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, 1996   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, 1997:  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:

                              Not applicable.

                         THE PACIFIC LUMBER COMPANY

                                   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 Group
Holdings Inc. ("MGHI") which in turn is a wholly owned subsidiary of MAXXAM
Inc. ("MAXXAM").  Pacific Lumber's principal wholly owned subsidiaries are
Scotia Pacific Holding Company ("Scotia Pacific") and Salmon Creek
Corporation ("Salmon Creek").  As used herein, the terms "Company" or
"Pacific Lumber," "MGHI," "MGI," or "MAXXAM" refer to the respective
companies and their subsidiaries, unless otherwise noted or the context
indicates otherwise.

          This Annual Report on Form 10-K contains statements which
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.  These statements appear in a
number of places (see Item 1. "Business--Regulatory and Environmental
Factors," Item 3. "Legal Proceedings," and Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Background,"
"Financial Condition and Investing and Financing Activities" and "Trends"). 
Such statements can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "estimates,""will," "should," "plans"
or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy.  Readers are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve significant risks and uncertainties, and
that actual results may vary materially from those in the forward-looking
statements as a result of various factors.  These factors include the
effectiveness of management's strategies and decisions, general economic
and business conditions, developments in technology, new or modified
statutory or regulatory requirements and changing prices and market
conditions.  This report  identifies other factors that could cause such
differences.  No assurance can be given that these are all of the factors
that could cause actual results to vary materially from the forward-looking
statements.

     TIMBERLANDS

          The Company owns and manages approximately 193,000 acres of
virtually contiguous commercial timberlands 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, are located in close proximity
to the Company's four sawmills and contain an extensive network of roads. 
Approximately 179,000 acres of the Company's timberlands are owned by
Scotia Pacific (the "Scotia Pacific Timberlands"), a special purpose
Delaware corporation and wholly owned subsidiary of the Company.  The
Company 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").  The Company  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 the Company, Scotia
Pacific and Britt Lumber Co., Inc. ("Britt"), an affiliate of the Company. 
Approximately 6,000 acres of the Company's timberlands are owned by Salmon
Creek.

          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 engages 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.  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.  During 1996, the
Company planted an estimated 529,000 redwood and Douglas-fir 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 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 a
critical habitat designation, sustained yield regulations and similar
matters concerning the Company and its operations.  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 better 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.

          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 systems chosen are those which will most
closely emulate those natural processes that result in the cycling of
natural forest stands.  Due to the magnitude of its timberlands and
conservative application of silvicultural systems, 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 that 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 289 million
board feet, with approximately 291, 290, and 286 million board feet
produced in 1996, 1995 and 1994, respectively.  The Fortuna sawmill
produces primarily common grade lumber.  During 1996, the Fortuna mill
produced approximately 99 million board feet of lumber.  The Carlotta
sawmill produces both common and upper grade redwood lumber.  During 1996,
the Carlotta mill produced approximately 63 million board feet of lumber. 
Sawmills "A" and "B" are both located in Scotia.  Sawmill "A" processes
Douglas-fir logs and Sawmill "B" primarily processes large diameter redwood
logs.  During 1996, Sawmills "A" and "B" produced 88 million and 41 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 redwood lumber industry's
largest variety of customized trim and fascia patterns.  The Company also
enhances the value of some grades of 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 plants.  The result is a standard sized
upper grade product which can be sold at a significant premium over common
grade products.  The Company has installed a lumber remanufacturing
facility at its mill in Fortuna which processes low grade redwood common
lumber into value-added, higher grade redwood fence and related products. 

          The Company dries the majority of its upper grade lumber before
it is sold.  Upper grades of redwood lumber are generally air-dried for
three to twelve 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 27 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 1996, the sale of surplus power
accounted for approximately 1% of the Company's total revenues.

