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

                                 FORM 10-K

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


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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995   COMMISSION FILE NUMBER 1-9204


                         THE PACIFIC LUMBER COMPANY
           (Exact name of Registrant as Specified in its Charter)

          DELAWARE                             13-3318327
      (State or other                       (I.R.S. Employer
        jurisdiction                     Identification Number)
    of incorporation or
       organization)

        P. O. BOX 37                             95565
      125 MAIN STREET                          (Zip Code)
     SCOTIA, CALIFORNIA
   (Address of Principal
     Executive Offices)

     Registrant's telephone number, including area code: (707) 764-2222

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


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

                                   None.


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

                                   None.

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


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

    All of the Registrant's voting stock is held by an affiliate of the
                                 Registrant.

    Number of shares of Common Stock outstanding at March 15, 1996:  100
     REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(J)(1)(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE
REDUCED DISCLOSURE FORMAT.

                    DOCUMENTS INCORPORATED BY REFERENCE:

                                   None.

                                   PART I


ITEM 1.        BUSINESS

     GENERAL

          The Pacific Lumber Company and its subsidiaries (collectively
referred to herein as the "Company" or "Pacific Lumber," unless the context
indicates otherwise) engage in several principal aspects of the lumber
industry--the growing and harvesting of redwood and Douglas-fir timber, the
milling of logs into lumber products and the manufacturing of lumber into a
variety of value-added finished products.  The Company has been in
continuous operation for over 125 years.

          The Company is an indirect wholly owned subsidiary of MAXXAM
Group Inc. ("MGI").  MGI is a wholly owned subsidiary of MAXXAM Inc.
("MAXXAM").

     TIMBERLANDS

          The Company owns and manages approximately 192,000 acres of
commercial timberlands.  These timberlands are located in Humboldt County
along the northern California coast which has very favorable soil and
climate conditions.  These timberlands contain approximately three-quarters
redwood and one-quarter Douglas-fir timber.  The Company's acreage is
virtually contiguous, is located in close proximity to its sawmills and
contains an extensive (1,100 mile) network of roads.  These factors
greatly facilitate the Company's operations and forest management
techniques.  The extensive roads throughout the Company's timberlands
facilitate log hauling, serve as fire breaks and allow the Company's
foresters access to employ forest stewardship techniques which protect the
trees from forest fires, erosion, insects and other damage.

          Approximately 179,000 acres of the Company's timberlands are
owned by Scotia Pacific Holding Company (the "Scotia Pacific Timberlands"),
a special purpose Delaware corporation and wholly owned subsidiary of
Pacific Lumber ("Scotia Pacific").  Pacific Lumber has the exclusive right
to harvest (the "Pacific Lumber Harvest Rights") approximately 8,000 non-
contiguous acres of the Scotia Pacific Timberlands consisting substantially
of virgin old growth redwood and virgin old growth Douglas-fir timber
located on numerous small parcels throughout the Scotia Pacific
Timberlands.  Substantially all of Scotia Pacific's assets, including the
Scotia Pacific Timberlands and the GIS (defined below), are pledged as
security for Scotia Pacific's 7.95% Timber Collateralized Notes due 2015
(the "Timber Notes").  Pacific Lumber harvests and purchases from Scotia
Pacific all of the logs harvested from the Scotia Pacific Timberlands.  See
"--Relationships With Scotia Pacific and Britt" for a description of this
and other relationships among Pacific Lumber, Scotia Pacific and Britt
Lumber Co., Inc. ("Britt"), an affiliate of the Company.

          The forest products industry grades lumber in various
classifications according to quality.  The two broad categories within
which all grades fall, based on the absence or presence of knots, are
called "upper" and "common" grades, respectively.  "Old growth" trees,
often defined as trees which have been growing for approximately 200 years
or longer, have a higher percentage of upper grade lumber than "young
growth" trees (those which have been growing for less than 200 years). 
"Virgin" old growth trees are located in timber stands that have not
previously been harvested.  "Residual" old growth trees are located in
timber stands which have been partially harvested in the past.

          The Company has engaged in extensive efforts
to supplement the natural regeneration of timber and increase the
amount of timber on its timberlands.  The Company is required to 
comply with California forestry regulations regarding reforestation, which
generally require that an area be reforested to specified standards within
an established period of time.  The Company also actively engages in
efforts to establish timberlands from open areas such as pasture land. 
During 1995, the Company planted approximately 676,000 redwood and
Douglas-fir seedlings.  Regeneration of redwood timber generally is
accomplished through the natural growth of new redwood sprouts from the
stump remaining after a redwood tree is harvested.  Such new redwood
sprouts grow quickly, thriving on existing mature root systems.  In
addition, the Company supplements natural redwood regeneration by planting
redwood seedlings.  Douglas-fir timber grown on the Company's timberlands
is regenerated almost entirely by planting seedlings.

     HARVESTING PRACTICES

          The ability of the Company to sell logs or lumber products will
depend, in part, upon its ability to obtain regulatory approval of timber
harvesting plans ("THPs").  THPs are required to be developed by registered
professional foresters and must be filed with, and approved by, the
California Department of Forestry ("CDF") prior to the harvesting of
timber.  Each THP is designed to comply with applicable environmental laws
and regulations.  The CDF's evaluation of proposed THPs incorporates review
and analysis of such THPs by several California and federal agencies and
public comments received with respect to such THPs.  An approved THP is
applicable to specific acreage and specifies the harvesting method and
other conditions relating to the harvesting of the timber covered by such
THP.  See "--Regulatory and Environmental Factors" for information
regarding proposed critical habitat designation, sustained yield
regulations and related matters.  The Company maintains a detailed
geographical information system covering its timberlands (the "GIS").  The
GIS covers numerous aspects of the Company's properties, including timber
type, tree class, wildlife data, roads, rivers and streams.  By carefully
monitoring and updating this data base and conducting field studies, the
Company's foresters are able to develop detailed THPs addressing the
various regulatory requirements.  The Company also utilizes a Global
Positioning System ("GPS") which allows precise location of geographic
features through satellite positioning.  Use of the GPS greatly enhances
the quality and efficiency of GIS data.

          The Company employs a variety of well-accepted methods of
selecting trees for harvest.  These methods, which are designed to achieve
optimal regeneration, are referred to as "silvicultural systems" in the
forestry profession.  Silvicultural systems range from very light thinnings
aimed at enhancing the growth rate of retained trees to clear cutting which
results in the harvest of all trees in an area and replacement with a new
forest stand.  In between are a number of varying levels of partial
harvests which can be employed.  The Company's foresters select the
appropriate silvicultural system for any given site based upon the specific
conditions of that site.  The Company customarily employs silvicultural
systems that involve thinnings followed by a variety of partial cuttings to
achieve a high degree of natural regeneration.  Partial harvesting allows
the remaining trees to obtain more light, nutrients and water, thereby
promoting faster growth rates.   Pacific Lumber uses a variety of factors,
including the size and density of the remaining trees, to determine when to
again submit a THP with respect to a given area.  Clear cutting is only
used under specific circumstances where it is advisable due to specific
site conditions (such as undesirable tree species composition for natural
regeneration, topographic difficulties which preclude partial cuttings or
the need to create more diverse wildlife habitats within watersheds as
recommended by the Company's wildlife biologists).  Due to the magnitude of
its timberlands and conservative application of silvicultural systems that
retain substantial numbers of trees on areas that are harvested, the
Company has historically conducted harvesting operations on approximately
5% of its timberlands in any given year.

     PRODUCTION FACILITIES

          The Company owns four highly mechanized sawmills and related
facilities located in Scotia, Fortuna and Carlotta, California.  The
sawmills historically have been supplied almost entirely from timber
harvested from the Company's timberlands.  Since 1986, the Company has
implemented numerous technological advances which have increased the
operating efficiency of its production facilities and the recovery of
finished products from its timber.  Over the past three years, the
Company's annual lumber production has averaged approximately 268 million
board feet, with approximately 290, 286, and 228 million board feet
produced in 1995, 1994 and 1993, respectively.  The Fortuna sawmill, built
by the Company in 1972, produces primarily common grade lumber.  During
1995, the Fortuna mill produced approximately 94 million board feet of
lumber.  The Carlotta sawmill was acquired in 1986 and produces both common
and upper grade redwood lumber.  During 1995, the Carlotta mill produced
approximately 67 million board feet of lumber.  Sawmill "A," located in
Scotia, was remodeled in 1983 and processes Douglas-fir logs while Sawmill
"B," also located in Scotia, primarily processes large diameter redwood
logs.   During 1995, Sawmills "A" and "B" produced 79 and 51 million board
feet of lumber, respectively.

          The Company operates a finishing plant which processes rough
lumber into a variety of finished products such as trim, fascia, siding and
paneling.  These finished products include the industry's largest variety
of customized trim and fascia patterns.  The Company also enhances the
value of some grades of common grade lumber by assembling knot-free pieces
of narrower and shorter lumber into wider or longer pieces in its
state-of-the-art end and edge glue plant.  The result is a standard sized
upper grade product which can be sold at a significant premium over common
grade products.

          The Company dries the majority of its upper grade lumber before
it is sold.  Upper grades of redwood lumber are generally air-dried for six
to eighteen months and then kiln-dried for seven to twenty-four days to
produce a dimensionally stable and high quality product which generally
commands higher prices than "green" lumber (which is lumber sold before it
has been dried).  Upper grade Douglas-fir lumber is generally kiln-dried
immediately after it is cut.  The Company owns and operates 34 kilns,
having an annual capacity of approximately 95 million board feet, to dry
its upper grades of lumber efficiently in order to produce a quality,
premium product.  The Company also maintains several large enclosed storage
sheds which hold approximately 25 million board feet of lumber.

          In addition, the Company owns and operates a modern 25-megawatt
cogeneration power plant which is fueled almost entirely by the wood
residue from the Company's milling and finishing operations.  This power
plant generates substantially all of the energy requirements of Scotia,
California, the town adjacent to the Company's timberlands where several of
its manufacturing facilities are located.  The Company sells surplus power
to Pacific Gas and Electric Company.  In 1995, the sale of surplus power
accounted for approximately 1% of the Company's total revenues.

     PRODUCTS

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

<TABLE>

<CAPTION>

                                                          Year Ended December 31, 1995           Year Ended December 31, 1994    
                                                     -------------------------------------   ------------------------------------
                                                     % of Total                              % of Total
                                                       Lumber     % of Total                   Lumber     % of Total
                                                     Production     Lumber     % of Total    Production     Lumber      % of Total
                                                       Volume      Revenues     Revenues       Volume      Revenues      Revenues 
                     Product                         ----------   ----------   ----------    ----------   ----------    ----------
<S>                                                  <C>          <C>          <C>           <C>          <C>           <C>
Upper grade redwood lumber                                  17%          38%          31%           17%          41%           33%
Common grade redwood lumber                                 54%          40%          32%           58%          36%           30%
                                                     ----------   ----------   ----------    ----------   ----------    ----------
     Total redwood lumber                                   71%          78%          63%           75%          77%           63%
                                                     ----------   ----------   ----------    ----------   ----------    ----------
Upper grade Douglas-fir lumber                               3%           5%           4%           3%           7%            5%
Common grade Douglas-fir lumber                             23%          14%          11%           20%          13%           10%
                                                     ----------   ----------   ----------    ----------   ----------    ----------
     Total Douglas-fir lumber                               26%          19%          15%           23%          20%           15%
                                                     ----------   ----------   ----------    ----------   ----------    ----------
Other grades of lumber                                       3%           3%           4%            2%           3%            4%
                                                     ----------   ----------   ----------    ----------   ----------    ----------
     Total lumber                                          100%         100%          82%          100%         100%           82%
                                                     ==========   ==========   ==========    ==========   ==========    ==========
Logs                                                                                   7%                                       9%
                                                                               ==========                               ==========
Hardwood chips                                                                         4%                                       4%
Softwood chips                                                                         5%                                       4%
                                                                               ----------                               ----------
     Total wood chips                                                                  9%                                       8%
                                                                               ==========                               ==========

</TABLE>

          Lumber
          The Company primarily produces and markets lumber.  In 1995, the
Company sold approximately 277 million board feet of lumber, which
accounted for approximately 82% of the Company's total revenues.  Lumber
products vary greatly by the species and quality of the timber from which
it is produced.  Lumber is sold not only by grade (such as "upper" grade
versus "common" grade), but also by board size and the drying process
associated with the lumber.

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

          Upper grade redwood lumber, which is derived primarily from old
growth trees and is characterized by an absence of knots and other defects
and a very fine grain, is used primarily in more costly and distinctive
interior and exterior applications.   The overall supply of upper grade
lumber has been diminishing due to increasing environmental and regulatory
restrictions and other factors.  While the Company's competitive
position with respect to upper grade lumber has been improving due to the
quality of its timberlands, its supply of upper grade lumber
has decreased in some premium product categories.  See Item 7. 
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."  Common grade redwood lumber, the Company's largest volume
product, has many of the same aesthetic and structural qualities of redwood
uppers, but has some knots, sapwood and a coarser grain.  Such lumber is
commonly used for construction purposes, including outdoor structures such
as decks, hot tubs and fencing.

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

          Logs
          The Company currently sells certain logs that, due to their size
or quality, cannot be efficiently processed by its mills into lumber.  The
purchasers of these logs are largely Britt, and surrounding mills which do
not own sufficient timberlands to support their mill operations.  See "--
Relationships With Scotia Pacific and Britt" below.  Except for the
agreement with Britt described below, the Company does not have any
significant contractual relationships with any third parties relating to
the purchase of logs.  The Company has historically not purchased
significant quantities of logs from third parties; however, the Company may
from time to time purchase logs from third parties for processing in its
mills or for resale to third parties if, in the opinion of management,
economic factors are advantageous to the Company.

          Wood Chips
          The Company uses a whole-log chipper to produce wood chips from
hardwood trees which would otherwise be left as waste.  These chips are
sold to third parties primarily for the production of facsimile and other
specialty papers.  The Company also produces softwood chips from the wood
residue and waste from its milling and finishing operations.  These chips
are sold to third parties for the production of wood pulp and paper
products.

     BACKLOG AND SEASONALITY

          The Company's backlog of sales orders at December 31, 1995 and
1994 was approximately $11.5 million and $11.9 million, respectively, the
substantial portion of which was delivered in the first quarter of the next
fiscal year.  The Company has historically experienced lower first quarter
sales due largely to the general decline in construction-related activity
during the winter months.  As a result, the Company's results in any one
quarter are not necessarily indicative of results to be expected for the
full year.

