing to, the
Extension, the Company agrees to pay Bank of America an extension fee in an
amount equal to $250,000 (the "Extension Fee") on the Signing Date.

In the event than any of the New Documents are not reasonably acceptable to the
Company and, as a result thereof, the Company does not execute the New Documents
on or prior to the Signing Date, then the Company shall, on or prior to
September 16, 2002, pay to Bank of America the $125,000 Arrangement Fee as
required in Section 2.10(b)(2) of the Existing Credit Agreement and all the
Extension Expenses, and except for the modification to the Existing Credit
Agreement as set forth in this paragraph regarding the extended period of time
for the Company to pay the Arrangement Fee as provided in Section 2.10(b)(2) of
the Existing Credit Agreement and as set forth in the immediately succeeding
paragraph, all the terms, covenants and agreements contained in the Loan
Documents shall remain in full force and effect.

Notwithstanding anything to the contrary in this letter, the Company and Bank of
America hereby agree that the Existing Credit Agreement is hereby amended as
follows: the Commitment under the Existing Credit Agreement shall be reduced to
$45,000,000 on August 14, 2002, and that effective on such date and thereafter,
the Commitment under the Existing Credit Agreement shall be $45,000,000.

The fee payable above shall be fully earned upon becoming due and payable, shall
be non-refundable for any reason whatsoever and shall be in addition to any
other fee, cost or expense payable pursuant to the Existing Credit Agreement or
any other Loan Document or, if applicable, the New Documents.

Please be advised that Bank of America and/or any of its affiliates may, in its
sole discretion, form a syndicate of financial institutions (the "Lenders")
reasonably acceptable to you for the Senior Credit Facility. In the event that
Bank of America and/or any of its affiliates proceeds with forming a syndication
of the Senior Credit Facility, you agree to actively assist Bank of America
and/or any of its affiliates in achieving the syndication of the Senior Credit
Facility that is satisfactory to Bank of America and/or any of its affiliates.
Such assistance shall include (a) your providing and causing your advisors to
provide us and the other Lenders upon request with all information reasonably
deemed necessary by us to complete syndication, and (b) otherwise assisting us
in our syndication efforts, including by making senior management and advisors
of the Company and its subsidiaries available from time to time to attend and
make presentations regarding the business and prospects of the Company and its
subsidiaries, as appropriate, at one or more meetings of prospective Lenders. It
is understood and agreed that Bank of America and/or any of its affiliates will
manage and control all aspects of any syndication of the Senior Credit Facility,
including decisions as to the selection of proposed Lenders and any titles
offered to proposed Lenders, when commitments will be accepted and the final
allocations of the commitments among the Lenders. It is understood and agreed
that no Lender participating in the Senior Credit Facility will receive
compensation from you in order to obtain its commitment, except as may be agreed
to in writing.

In addition to the Extension Fee and without limiting the foregoing, the Company
agrees to reimburse Bank of America from time to time on demand for all
reasonable out-of-pocket fees and expenses (including, but not limited to, the
reasonable fees, disbursements and expenses of outside counsel to Bank of
America and all allocated costs of internal counsel to Bank of America) incurred
by Bank of America before and/or after the date hereof in connection with this
letter, the Extension and any documentation thereof and the New Documents and
the syndication of the Senior Credit Facility and by any affiliate of Bank of
America in connection with the syndication of the Senior Credit Facility.

You agree to indemnify and hold harmless Bank of America, each Lender, and each
of their respective affiliates and each of their respective officers, directors,
employees, agents, advisors and other representatives (each an "Indemnified
Party") from and against (and will reimburse each Indemnified Party as the same
are incurred for) any and all claims, damages, losses, liabilities and expenses
(including, without limitation, the reasonable fees, disbursements and other
charges of counsel and the allocated cost of internal counsel to Bank of
America) that may be incurred by or asserted or awarded against any Indemnified
Party, in each case arising out of or in connection with or by reason of
(including, without limitation, in connection with any investigation, litigation
or proceeding or preparation of a defense in connection therewith) any matters
contemplated or arising out of this letter, any related transaction or the
Senior Credit Facility, except, as to any Indemnified Party, to the extent such
claim, damage, loss, liability or expense is found in a final, nonappealable
judgment by a court of competent jurisdiction to have resulted from such
Indemnified Party's gross negligence or willful misconduct. In the case of an
investigation, litigation or proceeding to which the indemnity in this paragraph
applies, such indemnity shall be effective whether or not such investigation,
litigation or proceeding is brought by you, any of your subsidiaries,
affiliates, equityholders or creditors, or an Indemnified Party, whether or not
an Indemnified Party is otherwise a party thereto.

This letter and the contents hereof are confidential and, except for the
disclosure hereof or thereof on a confidential basis to your accountants,
attorneys and other professional advisors retained in connection with the Senior
Credit Facility or as otherwise required by law, may not be disclosed in whole
or in part to any person or entity without our prior written consent; provided,
however, it is understood and agreed that you may disclose this letter on a
confidential basis to the board of directors, officers and advisors of the
Company in connection with their consideration of the matters contemplated
herein.

The provisions of the immediately preceding three paragraphs shall remain in
full force and effect regardless of whether any definitive documentation
contemplated in the paragraph numbered 3 above shall be executed and delivered
and notwithstanding the termination of this letter or any commitment or
undertaking of Bank of America hereunder.

This letter shall be governed by, and construed in accordance with, the laws of
the State of California. This letter may be executed in any number of
counterparts, each of which, when so executed and delivered, shall be deemed an
original, and all of which taken together shall be deemed to constitute one and
the same instrument. This letter may be modified or amended only by a written
agreement signed by each of the parties hereto.

This letter and all commitments and undertakings of Bank of America hereunder
will expire at 5:00 p.m. (San Francisco time) on Thursday, July 25, 2002 (and we
shall have no obligation to you) unless you execute this letter and return this
letter to us prior to that time (which may be by facsimile transmission),
whereupon this letter shall become a binding agreement. Thereafter, all
commitments and undertakings of Bank of America hereunder will expire (and we
shall have no obligation to you) at 5:00 p.m. (San Francisco time) on Monday,
September 16, 2002, unless the Signing Date occurs on or prior thereto.

If the foregoing is in accordance with your understanding, please execute and
return this letter to us.

Very truly yours

BANK OF AMERICA, N.A.



By:      /s/ Thomas R. Sullivan
    --------------------------------
Name:  Thomas R. Sullivan
         Title:    Vice President



ACCEPTED AND AGREED TO
AS OF JULY 24, 2002:

THE PACIFIC LUMBER COMPANY



By:      /s/ Gary L. Clark
    -----------------------
Name:  Gary L. Clark
Title:    Vice President--Finance