     PRODUCTS

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

<TABLE>

<CAPTION>
                                                YEAR ENDED DECEMBER 31, 1996              YEAR ENDED DECEMBER 31, 1995
                                         ----------------------------------------- -----------------------------------------
                                           % OF TOTAL                                % OF TOTAL
                                             LUMBER      % OF TOTAL                    LUMBER      % OF TOTAL
                                           PRODUCTION      LUMBER      % OF TOTAL    PRODUCTION      LUMBER      % OF TOTAL
                 PRODUCT                     VOLUME       REVENUES      REVENUES       VOLUME       REVENUES      REVENUES
                                         ------------- ------------- ------------- ------------- ------------- -------------
<S>                                      <C>           <C>           <C>           <C>           <C>           <C>
Upper grade redwood lumber                         13%           33%           28%           17%           38%           31%
Common grade redwood lumber                        53%           42%           35%           54%           40%           32%
                                         ------------- ------------- ------------- ------------- ------------- -------------
     Total redwood lumber                          66%           75%           63%           71%           78%           63%
                                         ------------- ------------- ------------- ------------- ------------- -------------
Upper grade Douglas-fir lumber                      3%            6%            5%            3%            5%            4%
Common grade Douglas-fir lumber                    27%           16%           13%           23%           14%           11%
                                         ------------- ------------- ------------- ------------- ------------- -------------
     Total Douglas-fir lumber                      30%           22%           18%           26%           19%           15%
                                         ------------- ------------- ------------- ------------- ------------- -------------
Other grades of lumber                              4%            3%            2%            3%            3%            4%
                                         ------------- ------------- ------------- ------------- ------------- -------------
     Total lumber                                 100%          100%           83%          100%          100%           82%
                                         ============= ============= ============= ============= ============= =============

Logs                                                                            9%                                        7%
                                                                     =============                             =============

Hardwood chips                                                                  2%                                        4%
Softwood chips                                                                  4%                                        5%
                                                                     -------------                             -------------
     Total wood chips                                                           6%                                        9%
                                                                     =============                             =============

</TABLE>

          Lumber
          The Company primarily produces and markets lumber.  In 1996, the
Company sold approximately 307 million board feet of lumber, which
accounted for approximately 83% 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 that permit it to be sold at a
premium to many other wood products.  Such characteristics include its
natural beauty, superior ability to retain paint and other finishes,
dimensional stability and innate resistance to decay, insects and
chemicals.  Typical applications include exterior siding, trim and fascia
for both residential and commercial construction, outdoor furniture, decks,
planters, retaining walls and other specialty applications.  Redwood also
has a variety of industrial applications because of its chemical resistance
and because it does not impart any taste or odor to liquids or solids.

          Upper grade redwood lumber, which is derived primarily from large
diameter logs and is characterized by an absence of knots and other defects,
is used primarily in distinctive interior and exterior applications.  The
overall supply of upper grade lumber has been diminishing due to increasing
environmental and regulatory restrictions and other factors, and the
Company's 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--Background."  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
majority of these logs are purchased by Britt. The balance are purchased by
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 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, 1996 and
1995 was approximately $21.3 million and approximately $11.5 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 66% of these sales in
1996.  Common grades of Douglas-fir lumber are sold primarily in
California.  In 1996, the largest and top five of the Company's customers
accounted for approximately 9% and 24%, respectively, of total revenues. 
Exports of lumber accounted for approximately 5% of the Company's total
revenues in 1996.  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
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, 1997, 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.  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 $112,000 per month in
1996 and is expected to be approximately $115,200 per month in 1997. 
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 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 the purpose of computing yield taxes and
generally are released every six months.  As Pacific Lumber 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 the purchase
price is therefore 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 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

          This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.

          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.  Moreover, these laws and regulations
are modified from time to time and are subject to judicial and
administrative interpretation.  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 and Federal Clean
Water Act require, in part, that the Company's operations be conducted so
as to reasonably protect the water quality of nearby rivers and streams. 
The Company is subject to certain pending matters described below which
could have a material adverse effect on its consolidated financial
position, results of operations or liquidity.  There can be no assurance
that certain pending or future legislation, governmental regulations or
judicial or administrative decisions will not have a material adverse
effect on the Company.

          In March 1992, the marbled murrelet was approved for listing as
endangered under the CESA.  In October 1992, the United States 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
6,600 acres (all containing virgin or residual old growth timber) which are
occupied marbled murrelet habitat.  The Company is unable to predict when
or if it will be able to harvest this acreage.