     MARKETING

          The housing, construction and remodeling markets are the primary
markets for the Company's lumber products.  The Company's policy is to
maintain a wide distribution of its products both geographically and in
terms of the number of customers.  The Company sells its lumber products
throughout the country to a variety of accounts, the large majority of
which are wholesalers, followed by retailers, industrial users, exporters
and manufacturers.  Upper grades of redwood and Douglas-fir lumber are sold
throughout the entire United States, as well as to export markets.  Common
grades of redwood lumber are sold principally west of the Mississippi
River, with California accounting for approximately 63% of these sales in
1995.  Common grades of Douglas-fir lumber are sold primarily in
California.  In 1995, no single customer accounted for more than 4% of the
Company's total revenues.  Exports of lumber accounted for approximately 4%
of the Company's total revenues in 1995.  The Company markets its products
through its own sales staff which focuses primarily on domestic sales.

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

     COMPETITION

          The Company's lumber is sold in highly competitive markets. 
Competition is generally based upon a combination of price, service,
product availability and product quality.  The Company's products compete
not only with other wood products but with metals, masonry, plastic and
other construction materials made from non-renewable resources.  The level
of demand for the Company's products is dependent on such broad factors as
overall economic conditions, interest rates and demographic trends.  In
addition, competitive considerations, such as total industry production and
competitors' pricing, as well as the price of other construction products,
affect the sales prices for the Company's lumber products.  The Company
currently enjoys a competitive advantage in the upper grade redwood lumber
market due to the quality of its timber holdings and relatively low cost
production operations.  Competition in the common grade redwood and
Douglas-fir lumber market is more intense, and the Company competes with
numerous large and small lumber producers.

     EMPLOYEES

          As of March 1, 1996, the Company had approximately 1,600
employees, none of whom are covered by a collective bargaining agreement.

     RELATIONSHIPS WITH SCOTIA PACIFIC AND BRITT

          In March 1993, Pacific Lumber consummated its offering of $235
million of 10-1/2% Senior Notes due 2003 (the "Senior Notes") and Scotia
Pacific consummated its offering of $385 million of Timber Notes.  Upon the
closing of such offerings, Pacific Lumber, Scotia Pacific and Britt entered
into a variety of agreements.  Pacific Lumber and Scotia Pacific entered
into a Services Agreement (the "Services Agreement") and an Additional
Services Agreement (the "Additional Services Agreement").  Pursuant to the
Services Agreement, Pacific Lumber provides operational, management and
related services with respect to the Scotia Pacific Timberlands containing
timber of Scotia Pacific ("Scotia Pacific Timber") not performed by Scotia
Pacific's own employees.  Such services include the furnishing of all
equipment, personnel and expertise not within Scotia Pacific's possession
and reasonably necessary for the operation and maintenance of the Scotia
Pacific Timberlands containing Scotia Pacific Timber.  In particular,
Pacific Lumber is required to regenerate Scotia Pacific Timber, prevent and
control loss of Scotia Pacific Timber by fires, maintain a system of roads
throughout the Scotia Pacific Timberlands, take measures to control the
spread of disease and insect infestation affecting Scotia Pacific Timber
and comply with environmental laws and regulations, including measures with
respect to waterways, habitat, hatcheries and endangered species.  Pacific
Lumber is also required (to the extent necessary) to assist Scotia Pacific
personnel in updating the GIS and to prepare and file, on Scotia Pacific's
behalf, all pleadings and motions and otherwise diligently pursue appeals
of any denial of any THP and related matters.  As compensation for these
and the other services to be provided by the Company, Scotia Pacific pays a
fee which is adjusted on January 1 of each year based on a specified
government index relating to wood products.  The fee was approximately
$115,100  per month in 1995 and is expected to be approximately $112,100
per month in 1996.  Pursuant to the Additional Services Agreement, Scotia
Pacific provides Pacific Lumber with a variety of services, including (a)
assisting Pacific Lumber to operate, maintain and harvest its own timber
properties, (b) updating and providing access to the GIS with respect to
information concerning the Pacific Lumber's own timber properties, and (c)
assisting Pacific Lumber with its statutory and regulatory compliance. 
Pacific Lumber pays Scotia Pacific a fee for such services equal to the
actual cost of providing such services, as determined in accordance with
generally accepted accounting principles.

          Pacific Lumber and Scotia Pacific also entered into a Master
Purchase Agreement (the "Master Purchase Agreement").  The Master Purchase
Agreement governs all purchases of logs by Pacific Lumber  from Scotia
Pacific.  Each purchase of logs by Pacific Lumber  from Scotia Pacific is
made pursuant to a separate log purchase agreement (which incorporates the
terms of the Master Purchase Agreement) for the Scotia Pacific Timber
covered by an approved THP.  Each log purchase agreement generally
constitutes an exclusive agreement with respect to the timber covered
thereby, subject to certain limited exceptions.  The purchase price must be
at least equal to the SBE Price (as defined below).  The Master Purchase
Agreement provides that if the purchase price equals or exceeds (i) the
price for such species and category thereof set forth on the structuring
schedule applicable to the Timber Notes and (ii) the SBE Price, then such
price shall be deemed to be the fair market value of such logs.  The Master
Purchase Agreement defines the "SBE Price," for any species and category of
timber, as the stumpage price for such species and category as set forth in
the most recent "Harvest Value Schedule" published by the California State
Board of Equalization ("SBE") applicable to the timber sold during the
period covered by such Harvest Value Schedule.  Such Harvest Value
Schedules are published for purposes of computing yield taxes and generally
are released every six months.  As the Company purchases logs from Scotia
Pacific pursuant to the Master Purchase Agreement, Pacific Lumber is
responsible, at its own expense, for harvesting and removing the standing
Scotia Pacific Timber covered by approved THPs and, thus, the purchase
price thereof is based upon "stumpage prices."  Title to the harvested logs
does not pass to Pacific Lumber until the logs are transported to Pacific
Lumber's log decks and measured.  Substantially all of Scotia Pacific's
revenues are derived from the sale of logs to Pacific Lumber under the
Master Purchase Agreement.

          Pacific Lumber, Scotia Pacific and Salmon Creek Corporation
("Salmon Creek," a wholly owned subsidiary of Pacific Lumber) also entered
into a Reciprocal Rights Agreement granting to each other certain
reciprocal rights of egress and ingress through their respective properties
in connection with the operation and maintenance of such properties and
their respective businesses.  In addition, Pacific Lumber entered into an
Environmental Indemnification Agreement with Scotia Pacific pursuant to
which Pacific Lumber agreed to indemnify Scotia Pacific from and against
certain present and future liabilities arising with respect to hazardous
materials, hazardous materials contamination or disposal sites, or under
environmental laws with respect to the Scotia Pacific Timberlands.

          Pacific Lumber entered into an agreement with Britt (the "Britt
Agreement") which governs the sale of logs by Pacific Lumber and Britt to
each other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber
for use in Pacific Lumber's cogeneration plant, the sale of lumber by
Pacific Lumber and Britt to each other, and the provision by Pacific Lumber
of certain administrative services to Britt (including accounting,
purchasing, data processing, safety and human resources services).  The
logs which Pacific Lumber sells to Britt and which are used in Britt's
manufacturing operations are sold at approximately 75% of applicable SBE
prices (to reflect the lower quality of these logs).  Logs which either
Pacific Lumber or Britt purchases from third parties and which are then
sold to each other are transferred at the actual cost of such logs.  Hog
fuel is sold at applicable market prices, and administrative services are
provided by Pacific Lumber based on Pacific Lumber's actual costs and an
allocable share of Pacific Lumber's overhead expenses consistent with past
practice.

     REGULATORY AND ENVIRONMENTAL FACTORS

          Regulatory and environmental issues play a significant role in
the Company's forest products operations.  The Company's forest products
operations are subject to a variety of California and federal laws and
regulations dealing with timber harvesting, endangered species and critical
habitat, and air and water quality.  These laws include the California
Forest Practice Act (the "Forest Practice Act"), which requires that timber
harvesting operations be conducted in accordance with detailed requirements
set forth in the Forest Practice Act and in the regulations promulgated
thereunder by the California Board of Forestry (the "BOF").  The federal
Endangered Species Act (the "ESA") and California Endangered Species Act
(the "CESA") provide in general for the protection and conservation of
specifically listed fish, wildlife and plants which have been declared to
be endangered or threatened.  The California Environmental Quality Act
("CEQA") provides, in general, for protection of the environment of the
state, including protection of air and water quality and of fish and
wildlife.  In addition, the California Water Quality Act requires, in part,
that the Company's operations be conducted so as to reasonably protect the
water quality of nearby rivers and streams.  The Company does not expect
that compliance with such existing laws and regulations will have a
material adverse effect on its future liquidity, consolidated results of
operations or financial position; however, these laws and regulations are
modified from time to time and there can be no assurance that certain
pending or future legislation, governmental regulations or judicial or
administrative decisions would not materially adversely affect the Company
(see below).

          In 1994, the BOF adopted certain regulations regarding compliance
with long-term sustained yield objectives.  These regulations require
timber companies to project the average annual growth they will have on
their timberlands during the last decade of a 100-year planning period
("Projected Annual Growth").  During any rolling ten-year period, the
average annual harvest over such ten-year period may not exceed Projected
Annual Growth.  The first ten-year period began in May 1994.  Pacific
Lumber is required to submit, by October 1996, a plan setting forth, among
other things, its Projected Annual Growth.  Pacific Lumber has not
completed its analysis of the projected productivity of its timberlands and
is therefore unable to predict the impact that these regulations will have
on its future timber harvesting practices; however, the final results of
this analysis could require Pacific Lumber to reduce (or permit it to
increase) its timber harvest in future years from the average annual
harvest that it has experienced in recent years.  Pacific Lumber believes
that it would be able to mitigate the effect of any required reduction in
harvest level by acquisitions of additional timberlands and by increasing
the productivity of its timberlands.

          In March 1992, the marbled murrelet was approved for listing as
endangered under the CESA.  In October 1992, the U.S. Fish and Wildlife
Service ("USFWS") issued its final rule listing the marbled murrelet as a
threatened species under the ESA in the tri-state area of Washington,
Oregon and California.  The Company has incorporated, and will continue to
incorporate as required, mitigation measures into its THPs to protect and
maintain habitat for the marbled murrelet on its timberlands.  The
BOF requires the Company to conduct pre-harvest marbled murrelet surveys to
provide certain site specific mitigations in connection with THPs covering
virgin old growth timber and unusually dense stands of residual old growth
timber.  Such surveys can only be conducted during a portion of the
murrelet's nesting and breeding season, which extends from April through
mid-September.  Accordingly, such surveys are expected to delay the review
and approval process with respect to certain of the THPs filed by the
Company.  The results of such surveys to date (based upon current survey
protocols) have indicated that the Company has approximately 6,000 acres of
occupied marbled murrelet habitat.  A substantial portion of this land
contains virgin and residual old growth timber and the bulk of it falls
within the areas proposed to be designated as critical habitat for the
marbled murrelet (see below).  The Company is unable to predict when or
if it will be able to harvest this acreage.

          In January 1994, the USFWS proposed designation of critical
habitat for the marbled murrelet under the ESA (which proposed designation
did not include any of Pacific Lumber's timberlands).  In July 1995, in a
case entitled Marbled Murrelet v. Babbitt (Case No. C-91-522R), a U.S.
District Court in Seattle ordered the USFWS to make its final designation
of critical habitat for the marbled murrelet by January 29, 1996 and to
issue its proposed final designation of critical habitat by August 1, 1995. 
On August 10, 1995, the USFWS published its proposed final designation of
critical habitat for the marbled murrelet (the "Proposed Designation"),
seeking to designate over four million acres as critical habitat for the
marbled murrelet, including approximately 33,000 acres of Pacific Lumber's
timberlands.  The Proposed Designation was subject to a 60-day comment
period and Pacific Lumber filed comments vigorously opposing the Proposed
Designation.  In February 1996, the Court extended until May 15, 1996 the
deadline for final designation of critical habitat for the marbled
murrelet.  The USFWS has not yet published its final designation of
critical habitat for the marbled murrelet.  The Company is unable to
predict when or if it would be able to harvest on any acreage finally
designated as critical habitat.  Furthermore, it is impossible to determine
the future adverse impact of such designation on the Company's liquidity,
consolidated financial position or results of operations until such time as
the Proposed Designation is finalized and related regulatory and legal
issues are fully resolved.  However, if Pacific Lumber is unable to
harvest, or is severely limited in harvesting, on timberlands designated as
marbled murrelet critical habitat, such restrictions could have a material
adverse effect on its liquidity, consolidated financial condition and
results of operations.  If Pacific Lumber is unable to harvest or is
severely limited in harvesting, it intends to seek full compensation from
the appropriate governmental agencies on the grounds that such restrictions
constitute a taking.

          The Company's wildlife biologists are conducting research
concerning the marbled murrelet on the Company's timberlands and are
currently developing a habitat conservation plan for the marbled murrelet
(the "Murrelet HCP").  The Murrelet HCP, which is designed to mitigate the
impact of the Proposed Designation, has been submitted to the USFWS.  The
Company is working with the USFWS and other government agencies on the
Murrelet HCP.  It is uncertain when the Murrelet Plan review process will
be completed or what the outcome will be of the review process or its
effect upon the Company's liquidity, consolidated financial position or
results of operations.

          There also continue to be other regulatory actions and lawsuits
seeking to have various other species listed as threatened or endangered
under the ESA and/or the CESA and to designate critical habitat for such
species.  The Company is uncertain what effect any such other listings
and/or designations of critical habitat would have on its liquidity,
consolidated financial position or results of operations.

          Various groups and individuals have filed objections with the CDF
and the BOF regarding the CDF's and the BOF's actions and rulings with
respect to certain of Pacific Lumber's THPs, and it expects that such
groups and individuals will continue to file objections to certain of its
THPs.  In addition, lawsuits are pending which seek to prevent Pacific
Lumber from implementing certain of its approved THPs and other harvesting
operations.  These challenges have severely restricted Pacific Lumber's
ability to harvest virgin old growth timber on its property (and to a
lesser extent, its residual old growth timber).  To date, challenges with
respect to Pacific Lumber's THPs relating to young growth and residual old
growth timber have been limited; however, no assurance can be given as to
the extent of such challenges in the future.  The Company believes that
environmentally focused challenges to its THPs are likely to occur in the
future, particularly with respect to virgin and residual old growth timber.
Although such challenges have delayed or prevented the Company from
conducting a portion of its operations, to date such challenges have not
had a material adverse effect on the Company's liquidity, consolidated
financial position or results of operations.  It is, however, impossible to
predict the future nature or degree of such challenges or their ultimate
impact on the liquidity, consolidated results of operations or financial
position of the Company.  See also Item 3. "Legal Proceedings--Timber
Harvesting Litigation" for a description of the pending Marbled Murrelet
action.

          In June 1990, the USFWS designated the northern spotted owl as
threatened under the ESA.  The owl's range includes all of the Company's
timberlands.  The ESA and its implementing regulations (and related
California regulations) generally prohibit harvesting operations in which
individual owls might be killed, displaced or injured or which result in
significant habitat modification that could impair the survival of
individual owls or the species as a whole.  Since 1988, biologists have
conducted inventory and habitat utilization studies of northern spotted
owls on the Company's timberlands.  The Company has developed and the USFWS
has given its full concurrence to a comprehensive wildlife management plan
for the northern spotted owl (the "Owl Plan").  The Owl Plan was recently
updated through 1999 and the USFWS agreed that operations consistent with
the Owl Plan would not result in the take of any owls.  By incorporating the
Owl Plan into each THP filed with the CDF, the Company is able to expedite
the approval time with respect to its THPs.  Both federal and state
agencies continue to review and consider possible additional regulations
regarding the northern spotted owl.  It is uncertain if such additional
regulations will become effective or their ultimate content.  The
plaintiffs in the Marbled Murrelet action have requested injunctive relief
with respect to the Owl Plan.  See Item 3.  "Legal Proceedings--Timber
Harvesting Litigation."

          Laws and regulations dealing with the Company's operations are
subject to change and new laws and regulations are frequently introduced
concerning the California timber industry.  From time to time, bills are
introduced in the California legislature and the U.S. Congress which relate
to the business of the Company, including the protection and acquisition of
old growth and other timberlands, endangered species, environmental
protection, air and water quality, and the restriction, regulation and
administration of timber harvesting practices.  For example, a bill has
been introduced in the California legislature which would, among other
things, initiate negotiations by the California Resources Agency for the
public acquisition of approximately 4,700 acres of Pacific Lumber's
timberlands, 3,000 acres of which is a contiguous block of virgin old
growth redwood forest often referred to as the "Headwaters Forest." In
addition, the U.S. Congressman from the congressional district in which
Pacific Lumber is located has introduced a bill which would, among other
things, authorize public acquisition of the Headwaters Forest and up to
1,700 contiguous acres.  The bill would authorize the Secretary of the
Interior to exchange government-owned timberlands and other property for
the appraised fair market value of the Headwaters Forest and any contiguous
acreage to be acquired.  Because such bills are subject to amendment, it is
premature to assess the ultimate content of these bills, the likelihood of
any of the bills passing or the impact of any of these bills on the future
liquidity, consolidated financial position or operating results of the
Company.  Furthermore, any bills which are passed are subject to executive
veto and court challenge.  In addition to existing and possible new or
modified statutory enactments, regulatory requirements and administrative
and legal actions, the California timber industry remains subject to
potential California or local ballot initiatives and evolving federal and
California case law which could affect timber harvesting practices.  It is,
however, impossible to assess the effect of such matters on the future
liquidity, consolidated financial position or operating results of the
Company.

ITEM 2.        PROPERTIES

          A description of the Company's properties is included under Item
1 above.

ITEM 3.        LEGAL PROCEEDINGS

     MERGER LITIGATION

          In September 1989, seven past and present employees of Pacific
Lumber brought an action against Pacific Lumber, MAXXAM, MGI, and certain
current and former directors and officers of Pacific Lumber, MAXXAM and
MGI, in the United States District Court, Northern District of California,
entitled Kayes, et al. v. Pacific Lumber Company, et al. (No. C89-3500)
(the "Kayes action").  Plaintiffs purport to be participants in or
beneficiaries of Pacific Lumber's former Retirement Plan (the "Retirement
Plan") for whom a group annuity contract was purchased from Executive Life
Insurance Company ("Executive Life") in 1986 after termination of the
Retirement Plan.  The Kayes action alleges that the Pacific Lumber, MAXXAM
and MGI defendants breached their fiduciary duties under the Employee
Retirement Income Security Act of 1974 ("ERISA") to participants and
beneficiaries of the Retirement Plan by purchasing the group annuity
contract from Executive Life and selecting Executive Life to administer the
annuity payments.  Plaintiffs seek, among other things, a new group annuity
contract on behalf of the Retirement Plan participants and beneficiaries. 
This case was dismissed on April 14, 1993 and was refiled as Jack Miller,
et al. v. Pacific Lumber Company, et al. (No. C-89-3500-SBA) (the "Miller
action") on April 26, 1993.  The Miller action was dismissed on May 14,
1993.  On October 22, 1994, the President signed the Pension Annuitants'
Protection Act of 1994, intended in part, to overturn the U.S. District
Court's dismissal of the Miller action and to make available certain
remedies not previously provided under ERISA.  On April 10, 1995, the U.S.
Ninth Circuit Court of Appeals reversed the dismissal of the Miller action. 
On August 7, 1995, the defendants requested the U.S. Supreme Court to
review the case by filing a petition for writ of certiorari.  The U.S.
Supreme Court denied defendants' petition for writ of certiorari.

          In June 1991, the U.S. Department of Labor filed a civil action
entitled Lynn Martin, Secretary of the U.S. Department of Labor v. The
Pacific Lumber Company, et al. (No. 91-1812-RHS) ("DOL civil action") in
the United States District Court, Northern District of California, against
Pacific Lumber, MAXXAM, MGI and certain of their current and former
officers and directors.  The allegations in the DOL civil action are
substantially similar to that in the Kayes action.

          On December 8, 1995, the parties in the Kayes/Miller action and
DOL civil action reached an agreement in principle to settle these matters. 
The proposed settlement is subject to execution of a definitive agreement
and other contingencies.  A status conference is scheduled for April 12,
1996 in the Kayes/Miller action and the DOL civil action.  A special
committee of the Board of Directors of MAXXAM has been appointed to review
the proposed settlement and a related derivative action.

          Management is of the opinion that the outcome of the foregoing
litigation and proposed settlement should not have a material adverse
effect on the Company's liquidity, consolidated financial position or
results of operations.

     TIMBER HARVESTING LITIGATION

          Various actions, similar to each other, have been filed against
Pacific Lumber and its subsidiaries, MAXXAM, MGI, various state officials
and others, alleging, among other things, violations of the Forest Practice
Act, the CEQA, ESA, CESA, and/or related regulations.  These actions seek
to prevent Pacific Lumber and its subsidiaries from harvesting certain of
their THPs and conducting certain other timber operations.

          The Sierra Club and EPIC v. The California Department of
Forestry, Scotia Pacific Holding Co., et al. (No. 95 DR 0072) action (the
"Sierra Club action") in the Superior Court of Humboldt County, filed on
March 10, 1995 by the Sierra Club and the Environmental Protection
Information Center ("EPIC"), relates to exemptions for forest health which
Pacific Lumber and its subsidiaries had previously filed covering their
entire timberlands.  The plaintiffs allege, among other things, that the
defendants have violated the CEQA, the CESA and the Forest Practice Act and
seek, among other things, to stay all operations authorized by the
exemptions.  In May 1995, the Court denied plaintiffs' request for a
preliminary injunction and dismissed the case on its merits.  On May 19,
1995, plaintiffs appealed the Court's decision and requested an emergency
stay of harvesting.  On June 6, 1995, the Court of Appeal denied the
plaintiffs' request for a stay of timber harvesting operations; however,
plaintiffs continued their appeal of the trial court's decision.  In July
1995, the USFWS and the California Department of Fish and Game ("CDFG")
inspected the Company's property and determined that certain areas (which
the Company estimates to be approximately 6,000 acres) are suitable marbled
murrelet habitat and have prohibited harvesting on these timberlands from
April 1 through September 15 (the marbled murrelet breeding and nesting
season).  These agencies have also imposed certain other restrictions to
assure that there is no adverse impact on the marbled murrelet.

          On September 1, 1995, Pacific Lumber and its subsidiaries
notified the CDF that they intended to commence operations under the forest
health exemptions shortly after September 15, 1995, the end of the marbled
murrelet breeding season.  In connection with the Sierra Club action, on
February 23, 1996, the Court of Appeal affirmed the trial court's decision
in favor of the Company, finding that harvesting of dead, dying or diseased
trees is exempt from the environmental review requirements of CEQA and the
Forest Practice Act.  It is uncertain if plaintiffs will seek review of
this decision from the California Supreme Court.  The Company is still
prohibited from harvesting under certain portions of the exemptions as a
result of the Marbled Murrelet action described below.

          On September 15, 1995, EPIC filed another lawsuit with respect to
the forest health exemptions; that case is entitled Marbled Murrelet, et
al. v. Bruce Babbitt, et al. (No. C-95-3261) (the "Marbled Murrelet
action") and was filed in the U.S. District Court for the Northern District
of California.  As amended, the complaint alleges, among other things,
violations of the ESA, the National Environmental Protection Act ("NEPA")
and the Administrative Procedures Act ("APA").  Plaintiffs claim, among
other things, that the timber harvesting operations pursuant to the forest
health exemptions will contribute to the destruction of habitat for the
marbled murrelet and the northern spotted owl.  Following a hearing on
September 28, 1995, the Court dissolved a temporary restraining order
("TRO") and issued a preliminary injunction enjoining the Company and its
subsidiaries from conducting timber harvesting operations under portions of
the forest health exemptions until a trial on the merits of the case.  The
majority of the timberlands which are subject to the injunction are
timberlands which have been proposed as critical habitat for the marbled
murrelet.  In October 1995, the Company appealed the issuance of the
preliminary injunction to the U.S. Ninth Circuit Court of Appeals; oral
argument in the appeal was held March 14, 1996.  On March 6, 1996, the
plaintiffs asked for leave to amend their pleadings to add additional
claims and seek additional injunctive relief concerning, among other
things, the Company's Owl Plan and up to eight other THPs (only two of
which are presently approved).  The eight THPs cover approximately 1,360
acres of the Company's timberlands and represent a substantial portion of
the volume the Company and its subsidiaries are planning to utilize in
their operations for 1996.  On March 15, 1996, the Court granted
plaintiffs' motion to file an amended complaint and issued a TRO enjoining
Pacific Lumber and its subsidiaries from harvesting pursuant to the eight
THPs. On March 20, 1996, the Court held a hearing on plaintiffs' motion for
a preliminary injunction and extended the TRO for ten additional days while
it considers the motion.

          The EPIC, et al. v. California State Board of Forestry, et al.
(No. 91CP244) action in the Superior Court of Humboldt County, filed by the
Sierra Club and EPIC in 1991, relates to a THP for approximately 237 acres
of virgin old growth timber.  After the Superior Court reversed the BOF's
approval of this THP, certain modifications were made to the THP, which was
then unanimously approved by the BOF.  The Superior Court later issued
judgment in favor of Pacific Lumber.  On appeal, the Court of Appeal in
October 1993 affirmed the trial court's judgment approving harvesting under
this THP.  In April 1993, EPIC filed another action with respect to this
THP entitled EPIC, Marbled Murrelet, et al. v. Bruce Babbitt, Secretary,
Department of Interior, et al. (No. C93-1400) (the "EPIC action") in the
U.S. District Court for the Northern District of California, alleging an
unlawful "taking" of the marbled murrelet under the ESA.  The Court
dismissed the federal and state agency defendants and limited plaintiffs'
claims against the Company.  Harvesting was stayed pending outcome of a
trial which commenced in August 1994 and concluded in September 1994.  On
February 24, 1995, the judge ruled that the area covered by the THP is
occupied by the marbled murrelet and permanently enjoined implementation of
the THP in order to protect the marbled murrelet.  The Company appealed the
Court's decision to the U.S. Ninth Circuit Court of Appeals; oral argument
on the appeal was held March 14, 1996.

          The Lost Coast League v. The California Department of Forestry,
et al. (No. 94DR0046) action in Superior Court of Humboldt County, filed in
February 1994, relates to a THP for approximately 121 acres of primarily
virgin old growth timber.  The Court issued an injunction staying timber
harvesting pending trial.  On July 14, 1994, after a trial on the merits,
the Court issued its decision setting aside CDF's approval of the THP and
remanding the THP to CDF for further review and consideration.  In October
1994, the Company submitted a revised THP, which was subsequently approved. 
The Court is expected to establish a briefing and trial schedule with
respect to plaintiff's objections to the reapproval of the revised THP.

          In view of the recent developments in the Marbled Murrelet
action, the Company is uncertain whether or not the matters described above
will have a material adverse effect on its liquidity, consolidated
financial position or results of operations.  See Item 1. "Business--
Regulatory and Environmental Factors" above for a description of regulatory
and similar matters which could affect Pacific Lumber's timber harvesting
practices and future operating results.

     USAT MATTER

          In January 1995, an action entitled U.S., ex rel., Martel v.
Hurwitz, et al. was filed in the U.S. District Court for the Northern
District of California (No. C950322) (the "Martel action") against MAXXAM,
MGI and others.  This action is purportedly brought by plaintiff on behalf
of the U.S. government; however, the U.S. government has declined to
participate in the suit.  The Company is not a defendant in this suit.
Plaintiff alleges, among other things, that defendants used the federally
insured assets of United Savings Association of Texas ("USAT") to acquire
junk bonds from Michael Milken and Drexel, Burnham, Lambert Inc. ("Drexel")
and that, in exchange, Mr. Milken and Drexel arranged financing for
defendants' various business ventures, including the acquisition of the
Company.  Plaintiff alleges that USAT became insolvent in 1988 and that
defendants should be required to pay $1.6 billion (subject to trebling) to
cover USAT's losses.  Plaintiff seeks, among other things, that the Court
impose a constructive trust upon the fruits of the alleged improper use of
USAT funds.  On March 22, 1996, the Court granted defendant's motion to
have this case transferred to the U.S. District Court for the Southern
District of Texas.  Management is of the opinion that the outcome of the
foregoing litigation should not have a material adverse effect on the
Company's liquidity, consolidated financial position or results of
operations.