          In May 1996, the USFWS published its final designation of
critical habitat for the marbled murrelet (the "Final Designation"),
designating over four million acres as critical habitat for the marbled
murrelet.  Although nearly all of the designated habitat is public land,
approximately 33,000 acres of the Company's timberlands are included in the
Final Designation, the substantial portion of such acreage being young
growth timber.  The bulk of the Company's 6,600 acres of occupied marbled
murrelet habitat falls within the 33,000 acres of the Company's timberlands
included in the Final Designation.  In order to mitigate the impact of the
Final Designation, particularly with respect to timberlands occupied by the
marbled murrelet, the Company over the last few years has attempted to
develop a habitat conservation plan for the marbled murrelet (the "Murrelet
HCP").  Due to, among other things, the unfavorable response of the USFWS
to the Company's initial Murrelet HCP efforts, the Company and its
subsidiaries filed two actions (the "Takings Litigation") alleging that
certain portions of their timberlands have been "taken" and seeking just
compensation. See Item 3. "Legal Proceedings" for a description of the
Takings Litigation. Pursuant to an agreement entered into by the Company, 
MAXXAM, the United States, and the State of California on September 28,
1996 (the "Headwaters Agreement") and described below under "--Headwaters
Agreement," the Takings Litigation has been stayed at the request of the
parties.

          It is impossible for the Company to determine the potential
adverse effect of the Final Designation on the Company's consolidated
financial position, results of operations or liquidity until such time as
various regulatory and legal issues are resolved; however, if the Company
is unable to harvest, or is severely limited in harvesting, on timberlands
designated as critical habitat for the marbled murrelet, such effect could
be materially adverse to the Company.  If the Company is unable to harvest
or is severely limited in harvesting, it intends to seek just compensation
from the appropriate governmental agencies on the grounds that such
restrictions constitute a governmental taking.  There continue to be other
regulatory actions and lawsuits seeking to have other species listed as
threatened or endangered under the ESA and/or the CESA and to designate
critical habitat for such species.  For example, the National Marine
Fisheries Service  has announced that by April 25, 1997 it will make a
final determination whether to list the coho salmon under the ESA in
northern California, including, potentially, lands owned by the Company. It
is uncertain what impact, if any, such listings and/or designations of
critical habitat would have on the Company's consolidated financial
position, results of operations or liquidity.

          In 1994, the BOF adopted certain regulations regarding compliance
with long-term sustained yield ("LTSY") objectives.  These regulations
require that timber companies project timber growth and harvest on their
timberlands over a 100-year planning period and establish a LTSY harvest
level that takes into account environmental and economic considerations.
The sustained yield plan ("SYP") must demonstrate that the average annual
harvest over any rolling ten-year period will not exceed the LTSY harvest
level and that the Company's projected timber inventory is capable of
sustaining the LTSY harvest level in the last decade of the 100-year
planning period.  On December 17, 1996, the Company submitted a proposed
SYP to the CDF.  The proposed SYP sets forth an LTSY harvest level
substantially the same as the Company's average annual timber harvest over
the last six years.  The proposed SYP also indicates that the Company's
average annual timber harvest during the first decade of the SYP would
approximate the LTSY harvest level. During the second decade of the
proposed SYP, the Company's average annual timber harvest would be
approximately 8% less than that proposed for the first decade. The SYP,
when approved, will be valid for ten years.  Thereafter, revised SYPs will
be prepared every decade that will address the LTSY harvest level based
upon reassessment of changes in the resource base and protection of public
resources.

          The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement will be consummated and that the Multi-Species HCP
(as defined below under "--Headwaters Agreement") will permit the Company
to harvest its timberlands (including over the next two decades a
substantial portion of its old growth timberlands not transferred pursuant
to the Headwaters Agreement) to achieve maximum sustained yield.  The SYP
is subject to review and approval by the CDF, and there can be no assurance
that the SYP will be approved in its proposed form.  Until the SYP is
reviewed and approved, the Company is unable to predict the impact that
these regulations will have on its future timber harvesting practices. It
is possible that the results of the review and approval process could
require the Company to reduce its timber harvest in future years from the
harvest levels set forth in the proposed SYP.  The Company believes it
would be able to mitigate the effect of any required reduction in harvest
level by acquisitions of additional timberlands (and making corresponding
amendments to the SYP); however, there can be no assurance that the Company
would be able to do so and the amount of such acquisitions would be limited
by the Company's available financial resources.  The Company is unable to
predict the ultimate impact the sustained yield regulations will have on
its future financial position, results of operations or liquidity.