     OTHER LITIGATION MATTERS

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

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

          Not applicable.

                                  PART II


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

          The Company's common stock is indirectly held entirely by MGI,
which is a wholly owned subsidiary of MAXXAM.  Accordingly, the Company's
common stock is not traded on any stock exchange and has no established
public trading market.  The Company declared and paid dividends on its
common stock in the amount of $22.0 million and $24.5 million in 1995 and
1994, respectively.  As of December 31, 1995, approximately $15.7 million
of dividends could be paid by the Company.  See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition and Investing and Financing Activities" and Note 4 to
the Consolidated Financial Statements appearing in Item 8.

          All of the Company's issued and outstanding common stock is
pledged as collateral for MGI's 11-1/4% Senior Secured Notes due 2003 and
12-1/4% Senior Secured Discount Notes due 2003 (collectively referred to
herein as the "MGI Notes").  See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial
Condition and Investing and Financing Activities" and Note 7 to the
Consolidated Financial Statements appearing in Item 8.

ITEM 6.        SELECTED FINANCIAL DATA

          Not applicable.

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

RESULTS OF OPERATIONS

          The following should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto appearing in Item
8.  The following table presents selected operational and financial
information for the years ended December 31, 1995 and 1994.

<TABLE>

<CAPTION>

                                                                                   Years Ended
                                                                                   December 31,      
                                                                             -----------------------
                                                                                1995         1994   
                                                                             ----------   ----------
                                                                                 (In millions of
                                                                                     dollars,
                                                                                 except shipments
                                                                                   and prices)
<S>                                                                          <C>          <C>
Shipments:
     Lumber: (1)
          Redwood upper grades                                                     46.5         52.9
          Redwood common grades                                                   146.8        144.3
          Douglas-fir upper grades                                                  7.4          8.6
          Douglas-fir common grades and other                                      76.0         66.3
                                                                             ----------   ----------
          Total lumber                                                            276.7        272.1
                                                                             ==========   ==========
     Logs (2)                                                                      40.3         34.4
                                                                             ==========   ==========
     Wood chips (3)                                                               192.8        197.7
                                                                             ==========   ==========

Average sales price:
     Lumber: (4)
          Redwood upper grades                                               $    1,495   $    1,443
          Redwood common grades                                                     496          481
          Douglas-fir upper grades                                                1,301        1,420
          Douglas-fir common grades                                                 392          444
     Logs (4)                                                                       396          567
     Wood chips (5)                                                                 107           86

Net sales:
     Lumber, net of discount                                                 $    181.4   $    186.0
     Logs                                                                          15.9         19.5
     Wood chips                                                                    20.7         17.1
     Cogeneration power                                                             2.5          3.5
     Other                                                                          1.4          1.3
                                                                             ----------   ----------
          Total net sales                                                    $    221.9   $    227.4
                                                                             ==========   ==========
Operating income                                                             $     64.6   $     70.4
                                                                             ==========   ==========
Operating cash flow (6)                                                      $     90.5   $     95.9
                                                                             ==========   ==========
Income before income taxes and extraordinary item                            $     13.0   $     26.3
                                                                             ==========   ==========
Net income                                                                   $      6.6   $     10.0
                                                                             ==========   ==========


<FN>


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

          (1)  Lumber shipments are expressed in millions of board feet.
          (2)  Log shipments are expressed in millions of feet, net Scribner scale.
          (3)  Wood chip shipments are expressed in thousands of bone dry units of 2,400 pounds.
          (4)  Dollars per thousand board feet.
          (5)  Dollars per bone dry unit.
          (6)  Operating income before depletion and depreciation, also referred to as "EBITDA."

</TABLE>


          Shipments
          Lumber shipments in 1995 increased as compared to 1994. 
Increased shipments of common grade Douglas-fir and redwood common lumber
were partially offset by decreased shipments of upper grade redwood lumber. 
Log shipments in 1995 were 40.3 million feet (net Scribner scale), an
increase of 5.9 million feet from 1994 shipments.  A significant portion of
the Company's log sales are to Britt.

          Old growth trees constitute the Company's principal source of
upper grade redwood lumber.  Due to the severe restrictions on the
Company's ability to harvest old growth timber (large diameter) on its
property (see "--Trends"), the Company's supply of upper grade lumber has
decreased in some premium product categories.  The Company has been able to
lessen the impact of these decreases by augmenting its production
facilities to increase its recovery of upper grade lumber from smaller
diameter logs and increasing production capacity for manufactured upper
grade lumber products through its end and edge glue facility (which was
expanded during 1994).  However, unless the Company is able to sustain the
harvest level of old growth trees it has experienced in prior years, the
Company expects that its production of premium upper grade lumber products
will decline from current levels and that its manufactured lumber products
will constitute a higher percentage of its shipments of upper grade lumber
products.

          Net sales
          Revenues from net sales of lumber and logs for 1995 decreased as
compared to 1994.  Decreased shipments of upper grade redwood lumber and
lower average realized prices for logs and common and upper grade Douglas-
fir lumber were partially offset by increased shipments of common grade
Douglas-fir lumber and logs, higher average realized prices for both upper
and common grades of redwood lumber and increased shipments of redwood
common lumber.  The increase in other sales for 1995 as compared to 1994
was due to higher average realized prices for wood chips, partially offset
by lower sales of electrical power.

          Operating income
          Operating income for 1995 decreased as compared to 1994.  This
decrease was primarily due to lower sales of lumber and logs, higher cost
of lumber and log sales and lower sales of electrical power, partially
offset by increased sales of wood chips and higher gross margins on wood
chip sales.  Cost of lumber sales for 1995 was unfavorably impacted by
higher purchases of logs from third parties, partially offset by improved
sawmill productivity. Cost of goods sold for 1995 was reduced by $1.5
million of business interruption insurance proceeds for the settlement of
claims related to an April 1992 earthquake.

          Logging costs have increased primarily due to the harvest of
smaller diameter logs and, to a lesser extent, compliance with
environmental regulations relating to the harvesting of timber and
litigation costs incurred in connection with certain THPs filed by the
Company.  See "--Trends."  During the past few years, the Company has
significantly increased its production capacity for manufactured lumber
products by assembling knot-free pieces of narrower and shorter lumber into
wider or longer pieces in its end and edge glue plant.  This manufactured
lumber results in a significant increase in lumber recovery and produces a
standard size upper grade product which is sold at a premium price compared
to common grade products of similar dimensions.  The Company has instituted
a number of measures at its sawmills during the past several years designed
to enhance the efficiency of its operations, such as expansion of its
manufactured lumber facilities and other improvements in lumber recovery,
automated lumber handling and the modification of its production scheduling
to maximize cogeneration power revenues.

          Income before income taxes and extraordinary item
          Income before income taxes and extraordinary item decreased for
1995 as compared to 1994.  This decrease was primarily due to lower
investment, interest and other income and the decrease in operating income. 
Investment, interest and other income for 1994 includes the receipt of a
franchise tax refund of $7.2 million (as described in Note 9 to the
Consolidated Financial Statements).

          Credit (provision) in lieu of income taxes
          The provision in lieu of income taxes for 1994 includes a credit
relating to reserves the Company no longer believes are necessary.

          Extraordinary item
          The litigation settlement in the second quarter of 1994 (as
described in Note 8 to the Consolidated Financial Statements) resulted in
an extraordinary loss of $14.9 million, net of related income taxes of $6.3
million.  The extraordinary loss consists of the Company's $14.8 million
cash payment to the settlement fund, a $2.0 million accrual for additional
contingent claims and $4.4 million of related legal fees.

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

          A significant portion of the Company's consolidated assets are
owned by Scotia Pacific, and the Company expects that Scotia Pacific will
provide a major portion of the Company's timber requirements from which it
will generate the substantial portion of its future operating cash flow. 
The holders of the Timber Notes have priority over the claims of creditors
of the Company with respect to the assets and cash flow of Scotia Pacific. 
Under the terms of the indenture governing the terms of the Timber Notes
(the "Timber Note Indenture"), Scotia Pacific will not have available cash
for distribution to Pacific Lumber unless Scotia Pacific's cash flow from
operations exceeds the amounts required by the Timber Note Indenture to be
reserved for the payment of current debt service (including interest,
principal and premiums) on the Timber Notes, capital expenditures and
certain other operating expenses.  The Timber Note Indenture prohibits
Scotia Pacific from incurring any additional indebtedness for borrowed
money and limits the business activities of Scotia Pacific to the ownership
and operation of its timber and timberlands and actions reasonably
incidental thereto.  The Timber Notes are structured to link, to the extent
of cash available, the deemed depletion of Scotia Pacific's timber (through
the harvest and sale of logs) to required amortization of the Timber Notes. 
The required amount of amortization due on any Timber Note payment date is
determined by various mathematical formulas set forth in the Timber Note
Indenture.  The minimum amount of principal which Scotia Pacific must pay
(on a cumulative basis) through any Timber Note payment date in order to
avoid an Event of Default (as defined in the Timber Note Indenture) is
Rated Amortization.  If all payments of principal are made in accordance
with Rated Amortization, the payment date on which Scotia Pacific will pay
the final installment of principal is July 20, 2015.  The amount of
principal which Scotia Pacific must pay through each Timber Note payment
date in order to avoid payment of prepayment or deficiency premiums is
Scheduled Amortization.  If all payments of principal are made in
accordance with Scheduled Amortization, the payment date on which Scotia
Pacific will pay the final installment of principal is July 20, 2009.

          The following table presents the amortization of the Timber Notes
based on Rated Amortization and Scheduled Amortization:

<TABLE>

<CAPTION>

                                                                        Rated           Scheduled
                                                                     Amortization      Amortization  
                                                                   ---------------   ---------------
                                                                        (In millions of dollars)
<S>                                                                <C>               <C>
Years Ending December 31:
     1996                                                          $           8.3   $          14.1
     1997                                                                      8.5              16.2
     1998                                                                      8.7              19.3
     1999                                                                     10.2              21.6
     2000                                                                     12.6              24.0
     Thereafter                                                              301.9             255.0
                                                                   ---------------   ---------------
                                                                   $         350.2   $         350.2
                                                                   ===============   ===============

</TABLE>


          During 1994, 1995 and January 1996, Scotia Pacific repaid
approximately $13.1 million, $13.6 million and $8.5 million, respectively,
of the aggregate principal amount outstanding on the Timber Notes in
accordance with Scheduled Amortization.

          Once appropriate provision is made for current debt service on
the Timber Notes and expenditures for operating and capital costs, and in
the absence of certain Trapping Events (as defined in the Timber Note
Indenture) or outstanding judgments, the Timber Note Indenture does not
limit monthly distributions of available cash from Scotia Pacific to the
Company.  Accordingly, the Company expects that once Scotia Pacific's debt
service, operating and capital expenditure requirements have been met,
substantially all of Scotia Pacific's available cash will be periodically
distributed to the Company.  Scotia Pacific paid $59.0 million and $88.9
million of dividends to the Company during the years ended December 31,
1995 and 1994, respectively.  In the event Scotia Pacific's cash flows are
not sufficient to generate distributable funds to the Company, the
Company's ability to pay interest on the Senior Notes and to service its
other indebtedness would be materially impaired.

          During the years ended December 31, 1995 and 1994, the Company's
operating income before depletion and depreciation ("operating cash flow")
amounted to $90.5 million and $95.9 million, respectively, which exceeded
interest incurred on all of its indebtedness in those years by $35.0
million and $39.8 million, respectively.

          The indentures governing the Senior Notes and the Timber Notes
and the Revolving Credit Agreement (as defined below) contain various
covenants which, among other things, limit the payment of dividends and
restrict transactions between the Company and its affiliates.  Generally,
the amount of dividends the Company may pay is limited to 50% of the
Company's consolidated net income and depletion and cash dividends received
from Scotia Pacific, exclusive of the net income and depletion of Scotia
Pacific as long as any Timber Notes are outstanding.  As of December 31,
1995, under the most restrictive of these covenants, approximately $15.7
million of dividends could be paid by the Company.  The Company paid an
aggregate of $22.0 million and $24.5 million of dividends in 1995 and 1994,
respectively.

          On August 4, 1993, all of the Company's issued and outstanding
common stock was pledged as collateral for the MGI Notes.  MGI conducts its
operations primarily through subsidiary companies.  The Company represents
the substantial portion of MGI's assets and operations.  The indenture
governing the MGI Notes requires the Company's board of directors to
declare and pay dividends on the Company's common stock to the maximum
extent permitted by any consensual restriction or encumbrance on the
Company's ability to declare and pay dividends, unless the Board determines
in good faith that such declaration and payment would be detrimental to the
capital or other operating needs of the Company.

          The Company has a revolving credit agreement with a bank (as
amended and restated, the "Revolving Credit Agreement") which expires on
May 31, 1998.  Borrowings under the Revolving Credit Agreement are secured
by the Company's trade receivables and inventories, with interest computed
at the bank's reference rate plus 1-1/4% or the bank's offshore rate plus
2-1/4%.  The Revolving Credit Agreement provides for borrowings of up to
$60.0 million, of which $15.0 million may be used for standby letters of
credit and $30.0 million is restricted to timberland acquisitions.
Borrowings made pursuant to the portion of the credit facility restricted
to timberland acquisitions would also be secured by the purchased
timberlands.   As of December 31, 1995, $48.1 million of borrowings was
available under the Revolving Credit Agreement, of which $3.1 million was
available for letters of credit and $30.0 million was restricted to
timberland acquisitions.  No borrowings were outstanding as of December 31,
1995, and letters of credit outstanding amounted to $11.9 million.  The
Revolving Credit Agreement contains covenants substantially similar to
those contained in the indenture governing the Senior Notes.

          The Company's capital expenditures were made to improve
production efficiency, reduce operating costs and, to a lesser degree,
acquire additional timberlands.  The Company's capital expenditures were
$9.1 million and $11.0 million for the years ended December 31, 1995 and
1994, respectively.  Capital expenditures for 1996 are expected to be $12.0
million and for the 1997 - 1998 period are estimated to be between $9.0
million and $14.0 million per year.  The Company may purchase additional
timberlands from time to time as appropriate opportunities arise. 
Moreover, such purchases could exceed historical levels.  Capital
expenditures attributable to the reconstruction of the commercial
facilities destroyed by an earthquake in April 1992 were approximately $1.9
million for 1993 and $2.6 million for 1994, when construction was
completed.

          As of December 31, 1995, the Company had consolidated working
capital of $68.9 million and long-term debt of $540.4 million (net of
current maturities and restricted cash deposited in a liquidity account for
the benefit of the holders of the Timber Notes) as compared to $60.0
million and $553.6 million, respectively, at December 31, 1994.  The
decrease in long-term debt was primarily due to principal payments on the
Timber Notes.  The Company anticipates that cash flow from operations,
together with existing cash and available sources of financing, will be
sufficient to fund its working capital and capital expenditure requirements
for the next year.  With respect to long-term liquidity, the Company
believes that its existing cash and cash equivalents, together with its
ability to generate sufficient cash flow from operations and its ability to
obtain both short and long-term financing, should provide sufficient funds
to meet its working capital and capital expenditure requirements.  However,
due to its highly leveraged condition, the Company is more sensitive than
less leveraged companies to factors affecting its operations, including
litigation and governmental regulation affecting timber harvesting
practices, increased competition from other lumber producers or alternative
building products and general economic conditions.

TRENDS

          The Company's operations are subject to a variety of California
and federal laws and regulations dealing with timber harvesting, endangered
species and critical habitat, and air and water quality.  The Company does
not expect that compliance with such existing laws and regulations will
have a material adverse effect on its future consolidated financial
position, results of operations or liquidity; however, these laws and
regulations are modified from time to time, and there can be no assurance
that certain pending or future governmental regulations, legislation or
judicial or administrative decisions would not adversely affect the Company
or its ability to sell lumber, logs or timber.  See "Business--Regulatory
and Environmental Factors" and Note 8 to the Consolidated Financial
Statements for information regarding sustained yield regulations, the
proposed final designation of approximately 33,000 acres of the Company's
timberlands as critical habitat for the marbled murrelet, and other
information regarding regulatory and environmental factors affecting the
Company's operations.

          Judicial or regulatory actions adverse to the Company, increased
regulatory delays and inclement weather in northern California,
independently or collectively, could impair the Company's ability to
maintain adequate log inventories and force the Company to temporarily idle
or curtail operations at certain lumber mills from time to time.

RECENT ACCOUNTING PRONOUNCEMENTS

     In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS 121").  SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  If the sum of the
estimated future cash flows expected to result from the use and eventual
disposition of an asset is less than the carrying amount of the asset, an
impairment loss is recognized.  Measurement of an impairment loss is based
on the fair value of the asset.  SFAS 121 requires that long-lived assets
and certain identifiable intangibles to be disposed of be reported at the
lower of carrying amount or fair value, less cost to sell.  SFAS 121 is
effective for financial statements for fiscal years beginning after
December 31, 1995.  The Company does not expect that the adoption of SFAS
121 will have a material impact on the Company's consolidated financial
statements.

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Board of Directors and Stockholder of
The Pacific Lumber Company:

          We have audited the accompanying consolidated balance sheets of
The Pacific Lumber Company (a Delaware corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, cash flows and stockholder's equity (deficit) for each of the
three years in the period ended December 31, 1995.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based
on our audits.

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

          In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
The Pacific Lumber Company and subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.

     As explained in Notes 5 and 6 to the financial statements, effective
January 1, 1993, the Company changed its method of accounting for income
taxes and postretirement benefits other than pensions.


                                   ARTHUR ANDERSEN LLP


San Francisco, California
January 19, 1996

                         CONSOLIDATED BALANCE SHEET

<TABLE>

<CAPTION>

                                                                                     December 31,        
                                                                             ----------------------------
                                                                                 1995            1994    
                                                                             ------------    ------------
                                                                               (In thousands of dollars)
<S>                                                                          <C>             <C>
                                  ASSETS

Current assets:
     Cash and cash equivalents                                               $     26,480    $     24,330 
     Receivables:
          Trade                                                                    19,688          23,258 
          Other                                                                     1,565           4,035 
     Inventories                                                                   75,580          68,168 
     Prepaid expenses and other current assets                                      6,933           3,660 
                                                                             ------------    ------------
               Total current assets                                               130,246         123,451 
Timber and timberlands, net of depletion of $204,856 and $188,003 at
     December 31, 1995 and 1994, respectively                                     337,390         350,871 
Property, plant and equipment, net                                                 93,726          96,960 
Deferred financing costs, net                                                      22,397          24,516 
Deferred income taxes                                                              41,958          50,142 
Restricted cash                                                                    31,367          32,402 
Other assets                                                                        5,502           5,925 
                                                                             ------------    ------------
                                                                             $    662,586    $    684,267 
                                                                             ============    ============

              LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

Current liabilities:
     Accounts payable                                                        $      3,898    $      3,309 
     Accrued compensation and related benefits                                      9,241          10,285 
     Accrued interest                                                              20,666          21,109 
     Deferred income taxes                                                         10,244          12,986 
     Other accrued liabilities                                                      3,077           2,105 
     Long-term debt, current maturities                                            14,195          13,670 
                                                                             ------------    ------------
               Total current liabilities                                           61,321          63,464 
Long-term debt, less current maturities                                           571,812         586,007 
Other noncurrent liabilities                                                       33,613          23,517 
                                                                             ------------    ------------
               Total liabilities                                                  666,746         672,988 
                                                                             ------------    ------------

Contingencies

Stockholder's equity (deficit):
     Common stock, $.01 par value, 100 shares authorized and issued                     -               - 
     Additional capital                                                           157,520         157,520 
     Accumulated deficit                                                         (161,680)       (146,241)
                                                                             ------------    ------------
               Total stockholder's equity (deficit)                                (4,160)         11,279 
                                                                             ------------    ------------
                                                                             $    662,586    $    684,267 
                                                                             ============    ============


</TABLE>


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

                               CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>

<CAPTION>

                                                                                Years Ended December 31,      
                                                                          ------------------------------------
                                                                             1995         1994         1993   
                                                                          ----------   ----------   ----------
                                                                                (In thousands of dollars)
<S>                                                                       <C>          <C>          <C>
Net sales:
     Lumber and logs                                                      $ 197,320    $ 205,504    $ 193,227 
     Other                                                                   24,619       21,875       17,407 
                                                                          ----------   ----------   ----------
                                                                            221,939      227,379      210,634 
                                                                          ----------   ----------   ----------

Operating expenses:
     Cost of goods sold (exclusive of depletion and depreciation)           116,445      116,316      115,175 
     Selling, general and administrative                                     14,992       15,190       18,869 
     Depletion and depreciation                                              25,927       25,485       25,374 
                                                                          ----------   ----------   ----------
                                                                            157,364      156,991      159,418 
                                                                          ----------   ----------   ----------

Operating income                                                             64,575       70,388       51,216 

Other income (expense):
     Investment, interest and other income                                    3,928       12,022        3,884 
     Interest expense                                                       (55,462)     (56,067)     (59,145)
                                                                          ----------   ----------   ----------
Income (loss) before income taxes, extraordinary items and cumulative
     effect of changes in accounting principles                              13,041       26,343       (4,045)
Credit (provision) in lieu of income taxes                                   (6,480)      (1,429)       1,683 
                                                                          ----------   ----------   ----------
Income (loss) before extraordinary items and cumulative effect of
     changes in accounting principles                                         6,561       24,914       (2,362)
Extraordinary items:
     Loss on litigation settlement, net of related credit in lieu of
          income taxes of $6,312                                                   -     (14,866)           - 
     Loss on early extinguishment of debt, net of related credit in
          lieu of income taxes of $5,566                                           -           -      (10,802)
Cumulative effect of changes in accounting principles:
     Postretirement benefits other than pensions, net of related
          credit in lieu of income taxes of $1,566                                 -           -       (2,348)
     Accounting for income taxes                                                   -           -        4,973 
                                                                          ----------   ----------   ----------
Net income (loss)                                                         $   6,561    $  10,048    $ (10,539)
                                                                          ==========   ==========   ==========


</TABLE>

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

                             CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>

<CAPTION>

                                                                      Years Ended December 31,      
                                                                ------------------------------------
                                                                   1995         1994         1993   
                                                                ----------   ----------   ----------
                                                                      (In thousands of dollars)
<S>                                                             <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                                          $   6,561    $  10,048    $ (10,539)
     Adjustments to reconcile net income (loss) to net cash
          provided by operating activities:
          Depletion and depreciation                               25,927       25,485       25,374 
          Net sales of marketable securities                          478        6,619        6,025 
          Amortization of deferred financing costs                  2,269        2,197        2,580 
          Net gains on marketable securities                         (478)        (984)      (1,310)
          Net loss (gain) on asset dispositions                       419         (830)         134 
          Extraordinary loss on early extinguishment of
               debt, net                                                -            -       10,802 
          Cumulative effect of changes in accounting
               principles, net                                          -            -       (2,625)
          Decrease (increase) in accrued and deferred income
               taxes                                                7,572        1,627       (1,697)
          Increase in accounts payable                                589          949           53 
          Decrease (increase) in receivables                        5,913       (8,742)       9,991 
          Increase (decrease) in other liabilities                  7,406       (2,027)        (394)
          Decrease (increase) in inventories, net of
               depletion                                           (7,301)      (1,608)         987 
          Decrease (increase) in prepaid expenses and other
               current assets                                      (3,273)        (721)         237 
          Decrease in accrued interest                               (443)        (518)      (9,398)
          Other                                                       423          706          (74)
                                                                ----------   ----------   ----------
               Net cash provided by operating activities           46,062       32,201       30,146 
                                                                ----------   ----------   ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Net proceeds from sale of assets                                  13        1,119          229 
     Capital expenditures                                          (9,140)     (10,962)     (10,472)
                                                                ----------   ----------   ----------
               Net cash used for investing activities              (9,127)      (9,843)     (10,243)
                                                                ----------   ----------   ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Dividends paid                                               (22,000)     (24,500)     (25,000)
     Redemptions, repurchase of and principal payments on
          long-term debt                                          (13,670)     (13,235)    (557,883)
     Incurrence of financing costs                                   (150)        (213)     (28,235)
     Proceeds from issuance of long-term debt                           -            -      620,000 
     Restricted cash deposits, net                                  1,035        1,160      (33,562)
                                                                ----------   ----------   ----------
               Net cash used for financing activities             (34,785)     (36,788)     (24,680)
                                                                ----------   ----------   ----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                2,150      (14,430)      (4,777)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                     24,330       38,760       43,537 
                                                                ----------   ----------   ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR                        $  26,480    $  24,330    $  38,760 
                                                                ==========   ==========   ==========

SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
     ACTIVITIES:
     Timber and timberlands acquired subject to loans from
          seller                                                $     615    $     910    $       - 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Interest paid, net of capitalized interest                 $  53,636    $  54,388    $  65,963 
     Income taxes paid (refunded)                                  (5,190)       1,170           14 


</TABLE>

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

                 CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)

<TABLE>

<CAPTION>

                                            Common
                                             Stock       Additional      Accumulated
                                          ($.01 Par)       Capital         Deficit          Total    
                                         ------------   ------------    ------------    ------------
                                                          (In thousands of dollars)
<S>                                      <C>            <C>             <C>             <C>
Balance, January 1, 1993                 $          -  $     157,520   $    (96,250)   $     61,270 

     Net loss                                       -              -        (10,539)        (10,539)

     Dividends                                      -              -        (25,000)        (25,000)
                                         ------------   ------------    ------------    ------------

Balance, December 31, 1993                          -        157,520       (131,789)         25,731 

     Net income                                     -              -         10,048          10,048 

     Dividends                                      -              -        (24,500)        (24,500)
                                         ------------   ------------    ------------    ------------

Balance, December 31, 1994                          -        157,520       (146,241)         11,279 

     Net income                                     -              -          6,561           6,561 

     Dividends                                      -              -        (22,000)        (22,000)
                                         ------------   ------------    ------------    ------------

Balance, December 31, 1995               $          -  $     157,520   $   (161,680)   $     (4,160)
                                         ============   ============    ============    ============

</TABLE>

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

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         (IN THOUSANDS OF DOLLARS)


1.        BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
          POLICIES

     BASIS OF PRESENTATION

          The consolidated financial statements include the accounts of The
Pacific Lumber Company and its wholly owned subsidiaries, collectively
referred to herein as the "Company."  The Company is an indirect wholly
owned subsidiary of MAXXAM Group Inc. ("MGI").  MGI is a wholly owned
subsidiary of MAXXAM Inc. ("MAXXAM").  Intercompany balances and
transactions have been eliminated.  Certain reclassifications have been
made to prior years' financial statements to be consistent with the current
year's presentation.

          The Company operates in several principal aspects of the lumber
industry - the growing and harvesting of redwood and Douglas-fir timber,
the milling of logs in lumber and the manufacture of lumber into a variety
of finished products.  Housing, construction and remodeling are the
principal markets for the Company's lumber products.  Export sales
generally constitute approximately 4% of the Company's sales.  A
significant portion of the Company's sales are made to third parties
located west of the Mississippi river.

          The preparation of financial statements in accordance with
generally accepted accounting principles requires the use of estimates and
assumptions that affect (i) the reported amounts of assets and liabilities,
(ii) disclosure of contingent assets and liabilities known to exist as of
the date the financial statements are published, and (iii) the reported
amount of revenues and expenses recognized during each period presented.
The Company reviews all significant estimates affecting its consolidated
financial statements on a recurring basis and records the effect of any
necessary adjustments prior to their publication.  Adjustments made with
respect to the use of estimates often relate to improved information not
previously available.  Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the subsequent
resolution of any one of the contingent matters described in Note 8 could
differ materially from current estimates.  The results of an adverse
resolution of such uncertainties could have a material effect on the
reported amounts of the Company's consolidated assets and liabilities.

     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Cash Equivalents
          Cash equivalents consist of highly liquid money market
instruments with original maturities of three months or less.

          Marketable Securities
          On December 31, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities ("SFAS 115").  In accordance with the provisions of
SFAS 115, marketable securities are carried at fair value beginning on
December 31, 1993.  Prior to that date, marketable securities portfolios
were carried at the lower of cost or market at the balance sheet date.  The
cost of the securities sold is determined using the first-in, first-out
method.  Included in investment, interest and other income for each of the
three years ended December 31, 1995 were: 1995 - net realized gains of
$478; 1994 - a decrease in net unrealized gains of $264 and net realized
gains of $1,248; and 1993 - net realized gains of $1,046 and net unrealized
gains of $264.