          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 the Company's THPs and other timber harvesting
operations, and the Company expects that such groups and individuals will
continue to file such objections.  In addition, lawsuits are pending or
threatened which seek to prevent the Company from implementing certain of
its approved THPs or which challenge other operations by the Company. 
These challenges have severely restricted the Company's ability to harvest
old growth timber on its property.  To date, challenges with respect to the
Company's THPs relating to young growth timber and to its other operations
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 timber harvesting and other operations 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, they have not had a
material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.  Nevertheless, it is impossible to
predict the future nature or degree of such challenges or their ultimate
impact on the Company's consolidated financial position, results of
operations or liquidity.

          In early 1997, the Environmental Protection Agency ("EPA")
entered into a consent decree agreeing to establish limits on
sedimentation, temperature and other factors (i.e. non-point source total
maximum daily loadings, "TMDL") under the Federal Clean Water Act for
seventeen northern California rivers and certain of their tributaries,
including rivers within the Company's timberlands.  The TMDL scheme will be
primarily aimed at protecting fish habitat.  It is impossible to predict the
ultimate impact this consent decree will have on the Company's consolidated
financial position, results of operations or liquidity.

          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 northern spotted owl management plan
(the "Federal Owl Plan").  The Federal Owl Plan, as amended from time to
time, is currently applicable through 1999 and the USFWS expressed its
agreement that operations consistent with the Federal Owl Plan would not
result in the taking of any owls.  The Company has also developed a Spotted
Owl Resource Plan (the "State Owl Plan"), and the California Department of
Fish and Game has expressed its agreement that operations consistent with
the State Owl Plan would not result in the taking of any owls.  By
incorporating the Federal Owl Plan or the State Owl Plan into each THP
filed with the CDF, the Company is able to expedite the approval time with
respect to its THPs.  The plaintiffs in the Marbled Murrelet action have
requested and received injunctive relief with respect to certain THPs
involving the Federal Owl Plan.  See Item 3. "Legal Proceedings--Timber
Harvesting Litigation."  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 or impact on the Company.

          Laws, regulations and related judicial and administrative
interpretations 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.  It is impossible to predict the content of any such
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 impossible, however, to assess the effect of
such matters on the Company's consolidated financial position, operating
results or liquidity.

     HEADWATERS AGREEMENT 

          On September 28, 1996, the Company (on behalf of itself, its
subsidiaries and affiliates) and MAXXAM (collectively, "the Pacific Lumber
Parties") entered into the Headwaters Agreement with the United States and
California.  The Headwaters Agreement provides the framework for the
acquisition by the United States and California of certain timberlands of
the Company.

          The Headwaters Agreement requires the parties to use their
respective best, good faith efforts to achieve certain items (the
"Specified Items").  The Specified Items include the transfer to the United
States and California of approximately 5,600 acres of the Company's
timberlands commonly referred to as the Headwaters Forest and the Elk Head
Springs Forest and related buffer zones (respectively, the "Headwaters
Forest" and the "Elk Head Forest" and, collectively, the "Headwaters
Timberlands").  A substantial portion of the Headwaters Timberlands
consists of virgin old growth timberlands.  Approximately 4,900 of these
acres are owned by Salmon Creek.  The remaining acreage is owned by Scotia
Pacific (the Company having harvesting rights on a portion of the acreage).

          The Headwaters Timberlands would be transferred in exchange for
(a) property and other consideration (possibly including cash) from both
the United States and California having an aggregate fair market value of
$300 million and (b) 7,755 acres of adjacent timberlands to be acquired by
the United States and California from a third party (the "Elk River
Timberlands").  The United States and California would also acquire and
retain an additional 1,900 acres of timberlands from such third party.  An
additional Specified Item is the expedited development and submission by
the Company and processing by the United States of an incidental take
permit ("Permit") to be based upon a habitat conservation plan for
multiple species ("Multi-Species HCP") covering (a) the timberlands and
timber harvesting rights which Pacific Lumber will own after consummation
of the Headwaters Agreement (the "Resulting Pacific Lumber Timber
Property") and (b) the Headwaters Timberlands and the 1,900 acres of Elk
River Timberlands retained by the United States and California (both as
conserved habitat).  The agreement also requires expedited processing by
California of an SYP covering the Resulting Pacific Lumber Timber Property. 
The Headwaters Agreement contains various provisions regarding the
processing of the Multi-Species HCP, the Permit and the SYP.  The Specified
Items also require, among other things, dismissal with prejudice at closing
of the Takings Litigation pending against the United States and California.
See Item 3."Legal Proceedings--Timber Harvesting Litigation."  Pursuant to
the Headwaters Agreement, the parties have stayed the Takings Litigation,
subject to certain rights of the parties to terminate the stay.

          The Headwaters Agreement also requires the United States and/or
California to provide to the Company a list of property interests owned or
controlled by the United States and/or California meeting certain
conditions, including that they have a good faith estimated fair market
value equal to or in excess of $300 million.  On December 5, 1996, the
United States and California each furnished a list of properties for the
Company's review and approval.  Neither list was accompanied by the
requisite background information, although both lists did indicate that
additional information would be made available.  The list of United States
properties consisted of oil and gas interests in Kern County, California,
approximately 3,000 acres of young growth timberlands in Humboldt,
Mendocino and Trinity Counties in California, and surplus acreage next to a
federal office building in Laguna Niguel, California.

           In February 1997, after full and careful consideration, Pacific
Lumber notified California that its Presented Properties were not
acceptable due to, among other things, various physical problems and
encumbrances on the properties, certain properties having been withdrawn by
the state and public opposition to the transfer of some of the properties. 
Pacific Lumber also advised California that it should proceed with the
steps necessary to assure that California can provide cash for its portion
of the consideration to be paid to Pacific Lumber.  There have been ongoing
discussions between the Pacific Lumber Parties and the United States
regarding the properties or other consideration to be furnished by the
United States.

          As part of the Headwaters Agreement, the Pacific Lumber Parties
agreed to not enter the Headwaters Forest or the Elk Head Forest to conduct
logging operations, including salvage logging (the "Moratorium").  The
Moratorium was to terminate if by July 28, 1997 the parties had not
achieved the Specified Items to their respective satisfaction.  On March
11, 1997, the Pacific Lumber Parties agreed to amend the Headwaters
Agreement to extend the period of time during which these closing
conditions must be met to February 17, 1998.  The extension is, however,
subject to the achievement of certain milestones toward completion of the
Headwaters Agreement. The parties have agreed to execute an amendment to
the Headwaters Agreement evidencing these modifications.

          Closing of the Headwaters Agreement is subject to various
conditions, including (a) completion of the Specified Items, (b) approval
of a Multi-Species HCP and SYP and issuance of the Permit, each in form and
substance satisfactory to the Company, (c) the issuance by the Internal
Revenue Service and the California Franchise Tax Board of closing
agreements in form and substance sought by and satisfactory to the Pacific
Lumber Parties, (d) the absence of a judicial decision in any litigation
brought by third parties that any party reasonably believes will
significantly delay or impair the transactions described in the Headwaters
Agreement, and (e) approval by the boards of directors of the applicable
Pacific Lumber Parties.  The Headwaters  Agreement also provides that the
parties will cooperate and act in good faith to preserve diligently the
Headwaters Agreement, the Multi-Species HCP, the Permit and the SYP against
third party challenge.  The parties to the Headwaters Agreement are working
to satisfy these conditions; however, there can be no assurance that the
Headwaters Agreement will be consummated.

ITEM 2.        PROPERTIES

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

ITEM 3.        LEGAL PROCEEDINGS

          This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.

     TIMBER HARVESTING LITIGATION

          Various actions, similar to each other, have been filed against
the Company and its subsidiaries, as well as MAXXAM, MGI, various state
officials and others, alleging, among other things, violations of the
Forest Practice Act, 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.