          Inventories
          Inventories are stated at the lower of cost or market value. 
Cost is determined using the last-in, first-out ("LIFO") method.

          Timber and Timberlands
          Timber and timberlands are stated at cost, net of accumulated
depletion.  Depletion is computed utilizing the unit-of-production method
based upon estimates of timber values and quantities. 

          Property, Plant and Equipment
          Property, plant and equipment, including capitalized interest, is
stated at cost, net of accumulated depreciation.  Depreciation is computed
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets.

          Deferred Financing Costs
          Costs incurred to obtain financing are deferred and amortized
over the term of the related borrowing.

          Restricted Cash and Concentrations of Credit Risk  
          Restricted cash represents the amount initially deposited into an
account (the "Liquidity Account") held by the trustee under the indenture
governing the 7.95% Timber Collateralized Notes due 2015 (the "Timber
Notes") of Scotia Pacific Holding Company ("Scotia Pacific"), a wholly
owned subsidiary of the Company.  See Note 4.  The Liquidity Account is not
available, except under certain limited circumstances, for Scotia Pacific's
working capital purposes; however, it is available to pay the Rated
Amortization (as defined in Note 4) and interest on the Timber Notes if and
to the extent that cash flows are insufficient to make such payments.  The
required Liquidity Account balance will generally decline as principal
payments are made on the Timber Notes.  Investment, interest and other
income for the years ended December 31, 1995, 1994 and 1993 includes
interest of approximately $2,560, $2,638 and $2,101, respectively,
attributable to an investment rate agreement (at 7.95% per annum) with the
financial institution which holds the Liquidity Account.

          At December 31, 1995 and 1994, cash and cash equivalents include
$19,742 and $19,439, respectively, (the "Payment Account") which is
reserved for debt service payments on the Timber Notes (see Note 4).  The
Payment Account and the Liquidity Account are each held by a different
financial institution.  In the event of nonperformance by such financial
institutions, the Company's exposure to credit loss is represented by the
amounts deposited plus any unpaid accrued interest thereon.  The Company
mitigates its concentrations of credit risk with respect to these
restricted cash deposits by maintaining them at high credit quality
financial institutions and monitoring the credit ratings of these
institutions.

          Fair Value of Financial Instruments
          The carrying amounts of cash and cash equivalents and restricted
cash approximate fair value.  The fair value of marketable securities is
determined based on quoted market prices.  The estimated fair value of
long-term debt is determined based on the quoted market prices for the
Timber Notes and the 10-1/2% Senior Notes due 2003 (the "Senior Notes"),
and on the current rates offered for borrowings similar to the other debt. 
The Timber Notes and the Senior Notes are thinly traded financial
instruments; accordingly, their market prices at any balance sheet date may
not be representative of the prices which would be derived from a more
active market.

          The estimated fair values of the Company's financial instruments,
along with the carrying amounts of the related assets (liabilities), are as
follows:


<TABLE>

<CAPTION>

                                                                December 31, 1995         December 31, 1994   
                                                             -----------------------   -----------------------
                                                              Carrying       Fair       Carrying       Fair
                                                               Amount        Value       Amount        Value   
                                                             ----------   ----------   ----------   ----------
<S>                                                          <C>          <C>          <C>          <C>
Cash and cash equivalents                                    $  26,480    $  26,480    $  24,330    $  24,330 
Restricted cash                                                 31,367       31,367       32,402       32,402 
Long-term debt                                                (586,007)    (590,594)    (599,677)    (558,801)

</TABLE>

2.        INVENTORIES

          Inventories consist of the following:


<TABLE>

<CAPTION>

                                                                                   December 31,      
                                                                             -----------------------
                                                                                1995         1994   
                                                                             ----------   ----------
<S>                                                                          <C>          <C>
Lumber                                                                       $   57,905   $   53,393
Logs                                                                             17,675       14,775
                                                                             ----------   ----------
                                                                             $   75,580   $   68,168
                                                                             ==========   ==========

</TABLE>

          During 1993, inventory quantities were reduced.  This reduction
resulted in the liquidation of LIFO inventory quantities carried at
prevailing costs from prior years which were higher than the current cost
of inventory.  The effect of this inventory liquidation increased cost of
goods sold by approximately $222 for the year ended December 31, 1993.

3.        PROPERTY, PLANT AND EQUIPMENT

          The major classes of property, plant and equipment are as
follows:


<TABLE>

<CAPTION>

                                                                                             December 31,      
                                                                                       -----------------------
                                                                         Estimated
                                                                           Useful
                                                                           Lives          1995         1994   
                                                                       -------------   ----------   ----------
<S>                                                                    <C>             <C>          <C>
Machinery and equipment                                                 5 - 15 years   $ 122,437    $ 119,280 
Buildings                                                                   33 years      29,079       27,666 
Logging roads                                                               15 years       7,486        7,102 
                                                                                       ----------   ----------
                                                                                         159,002      154,048 
Less: accumulated depreciation                                                           (65,276)     (57,088)
                                                                                       ----------   ----------
                                                                                       $  93,726    $  96,960 
                                                                                       ==========   ==========

</TABLE>


          Depreciation expense for the years ended December 31, 1995, 1994
and 1993 was $9,185, $8,808 and $8,233, respectively.

4.        LONG-TERM DEBT

          Long-term debt consists of the following:


<TABLE>

<CAPTION>

                                                                                   December 31,      
                                                                             -----------------------
                                                                                1995         1994   
                                                                             ----------   ----------
<S>                                                                          <C>          <C>
7.95% Scotia Pacific Timber Collateralized Notes due July 20, 2015           $ 350,233    $ 363,811 
10-1/2% Pacific Lumber Senior Notes due March 1, 2003                          235,000      235,000 
Other                                                                              774          866 
                                                                             ----------   ----------
                                                                               586,007      599,677 
Less: current maturities                                                       (14,195)     (13,670)
                                                                             ----------   ----------
                                                                             $ 571,812    $ 586,007 
                                                                             ==========   ==========

</TABLE>

          On March 23, 1993, the Company issued $235,000 of the Senior
Notes and Scotia Pacific, its newly-formed wholly owned subsidiary, issued
$385,000 of the Timber Notes.  The Company and Scotia Pacific used the net
proceeds from the sale of the Senior Notes and the Timber Notes, together
with the Company's cash and marketable securities, to (i) retire (a)
$163,784 aggregate principal amount of the Company's 12% Series A Senior
Notes due July 1, 1996 (the "Series A Notes"), (b) $299,725 aggregate
principal amount of the Company's 12.2% Series B Senior Notes due July 1,
1996 (the "Series B Notes"), and (c) $41,750 aggregate principal amount of
the Company's 12-1/2% Senior Subordinated Debentures due July 1, 1998 (the
"Debentures;" the Series A Notes, the Series B Notes and the Debentures are
referred to collectively as the "Old Pacific Lumber Securities"); (ii) pay
accrued interest on the Old Pacific Lumber Securities through the date of
redemption; (iii) pay the applicable redemption premiums on the Old Pacific
Lumber Securities; (iv) repay the Company's $28,867 cogeneration facility
loan; (v) fund the initial deposit of $35,000 to the Liquidity Account; and
(vi) pay a $25,000 dividend to a subsidiary of MGI.  These transactions
resulted in a pre-tax extraordinary loss of $16,368, consisting primarily
of the payment of premiums and the write-off of unamortized deferred
financing costs on the Old Pacific Lumber Securities.

          The indenture governing the Timber Notes (the "Timber Note
Indenture") prohibits Scotia Pacific from incurring any additional
indebtedness for borrowed money and limits the business activities of
Scotia Pacific to the ownership and operation of its timber and
timberlands.  The Timber Notes are senior secured obligations of Scotia
Pacific and are not obligations of, or guaranteed by, the Company or any
other person.  The Timber Notes are secured by a lien on (i) Scotia
Pacific's timber and timberlands (representing $179,364 of the Company's
consolidated balance at December 31, 1995), (ii) Scotia Pacific's contract
rights and certain other assets, (iii) the funds deposited in the Payment
Account and the Liquidity Account, and (iv) substantially all of Scotia
Pacific's other property and equipment.

          The Timber Notes are structured to link, to the extent of
available cash, the deemed depletion of Scotia Pacific's timber (through
the harvest and sale of logs) to required amortization of the Timber Notes. 
The required amount of amortization due on any Timber Note payment date is
determined by various mathematical formulas set forth in the Timber Note
Indenture.  The minimum amount of principal which Scotia Pacific must pay
(on a cumulative basis) through any Timber Note payment date in order to
avoid an Event of Default (as defined in the Timber Note Indenture) is
referred to as rated amortization ("Rated Amortization").  If all payments
of principal are made in accordance with Rated Amortization, the payment
date on which Scotia Pacific will pay the final installment of principal is
July 20, 2015.  The amount of principal which Scotia Pacific must pay
through each Timber Note payment date in order to avoid prepayment or
deficiency premiums is referred to as scheduled amortization ("Scheduled
Amortization").  If all payments of principal are made in accordance with
Scheduled Amortization, the payment date on which Scotia Pacific will pay
the final installment of principal is July 20, 2009.  Scheduled
Amortization on the Timber Notes is as follows: years ending December 31,
1996 - $14,103; 1997 - $16,165; 1998 - $19,335; 1999 - $21,651; 2000 -
$23,970; thereafter - $255,009.

          Principal and interest on the Timber Notes are payable semi-
annually on January 20 and July 20.  The Timber Notes are redeemable at the
option of Scotia Pacific, in whole but not in part, at any time.  The
redemption price of the Timber Notes is equal to the sum of the principal
amount, accrued interest and a prepayment premium calculated based upon the
yield of like-term Treasury securities plus 50 basis points.

          Interest on the Senior Notes is payable semi-annually on March 1
and September 1.  The Senior Notes are redeemable at the option of the
Company, in whole or in part, on or after March 1, 1998 at a price of 103%
of the principal amount plus accrued interest.  The redemption price is
reduced annually until March 1, 2000, after which time the Senior Notes are
redeemable at par.

          The Company has a revolving credit agreement with a bank (as
amended and restated, the "Revolving Credit Agreement") which expires on
May 31, 1998.  Borrowings under the Revolving Credit Agreement are secured
by the Company's trade receivables and inventories, with interest computed
at the bank's reference rate plus 1-1/4% or the bank's offshore rate plus
2-1/4%.  The Revolving Credit Agreement provides for borrowings of up to
$60,000, of which $15,000 may be used for standby letters of credit and
$30,000 is restricted to timberland acquisitions.  Borrowings made pursuant
to the portion of the credit facility restricted to timberland acquisitions
would also be secured by the purchased timberlands.  As of December 31,
1995, $48,090 of borrowings was available under the Revolving Credit
Agreement, of which $3,090 was available for letters of credit and $30,000
was restricted to timberland acquisitions.  No borrowings were outstanding
as of December 31, 1995, and letters of credit outstanding amounted to
$11,910.

          The indentures governing the Senior Notes and the Timber Notes
and the Revolving Credit Agreement contain various covenants which, among
other things, limit the payment of dividends and restrict transactions
between the Company and its affiliates.  As of December 31, 1995, under the
most restrictive of these covenants, approximately $15,663 of dividends
could be paid by the Company.

          Scheduled maturities of long-term debt outstanding at December
31, 1995 are as follows:  years ending December 31, 1996 - $14,195; 1997 -
$16,258; 1998 - $19,429; 1999 - $21,745; 2000 - $24,065; thereafter -
$490,315.

5.        CREDIT (PROVISION) IN LIEU OF INCOME TAXES

          The Company and its subsidiaries are members of MAXXAM's
consolidated return group for federal income tax purposes.  The Company's
tax allocation agreement with MAXXAM (as amended on March 23, 1993, the
"Tax Allocation Agreement"), provides that The Pacific Lumber Company,
excluding its wholly owned subsidiaries  ("Pacific Lumber"), is liable to
MAXXAM for the federal consolidated income tax liability of Pacific Lumber,
Scotia Pacific and certain other subsidiaries of Pacific Lumber (but
excluding Salmon Creek Corporation) (collectively, the "PL Subgroup")
computed as if the PL Subgroup was a separate affiliated group of
corporations which was never affiliated with MAXXAM.  The Tax Allocation
Agreement further provides that Salmon Creek Corporation is liable to
MAXXAM for its federal income tax liability computed as if Salmon Creek
Corporation was a separate corporation which was never affiliated with
MAXXAM.  Under the tax allocation agreement with MAXXAM, prior to the
effective date of its amendment on March 23, 1993, Pacific Lumber recorded
tax liabilities or benefits computed as if it filed separate tax returns.

          The credit (provision) in lieu of income taxes on income (loss)
before income taxes, extraordinary items and cumulative effect of changes
in accounting principles consists of the following:

<TABLE>

<CAPTION>

                                                                      Years Ended December 31,      
                                                                ------------------------------------
                                                                   1995         1994         1993   
                                                                ----------   ----------   ----------
<S>                                                             <C>          <C>          <C>
Current:
     Federal credit (provision) in lieu of income taxes         $    (239)   $       -    $       - 
     State and local                                                  (61)         (50)           - 
                                                                ----------   ----------   ----------
                                                                     (300)         (50)           - 
                                                                ----------   ----------   ----------
Deferred:
     Federal credit (provision) in lieu of income taxes            (4,755)      (1,748)       1,913 
     State and local                                               (1,425)         369         (230)
                                                                ----------   ----------   ----------
                                                                   (6,180)      (1,379)       1,683 
                                                                ----------   ----------   ----------
                                                                $  (6,480)   $  (1,429)   $   1,683 
                                                                ==========   ==========   ==========

</TABLE>


          The 1994 deferred federal provision in lieu of income taxes of
$1,748 includes a credit relating to reserves the Company no longer
believes are necessary.  The 1993 deferred federal credit in lieu of income
taxes of $1,913 includes an $850 benefit for increasing net deferred income
tax assets (liabilities) as of the date of enactment (August 10, 1993) of
the Omnibus Budget Reconciliation Act of 1993 which retroactively increased
the federal statutory income tax rate from 34% to 35% for periods beginning
on or after January 1, 1993.