          On September 15, 1995, an action entitled Marbled Murrelet, et
al. v. Bruce Babbitt, et al.  (No. C-95-3261) (the "Marbled Murrelet
action") was filed in the U.S. District Court for the Northern District of
California.  This action relates to, among other things, exemptions for
forest health which Pacific Lumber and its subsidiaries had previously
filed covering their entire timberlands.  These exemptions allow Pacific
Lumber to harvest dead, dying or diseased trees ("exempt harvesting
operations").  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 exempt harvesting operations will contribute to the
destruction of habitat for the marbled murrelet and the northern spotted
owl.  After the U.S. Ninth Circuit Court of Appeals reversed a preliminary
injunction granted by the trial court enjoining  the exempt harvesting
operations,  the plaintiffs asked for leave to amend their pleadings.  On
April 3, 1996, the trial court granted a preliminary injunction preventing
harvesting on eight already-approved THPs to the extent that they rely on
the Federal Owl Plan.  In addition to appealing the preliminary injunction,
the Company has obtained regulatory reapproval of seven of the eight
enjoined THPs without reliance on the Federal Owl Plan and has, to date,
confirmed with the trial court that six of those THPs are no longer subject
to the preliminary injunction.  On November 4, 1996, the U.S. Ninth Circuit
Court of Appeals heard oral arguments concerning Pacific Lumber's appeal
but has not yet rendered a decision on this matter.  In January 1997, the
trial court dismissed plaintiffs' claims that the Company had and was
causing "takes" of the marbled murrelet and northern spotted owl.

          On November 15, 1996, an action entitled Redway Forest Defense,
et al. v. CDF, et al. (No. 96CP0856; the "Redway action") was filed against
Pacific Lumber and others in the Superior Court of Humboldt County,
California.  This action seeks to overturn the CDF's approval of THP 96-036
which permits harvesting of approximately 63 acres of primarily old growth
timber.  The action alleges, among other things, violations of CEQA
relating primarily to salmon fisheries.  

          The Company does not believe the matters described above will
have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.  See "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.

          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 the Environmental Protection Information Center ("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.  In February 1995, the
Court 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.  Upon appeal, the U.S. Ninth Circuit Court of
Appeals affirmed the District Court's decision.  Pacific Lumber
subsequently appealed the matter to the U.S. Supreme Court, but on February
19, 1997, the U. S. Supreme Court ruled that it would not consider Pacific
Lumber's appeal.  In March 1997, the Company paid approximately $1.4
million in legal fees which the trial court had awarded to the plaintiffs.

          On April 22, 1996, Salmon Creek filed a lawsuit entitled Salmon
Creek Corporation v. California State Board of Forestry, et al. (No.
96CS01057) in the Superior Court of Sacramento County.  This action seeks
to overturn the BOF's decision denying approval of a THP for approximately
8 acres of virgin old growth timber in the Headwaters Forest.  Salmon Creek
seeks a court order requiring approval of the THP so that it may harvest in
accordance with the THP. Salmon Creek also seeks constitutional "just
compensation" damages to the extent that its old growth timber within and
surrounding the THP has been "taken" by reason of this regulatory denial
and previous actions of governmental authorities. In addition, on May 7,
1996, Pacific Lumber, Scotia Pacific and Salmon Creek filed a lawsuit
entitled The Pacific Lumber Company, et al. v. The United States of America
(No. 96-257L) in the United States Court of Federal Claims.  The suit
alleges that the federal government has "taken" over 3,800 acres of Pacific
Lumber's old growth timberlands (including the Headwaters Forest) through
its application of the ESA.  Pacific Lumber, Scotia Pacific and Salmon
Creek seek constitutional "just compensation" damages for the taking of
these timberlands by the federal government's actions. The Court in each of
these actions (collectively, the "Takings Litigation") has granted the
parties' agreed motions to stay the actions pursuant to the Headwaters
Agreement.  These actions would be dismissed if the Headwaters Agreement is
consummated.  See Item 1. "Business--Headwaters Agreement" for a
description of the Headwaters Agreement.

     USAT MATTER

          In January 1995, an action entitled U.S., ex rel., Martel v.
Hurwitz, et al. (the "Martel action") was filed in the U.S. District Court
for the Northern District of California (No. C950322) 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.  The
suit alleges that defendants made false statements and claims in violation
of the Federal False Claims Act in connection with United Savings
Association of Texas ("USAT").  Plaintiff alleges, among other things, that
defendants used the federally insured assets of 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.  In August 1996, the Court transferred this matter to the U.S.
District Court for the Southern District of Texas in which court the
Federal Deposit Insurance Corporation has brought another action arising
out of the USAT matters.  The parties are awaiting a ruling or hearing on
defendants' motion to dismiss.  The Company believes that this matter should
not have a material adverse effect on the Company's consolidated financial
position, or results of operations or liquidity.

     OTHER LITIGATION MATTERS

          The Company is involved in other claims, lawsuits and other
proceedings.  While uncertainties are inherent in the final outcome of such
matters and it is presently impossible to determine the actual costs that
ultimately may be incurred, 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.

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

          All of the Company's common stock is owned indirectly by MGI,
which is a wholly owned subsidiary of MGHI, which in turn is wholly owned
by 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 cash dividends on its common stock in the amount of $20.5
million, $22.0 million and $24.5 million in 1996, 1995 and 1994,
respectively.  As of December 31, 1996, approximately $17.2 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

BACKGROUND

          This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.

          The Company's business is seasonal in that the forest products
business generally experiences lower first quarter sales due largely to the
general decline in construction-related activity during the winter months. 
The following should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto appearing in Item 8.

          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 virgin old growth timber on its property, the
Company's supply of upper grade lumber has decreased in some premium
product categories. Furthermore, logging costs have increased primarily due
to the harvest of smaller diameter logs and compliance with environmental
regulations relating to the harvesting of timber and litigation costs
incurred in connection with certain THPs filed by the Company.  The Company
has been able to lessen the impact of these factors by augmenting its
production facilities to increase its recovery of upper grade lumber from
smaller diameter logs and by increasing production capacity for manufactured
upper grade lumber products through its end and edge glue facility (which
was expanded during 1994).  At this facility knot-free pieces of lumber are
assembled into wider or longer pieces.  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 also increased shipments
of air seasoned, primed and specialty cut lumber which are examples of value
added products.  Additionally, 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, and installation of a lumber
remanufacturing facility at its Fortuna lumber mill.  However, unless the
Company is able to sustain the harvest level of old growth trees, the
Company expects that its production of premium upper grade lumber products
will decline and that its manufactured lumber products will constitute a
higher percentage of its shipments of upper grade lumber products.  See
also "--Trends" and Item 1. "Business--Regulatory and Environmental
Factors."

RESULTS OF OPERATIONS

          The following table presents selected operational and financial
information for the years ended December 31, 1996, 1995 and 1994.

<TABLE>

<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                        -----------------------------------------
                                                             1996          1995          1994
                                                        ------------- ------------- -------------
                                                                 (IN MILLIONS OF DOLLARS,
                                                               EXCEPT SHIPMENTS AND PRICES)
<S>                                                     <C>           <C>           <C>
Shipments:
     Lumber: (1)
          Redwood upper grades                                   49.7          46.5          52.9
          Redwood common grades                                 159.4         146.8         144.3
          Douglas-fir upper grades                               10.6           7.4           8.6
          Douglas-fir common grades                              74.9          64.6          54.2
          Other                                                  12.5          11.4          12.1
                                                        ------------- ------------- -------------
               Total lumber                                     307.1         276.7         272.1
                                                        ============= ============= =============
     Logs (2)                                                    49.4          40.3          34.4
                                                        ============= ============= =============
     Wood chips (3)                                             187.2         192.8         197.7
                                                        ============= ============= =============
Average sales price:
     Lumber: (4)
          Redwood upper grades                          $       1,380 $       1,495 $       1,443
          Redwood common grades                                   542           496           481
          Douglas-fir upper grades                              1,154         1,301         1,420
          Douglas-fir common grades                               439           392           444
     Logs (4)                                                     450           396           567
     Wood chips (5)                                                79           107            86
Net sales:
     Lumber, net of discount                            $       202.8 $       181.4 $       186.0
     Logs                                                        22.2          15.9          19.5
     Wood chips                                                  14.8          20.7          17.1
     Cogeneration power                                           3.3           2.5           3.5
     Other                                                        1.7           1.4           1.3
                                                        ------------- ------------- -------------
          Total net sales                               $       244.8 $       221.9 $       227.4
                                                        ============= ============= =============
Operating income                                        $        66.3 $        64.6 $        70.4
                                                        ============= ============= =============
Operating cash flow (6)                                 $        93.9 $        90.5 $        95.9
                                                        ============= ============= =============
Income before income taxes and extraordinary item       $        16.1 $        13.0 $        26.3
                                                        ============= ============= =============
Net income                                              $        9.9  $         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>

          Net sales
          Net sales for 1996 increased compared to 1995 principally due to
higher lumber shipments in all categories and higher average realized
prices for common grade lumber.  Partially offsetting these improvements
were lower average realized prices for upper grade redwood lumber and wood
chips.  Shipments of fencing and other value-added common lumber products
from the Company's new remanufacturing facility were a contributing factor
in the improved redwood common lumber realizations.