          A reconciliation between the credit (provision) in lieu of income
taxes and the amount computed by applying the federal statutory income tax
rate to income (loss) before income taxes, extraordinary items and
cumulative effect of changes in accounting principles is as follows:

<TABLE>

<CAPTION>

                                                                                Years Ended December 31,      
                                                                          ------------------------------------
                                                                             1995         1994         1993   
                                                                          ----------   ----------   ----------
<S>                                                                       <C>          <C>          <C>
Income (loss) before income taxes, extraordinary items and cumulative
     effect of changes in accounting principles                           $  13,041    $  26,343    $  (4,045)
                                                                          ==========   ==========   ==========
Amount of federal income tax based upon the statutory
     rate                                                                 $  (4,564)   $  (9,220)   $   1,416 
State and local taxes, net of federal tax benefit                              (966)         207         (150)
Revision of prior years' tax estimates and other changes in valuation
     allowances                                                                (651)       7,148         (566)
Increase in net deferred income tax assets due to tax rate change                 -            -          850 
Other                                                                          (299)         436          133 
                                                                          ----------   ----------   ----------
                                                                          $  (6,480)   $  (1,429)   $   1,683 
                                                                          ==========   ==========   ==========

</TABLE>

          As shown in the Consolidated Statement of Operations for the year
ended December 31, 1994, the Company recorded an extraordinary loss related
to the settlement of litigation in connection with MGI's acquisition of the
Company (see Note 8).  The Company reported the loss net of related
deferred income taxes of $6,312 which is less than the federal and state
statutory income tax rates due to expenses for which no tax benefit was
recognized.

          As shown in the Consolidated Statement of Operations for the year
ended December 31, 1993, the Company reported an extraordinary loss related
to the early extinguishment of debt.  The Company reported the loss net of
related deferred income taxes of $5,566 which approximated the federal
statutory income tax rate in effect on the date the transaction occurred.

          Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109").  The adoption of SFAS 109 changed the Company's method of accounting
for income taxes to an asset and liability approach from the deferral
method prescribed by APB 11.  The asset and liability approach requires the
recognition of deferred income tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the
Company's financial statements or tax returns.  Under this method, deferred
income tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.  The cumulative effect of the change
in accounting principle, as of January 1, 1993, increased the Company's
results of operations by $4,973.  The implementation of SFAS 109 required
the Company to restate certain assets and liabilities to their pre-tax
amounts from their net-of-tax amounts originally recorded in connection
with the acquisition of the Company in 1986.  As a result of restating
these assets and liabilities, the loss before income taxes, extraordinary
item and cumulative effect of changes in accounting principles for the year
ended December 31, 1993 was decreased by $875.

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

<TABLE>

<CAPTION>

                                                                                   December 31,      
                                                                             -----------------------
                                                                                1995         1994   
                                                                             ----------   ----------
<S>                                                                          <C>          <C>
Deferred income tax assets:
     Timber and timberlands                                                  $  32,528    $  37,209 
     Loss and credit carryforwards                                              25,408       29,301 
     Other liabilities                                                           7,806        4,840 
     Postretirement benefits other than pensions                                 2,316        2,145 
     Other                                                                         222          892 
     Valuation allowances                                                       (2,825)      (2,664)
                                                                             ----------   ----------
          Total deferred income tax assets, net                                 65,455       71,723 
                                                                             ----------   ----------
Deferred income tax liabilities:
     Inventories                                                               (16,056)     (16,339)
     Property, plant and equipment                                             (15,023)     (14,848)
     Other                                                                      (2,662)      (3,380)
                                                                             ----------   ----------
          Total deferred income tax liabilities                                (33,741)     (34,567)
                                                                             ----------   ----------

Net deferred income tax assets                                               $  31,714    $  37,156 
                                                                             ==========   ==========

</TABLE>

          A principal component of the net deferred income tax assets
listed above relates to the excess of the tax basis over financial
statement basis with respect to timber and timberlands.  The Company
believes that it is more likely than not that this net deferred income tax
asset will be realized, based primarily upon the estimated value of its
timber and timberlands which is well in excess of its tax basis.  The
valuation allowances listed above relate primarily to loss and credit
carryforwards.  The Company evaluated all appropriate factors to determine
the proper valuation allowances for loss and credit carryforwards.  These
factors included any limitations concerning use of the carryforwards, the
year the carryforwards expire and the levels of taxable income necessary
for utilization.  The Company has concluded that it will more likely than
not generate sufficient taxable income to realize the benefit attributable
to the loss and credit carryforwards for which valuation allowances were
not provided.

          Included in the net deferred income tax assets listed above are
$28,199 and $33,540 at December 31, 1995 and 1994, respectively, which are
recorded pursuant to the Tax Allocation Agreement with MAXXAM.

          The following table presents the Company's estimated tax
attributes, for federal income tax purposes, under the terms of the Tax
Allocation Agreement at December 31, 1995.

<TABLE>

<CAPTION>

                                                                                           Expiring
                                                                                            Through  
                                                                                          ----------
             <S>                                                             <C>          <C>
             Regular Tax Attribute Carryforwards:
                  Net operating losses                                       $   60,718      2010
                  Net capital losses                                              3,121      1997
                  Minimum tax credit                                                239        -

             Alternative Minimum Tax Attribute Carryforwards:
                  Net operating losses                                       $   23,618      2010

</TABLE>


6.        EMPLOYEE BENEFIT PLANS

          The Company has a defined benefit plan which covers all employees
of the Company.  Under the plan, employees are eligible for benefits at age
65 or earlier, if certain provisions are met.  The benefits are determined
under a career average formula based on each year of service with the
Company and the employee's compensation for that year.  The Company's
funding policy is to contribute annually an amount at least equal to the
minimum cash contribution required by The Employee Retirement Income
Security Act of 1974, as amended.

          A summary of the components of net periodic pension cost is as
follows:

<TABLE>

<CAPTION>

                                                                                Years Ended December 31,      
                                                                          ------------------------------------
                                                                             1995         1994         1993   
                                                                          ----------   ----------   ----------
             <S>                                                          <C>          <C>          <C>
             Service cost - benefits earned during the year               $   1,483    $   1,643    $   1,600 
             Interest cost on projected benefit obligation                    1,693        1,263          918 
             Actual loss (gain) on plan assets                               (3,900)          10       (2,128)
             Net amortization and deferral                                    2,460         (859)       1,359 
                                                                          ----------   ----------   ----------
             Net periodic pension cost                                    $   1,736    $   2,057    $   1,749 
                                                                          ==========   ==========   ==========


</TABLE>

          The following table sets forth the funded status and amounts
recognized in the Consolidated Balance Sheet:


<TABLE>

<CAPTION>

                                                                                   December 31,      
                                                                             -----------------------
                                                                                1995         1994   
                                                                             ----------   ----------
<S>                                                                          <C>          <C>
Actuarial present value of accumulated plan benefits:
     Vested benefit obligation                                               $  16,910    $  11,809 
     Non-vested benefit obligation                                               1,214          779 
                                                                             ----------   ----------
          Total accumulated benefit obligation                               $  18,124    $  12,588 
                                                                             ==========   ==========

Projected benefit obligation                                                 $  21,841    $  15,047 
Plan assets at fair value, primarily equity and debt securities                (18,363)     (13,184)
                                                                             ----------   ----------
Projected benefit obligation in excess of plan assets                            3,478        1,863 
Unrecognized net transition asset                                                   24           29 
Unrecognized net gain (loss)                                                       (27)       1,475 
Unrecognized prior service cost                                                    (45)         (50)
                                                                             ----------   ----------
          Accrued pension liability                                          $   3,430    $   3,317 
                                                                             ==========   ==========

</TABLE>

          The assumptions used in accounting for the defined benefit plan
were as follows:


<TABLE>

<CAPTION>

                                                                             1995         1994         1993   
                                                                          ----------   ----------   ----------
<S>                                                                       <C>          <C>          <C>
Rate of increase in compensation levels                                      5.0%         5.0%         5.0%
Discount rate                                                                7.25%        8.5%         7.5%
Expected long-term rate of return on assets                                  8.0%         8.0%         8.0%

</TABLE>

          The Company has an unfunded defined benefit plan for certain
postretirement and other benefits which covers substantially all employees
of the Company.  Participants of the plan are eligible for certain health
care benefits upon termination of employment and retirement and
commencement of pension benefits.  Participants make contributions for a
portion of the cost of their health care benefits.

          The Company adopted Statement of Financial Accounting Standards
No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions ("SFAS 106") as of January 1, 1993.  The costs of postretirement
benefits other than pensions are accrued over the period the employees
provide services to the date of their full eligibility for such benefits. 
Previously, such costs were expensed as actual claims were incurred.  The
cumulative effect of the change in accounting principle for the adoption of
SFAS 106 was recorded as a charge to results of operations of $2,348, net
of related income taxes of $1,566.  The deferred income tax benefit related
to the adoption of SFAS 106 was recorded at the federal and state statutory
rates in effect on the date SFAS 106 was adopted.

          A summary of the components of net periodic postretirement
benefit cost is as follows:

<TABLE>

<CAPTION>

                                                                                Years Ended December 31,      
                                                                          ------------------------------------
                                                                             1995         1994         1993   
                                                                          ----------   ----------   ----------
<S>                                                                       <C>          <C>          <C>
Service cost - benefits earned during the year                            $     228    $     216    $      153
Interest cost on accumulated postretirement benefit obligation                  317          294           315
Net amortization and deferral                                                   (53)          (7)            -
                                                                          ----------   ----------   ----------
Net periodic postretirement benefit cost                                  $     492    $     503    $      468
                                                                          ==========   ==========   ==========

</TABLE>

          The adoption of SFAS 106 increased the Company's loss before
extraordinary item and cumulative effect of changes in accounting
principles by $212 ($360 before tax) for the year ended December 31, 1993.

          The postretirement benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows:

<TABLE>

<CAPTION>

                                                                                   December 31,      
                                                                             -----------------------
                                                                                1995         1994   
                                                                             ----------   ----------
<S>                                                                          <C>          <C>
Retirees                                                                     $      634   $      860
Actives eligible for benefits                                                       726          656
Actives not eligible for benefits                                                 3,317        2,355
                                                                             ----------   ----------
     Accumulated postretirement benefit obligation                                4,677        3,871
Unrecognized net gain                                                               553          972
                                                                             ----------   ----------
     Postretirement benefit liability                                        $    5,230   $    4,843
                                                                             ==========   ==========

</TABLE>

          The annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 11.0% for 1996 and
is assumed to decrease gradually to 5.5% in 2008 and remain at that level
thereafter.  Each one percentage point increase in the assumed health care
cost trend rate would increase the accumulated postretirement benefit
obligation as of December 31, 1995 by approximately $674 and the aggregate
of the service and interest cost components of net periodic postretirement
benefit cost by approximately $90.

          The discount rates used in determining the accumulated
postretirement benefit obligation were 7.25% and 8.5% at December 31, 1995
and 1994, respectively.

          Subsequent to December 31, 1993, the Company's employees were
eligible to participate in a defined contribution savings plan sponsored by
MAXXAM.  This plan is designed to enhance the existing retirement programs
of participating employees.  Employees may elect to contribute up to 16% of
their compensation to the plan.  For those participants who have elected to
make voluntary contributions to the plan, the Company's contributions
consist of a matching contribution of up to 4% of the compensation of
participants for each calendar quarter.  The cost to the Company of this
plan was $1,281 and $1,215 for the years ended December 31, 1995 and 1994,
respectively.

          The Company is self-insured for workers' compensation benefits. 
Included in accrued compensation and related benefits and other noncurrent
liabilities are accruals for workers' compensation claims amounting to
$8,900 and $9,233 at December 31, 1995 and 1994, respectively.  Workers'
compensation expenses amounted to $3,302, $3,698 and $3,317 for the years
ended December 31, 1995, 1994 and 1993, respectively.

7.        RELATED PARTY TRANSACTIONS

          MAXXAM provides the Company with personnel, insurance, legal,
accounting, financial, and certain other services.  MAXXAM is compensated
by the Company through the payment of a fee representing the reimbursement
of actual out-of-pocket expenses incurred by MAXXAM, including, but not
limited to, labor costs of personnel of MAXXAM rendering services to the
Company.  Charges by MAXXAM for such services were $1,694, $1,744 and
$2,598 for the years ended December 31, 1995, 1994 and 1993, respectively.

          An agreement with Britt Lumber Co., Inc., an indirect wholly
owned subsidiary of MGI ("Britt"), governs, among other things, the sale of
logs and lumber by the Company and Britt to each other and the sale of hog
fuel (wood residue) by Britt to the Company.  The logs which the Company
sells to Britt are sold at approximately 75% of the applicable price for
such species and category as established by the California State Board of
Equalization, which reflects the lower quality of these logs.  Logs which
either the Company or Britt purchases from third parties and which are then
sold to each other are transferred at the actual cost of such logs.  Hog
fuel is sold to the Company by Britt at applicable market prices.  Net
sales for the years ended December 31, 1995, 1994 and 1993 include revenues
of $13,627, $10,326 and $9,198, respectively, from Britt.  The Company
recognized operating income of $5,527, $5,571 and $1,972 on these revenues
for the years ended December 31, 1995, 1994 and 1993, respectively.  At
December 31, 1995 and 1994, receivables include $813 and $1,283,
respectively, related to these affiliate sales.

          On August 4, 1993, all of the Company's issued and outstanding
common stock was pledged as collateral for MGI's $100.0 million 11-1/4%
Senior Secured Notes due 2003 and $126.7 million 12-1/4% Senior Secured
Discount Notes due 2003 (collectively, the "MGI Notes").  MGI conducts its
operations primarily through subsidiary companies.  The Company represents
the substantial portion of MGI's assets and operations.  The indenture
governing the MGI Notes requires the Company's board of directors to
declare and pay dividends on the Company's common stock to the maximum
extent permitted by any consensual restriction or encumbrance on the
Company's ability to declare and pay dividends, unless the Board determines
in good faith that such declaration and payment would be detrimental to the
capital or other operating needs of the Company.

          In 1994, in connection with the litigation settlement described
in Note 8, the Company paid approximately $3,185 to a law firm in which a
director of the Company is also a partner.  In 1993, the Company paid
approximately $1,931 in connection with the offering of the Senior Notes
and the Timber Notes to this same law firm.

8.        LOSS ON LITIGATION SETTLEMENT AND CONTINGENCIES

          During 1994, MAXXAM, the Company and others agreed to a
settlement, subsequently approved by the court, of class and related
individual claims brought by former stockholders of the Company against
MAXXAM, MGI, the Company, former directors of the Company and others
concerning MGI's acquisition of the Company.  Of the $52,000 settlement,
$33,000 was paid by insurance carriers of MAXXAM and the Company, $14,800
was paid by the Company, and the balance was paid by other defendants and
through the assignment of certain claims.  In 1994, the Company recorded an
extraordinary loss of $14,866 related to the settlement and associated
costs, including a $2,000 accrual for certain contingent claims and $4,400
of related legal fees, net of benefits for federal and state income taxes
of $6,312.

          The Company's operations are subject to a variety of California
and federal laws and regulations dealing with timber harvesting, endangered
species and critical habitat, and air and water quality.  The Company does
not expect that compliance with such existing laws and regulations will
have a material adverse effect on its future consolidated financial
position, results of operations or liquidity; however, these laws are
modified from time to time and there can be no assurance that certain
pending or future legislation, governmental regulations or judicial or
administrative decisions would not materially adversely affect the Company
or its ability to sell lumber, logs or timber.

          In 1995, the U.S. Fish and Wildlife Service (the "USFWS")
published its proposed final designation of critical habitat for the
marbled murrelet (the "Proposed Designation"), seeking to  designate over
four million acres as critical habitat for the marbled murrelet, including
approximately 33,000 acres of the Company's timberlands.  The Proposed
Designation was subject to a 60-day comment period and the Company filed
comments vigorously opposing the Proposed Designation.  The USFWS has not
yet published its final designation of critical habitat for the marbled
murrelet.  The Company is unable to predict when or if it would be able to
harvest on any acreage finally designated as critical habitat. 
Furthermore, it is impossible to determine the future adverse impact of
such designation on the Company's consolidated financial position, results
of operations or liquidity until such time as the Proposed Designation and
related regulatory and legal issues are fully resolved.  However, if the
Company is unable to harvest, or is severely limited in harvesting, on
timberlands designated as marbled murrelet critical habitat, such
restrictions could have a material adverse effect on the Company's
consolidated financial position, results of operations and liquidity.  If
the Company is unable to harvest or is severely limited in harvesting, the
Company intends to seek full compensation from the appropriate governmental
agencies on the grounds that such restrictions constitute a taking.

          There continue to be other regulatory actions and lawsuits
seeking to have various other species listed as threatened or endangered
under the federal Endangered Species Act and/or the California Endangered
Species Act and to designate critical habitat for such species.  It is
uncertain what impact, if any, such listings and/or designations of
critical habitat will have on the Company's consolidated financial
position, results of operations or liquidity.

          In 1994, the California Board of Forestry (the "BOF") adopted
certain regulations regarding compliance with long-term sustained yield
objectives.  These regulations require timber companies to project the
average annual growth they will have on their timberlands during the last
decade of a 100-year planning period ("Projected Annual Growth").  During
any rolling ten-year period, the average annual harvest over such ten-year
period may not exceed Projected Annual Growth.  The first ten-year period
began in May 1994.  The Company is required to submit, by October 1996, a
plan setting forth, among other things, its Projected Annual Growth.  The
Company has not completed its analysis of the projected productivity of its
timberlands and is therefore unable to predict the impact that these
regulations will have on its future timber harvesting practices; however,
the final results of this analysis could require the Company to reduce (or
permit it to increase) its timber harvest in future years from the average
annual harvest that it has experienced in recent years.  The Company
believes that it would be able to mitigate the effect of any required
reduction in harvest level by acquisitions of additional timberlands and by
increasing the productivity of its timberlands.  The Company is unable to
predict the ultimate impact the sustained yield regulations will have on
its future consolidated financial position, results of operations or
liquidity.

          Various groups and individuals have filed objections with the
California Department of Forestry ("CDF") and the BOF regarding the CDF's
and the BOF's actions and rulings with respect to certain of the Company's
timber harvesting plans ("THPs"), and the Company expects that such groups
and individuals will continue to file objections to certain of the
Company's THPs.  In addition, lawsuits are pending which seek to prevent
the Company from implementing certain of its approved THPs and other timber
operations.  These challenges have severely restricted the Company's
ability to harvest virgin old growth redwood timber on its property (and,
to a lesser extent, its residual old growth timber).  To date, challenges
with respect to the Company's THPs relating to young growth and residual
old growth have been limited; however, no assurance can be given as to the
extent of such challenges in the future.  The Company believes that
environmentally focused challenges to its THPs are likely to occur in the
future, particularly with respect to virgin and residual old growth timber.
Although such challenges have delayed or prevented the Company from
conducting a portion of its operations, to date such challenges have not
had a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.  It is, however, impossible
to predict the future nature or degree of such challenges or their ultimate
impact on the consolidated financial position, results of operations or
liquidity of the Company.

          The Company is also involved in various claims, lawsuits and
proceedings relating to a wide variety of other matters.  While there are
uncertainties inherent in the ultimate outcome of such matters and it is
impossible to presently determine the ultimate costs that may be incurred,
management believes that the resolution of such uncertainties and the
incurrence of such costs should not have a material adverse effect on the
Company's consolidated financial position, results of operations or
liquidity.

9.        OTHER ITEMS

          Investment, Interest and Other Income
          In February 1994, the Company received a franchise tax refund of
$7,243, the substantial portion of which represents interest, from the
State of California relating to tax years 1972 through 1985.  This amount
is included in investment, interest and other income for the year ended
December 31, 1994.

          Items Related to 1992 Earthquake
          In 1995 and 1993, the Company recorded reductions in cost of
sales of $1,527 and $1,200, respectively, resulting from business
interruption insurance reimbursements for higher operating costs and the
related loss of revenues resulting from the April 1992 earthquake.  Other
receivables at December 31, 1994 included $1,684 related to earthquake
related insurance claims.

10.       QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

          Summary quarterly financial information for the years ended
December 31, 1995 and 1994 is as follows:

<TABLE>

<CAPTION>

                                                                                       Three Months Ended                     
                                                                  -----------------------------------------------------------
                                                                   March 31      June 30      September 30      December 31  
                                                                  ----------   ----------   ---------------   ---------------
<S>                                                               <C>          <C>          <C>               <C>
1995:
     Net sales                                                    $  47,309    $  58,408    $        58,807   $        57,415
     Operating income                                                 9,991       18,785             17,115            18,684
     Net income (loss)                                               (2,013)       3,861              2,669             2,044

1994:
     Net sales                                                    $  50,816    $  55,120    $        55,001   $       66,442 
     Operating income                                                12,148       19,527             17,092           21,621 
     Income before extraordinary item                                 3,381        4,380              9,555            7,598 
     Extraordinary item, net                                              -      (14,866)                 -                - 
     Net income (loss)                                                3,381      (10,486)             9,555            7,598 


</TABLE>


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

          None.

                                  PART III

          Not applicable.

                                  PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

<TABLE>

<CAPTION>

(A)  INDEX TO FINANCIAL STATEMENTS                                                                                            PAGE
<S>                                                                                                                           <C> 
          1.        FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):

                    Report of Independent Public Accountants                                                                    22
                    Consolidated balance sheet at December 31, 1995 and 1994                                                    23
                    Consolidated statement of operations for the years ended December 31, 1995, 1994
                       and 1993                                                                                                 24
                    Consolidated statement of cash flows for the years ended December 31, 1995, 1994
                       and 1993                                                                                                 25
                    Consolidated statement of stockholder's equity (deficit) for the years ended December 31,
                       1995, 1994 and 1993                                                                                      26
                    Notes to consolidated financial statements                                                                  27

</TABLE>

          2.        FINANCIAL STATEMENT SCHEDULES:

                    Schedules are inapplicable or the required information
                    is included in the consolidated financial statements or
                    the notes thereto.

(B)  REPORTS ON FORM 8-K

               None.

(C)  EXHIBITS

               Reference is made to the Index of Exhibits immediately
preceding the exhibits hereto (beginning on page 42), which index is
incorporated herein by reference.

                                 SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

                                  THE PACIFIC LUMBER COMPANY


Date: March 28, 1996          By:      PAUL N. SCHWARTZ         
                                       Paul N. Schwartz
                              Vice President and Chief Financial
                                            Officer
                                 (Principal Financial Officer)


Date: March 28, 1996          By:        GARY L. CLARK           
                                         Gary L. Clark
                                 Vice President - Finance and
                                        Administration
                                (Principal Accounting Officer)


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


Date: March 28, 1996          By:      JOHN A. CAMPBELL         
                                       John A. Campbell
                              President, Chief Executive Officer
                                         and Director


Date: March 28, 1996          By:      PAUL N. SCHWARTZ         
                                       Paul N. Schwartz
                                Vice President, Chief Financial
                                            Officer
                                         and Director


Date: March 28, 1996          By:       JOHN T. LA DUC          
                                        John T. La Duc
                                  Vice President and Director


Date: March 28, 1996          By:        EZRA G. LEVIN           
                                         Ezra G. Levin
                                           Director


Date: March 28, 1996          By:      ANTHONY R. PIERNO         
                                       Anthony R. Pierno
                                Vice President, General Counsel
                                         and Director

Date: March 28, 1996          By:      WILLIAM S. RIEGEL         
                                       William S. Riegel
                                  Vice President - Sales and
                                           Director

                         THE PACIFIC LUMBER COMPANY

                             INDEX OF EXHIBITS

 Exhibit
 Number                          Description                      

     3.1   Articles of Incorporation of The Pacific Lumber
           Company (the "Company" or "Pacific Lumber")
           (incorporated herein by reference to Exhibit 3.1 to
           the Company's Annual Report on Form 10-K for the
           fiscal year ended December 31, 1992)

     3.2   By-laws of the Company, as amended (incorporated
           herein by reference to Exhibit 3.2 to the Company's
           Annual Report on Form 10-K for the fiscal year ended
           December 31, 1992)

     4.1   Indenture between the Company and State Street Bank
           and Trust Company (as successor trustee to the First
           National Bank of Boston) ("State Street"), regarding
           Pacific Lumber's 10-1/2% Senior Notes due 2003
           (incorporated herein by reference to Exhibit 4.1 to
           the Company's Annual Report on Form 10-K for the
           fiscal year ended December 31, 1993)

     4.2   Indenture between Scotia Pacific Holding Company
           ("Scotia Pacific") and State Street, as Trustee,
           regarding Scotia Pacific's 7.95% Timber Collateralized
           Notes due 2015 (incorporated herein by reference to
           Exhibit 4.1 to Scotia Pacific's Annual Report on Form
           10-K for the fiscal year ended December 31, 1993; the
           "Scotia Pacific 1993 Form 10-K")

     4.3   Amended and Restated Revolving Credit Agreement dated
           as of November 10, 1995 (the "Revolving Credit
           Agreement") between the Company and Bank of America
           National Trust and Savings Association (incorporated
           herein by reference to Exhibit 4.1 to the Company's
           Quarterly Report on Form 10-Q for the quarter ended
           September 30, 1995)

     4.4   Form of Deed of Trust, Assignment of Rents, Grant of
           Easement and Fixture Filing (incorporated herein by
           reference to Exhibit 4.2 to the Company's Quarterly
           Report on Form 10-Q for the quarter ended September
           30, 1995)

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

     10.1  Agreement dated December 20, 1985 between the Company
           and General Electric Company (the "1985 GE Agreement")
           (incorporated herein by reference to Exhibit 10(m) to
           the Registration Statement of Pacific Lumber on Form
           S-1, Registration No. 33-5549)

     10.2  Amendment No. 1 to Agreement between the Company and
           General Electric Company dated July 29, 1986 relating
           to the 1985 GE Agreement (incorporated herein by
           reference to Exhibit 10.4 to Pacific Lumber's Annual
           Report on Form 10-K for the fiscal year ended December
           31, 1988)

     10.3  Power Purchase Agreement dated January 17, 1986
           between the Company and Pacific Gas and Electric
           Company (incorporated herein by reference to Exhibit
           10(n) to the Registration Statement of the Company on
           Form S-1, Registration No. 33-5549)

     10.4  Tax Allocation Agreement dated as of May 21, 1988
           among MAXXAM Inc., MAXXAM Group Inc., the Company and
           the corporations signatory thereto (incorporated
           herein by reference to Exhibit 10.8 of the Company's
           Annual Report on Form 10-K for the fiscal year ended
           December 31, 1988)

     10.5  Tax Allocation Agreement among the Company, Scotia
           Pacific, Salmon Creek Corporation and MAXXAM Inc.
           dated March 23, 1993 (incorporated herein by reference
           to Exhibit 10.1 to Amendment No. 3 to the Form S-1
           Registration Statement of Scotia Pacific, Registration
           No. 33-55538)

     10.6  Deed of Trust, Security Agreement, Financing
           Statement, Fixture Filing and Assignment among Scotia
           Pacific, State Street, as Trustee, and State Street,
           as Collateral Agent (incorporated herein by reference
           to Exhibit 4.2 to the Scotia Pacific 1993 Form 10-K)

     10.7  Master Purchase Agreement between the Company and
           Scotia Pacific (incorporated herein by reference to
           Exhibit 10.1 to the Scotia Pacific 1993 Form 10-K)

     10.8  Services Agreement between the Company and Scotia
           Pacific (incorporated herein by reference to Exhibit
           10.2 to the Scotia Pacific 1993 Form 10-K)

     10.9  Additional Services Agreement between the Company and
           Scotia Pacific (incorporated herein by reference to
           Exhibit 10.3 to the Scotia Pacific 1993 Form 10-K)

     10.10 Reciprocal Rights Agreement among the Company, Scotia
           Pacific and Salmon Creek Corporation (incorporated
           herein by reference to Exhibit 10.4 to the Scotia
           Pacific 1993 Form 10-K)

     10.11 Environmental Indemnification Agreement between the
           Company and Scotia Pacific (incorporated herein by
           reference to Exhibit 10.5 to the Scotia Pacific 1993
           Form 10-K)

     10.12 Purchase and Services Agreement between the Company
           and Britt Lumber Co., Inc. (incorporated herein by
           reference to Exhibit 10.17 to Amendment No. 2 to the
           Form S-2 Registration Statement of Pacific Lumber,
           Registration Statement No. 33-56332)

     10.13 Investment Management Agreement, dated as of December
           1, 1991, by and among the Company, MAXXAM Inc. and
           certain related corporations (incorporated herein by
           reference to Exhibit 10.23 to  Amendment No. 5 to the
           Registration Statement on Form S-2 of MAXXAM Group
           Inc., Registration No. 33-64042)

     *27   Financial Data Schedule

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

* Included with this filing.