          Net sales for 1995 decreased compared to 1994.  Decreased
shipments of upper grade redwood lumber, lower average realized prices for
common grade Douglas-fir lumber and logs, decreased shipments of redwood
common lumber and lower sales of electrical power were largely offset by
increased shipments of common grade Douglas-fir lumber and logs, increased
sales of wood chips and higher average realized prices for both common and
upper grades of redwood lumber.

          Operating income
          Operating income, after excluding from 1995 cost of sales a $1.5
million settlement of business interruption insurance claims related to an
April 1992 earthquake, increased in 1996 due to the increase in net sales
discussed above.  Increases in costs of goods sold reflect both the impact
of additional manufacturing costs attributable to the increased shipments
of manufactured lumber products, higher shipments of lower margin lumber
and the increasing cost of regulatory compliance for the Company's timber
harvesting operations.

          Operating income for 1995 decreased compared to 1994.  This
decrease was primarily due to the higher cost and lower sales of lumber,
logs and electrical power, partially offset by increased sales and margins
on wood chips.  Cost of lumber sales for 1995 was unfavorably impacted by
higher purchases of logs from third parties, partially offset by improved
sawmill productivity. 

          Income before income taxes and extraordinary item
          Income before income taxes for 1996 increased from 1995,
primarily as a result of the increase in operating income as discussed
above and lower interest expense.  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 10 to the Consolidated Financial Statements).

          Provision in lieu of income taxes
          The provision in lieu of income taxes for 1996 and 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

          This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.

          A significant portion of the Company's consolidated assets are
owned by Scotia Pacific.  Moreover, Scotia Pacific provides a substantial
portion of the Company's log requirements.  The Company harvests and
purchases logs from Scotia Pacific's timberlands at prices established
pursuant to a Master Purchase Agreement.  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.  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, once Scotia Pacific's debt
service, operating and capital expenditure requirements have been met,
substantially all of Scotia Pacific's available cash is periodically
distributed to the Company.  Scotia Pacific paid $76.9 million, $59.0
million and $88.9 million of dividends to the Company during the years
ended December 31, 1996, 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, 1996, 1995 and 1994, the
Company's operating income before depletion and depreciation ("operating
cash flow") amounted to $93.9 million, $90.5 million and $95.9 million,
respectively, which exceeded interest incurred on all of its indebtedness
in those years by $39.5 million, $35.0 million and $39.8 million,
respectively.

          The indentures governing the Senior Notes, the Timber Notes and
the Company's revolving credit agreement (the "Revolving Credit Agreement")
contain various covenants which, among other things, limit the ability to
incur additional indebtedness and liens, to engage in transactions with
affiliates, to pay dividends and to make investments.  The Company can pay
dividends in an amount that is generally equal to 50% of the Company's
consolidated net income plus 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, 1996,
under the most restrictive of these covenants, approximately $17.2 million
of dividends could be paid by the Company.  The Company paid an aggregate
of $20.5 million,  $22.0 million and $24.5 million of dividends in 1996,
1995 and 1994, respectively.

          All of the Company's issued and outstanding common stock is
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.

          Borrowings under the Revolving Credit Agreement, which expires on
May 31, 1999, are secured by the Company's trade receivables and
inventories, with interest currently 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 acquisitions of timberlands. 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, 1996,
$47.0 million of borrowings was available under the Revolving Credit
Agreement, of which $4.7 million was available for letters of credit and
$30.0 million was restricted to timberland acquisitions.  No borrowings
were outstanding as of December 31, 1996, and letters of credit outstanding
amounted to $10.3 million.  The Revolving Credit Agreement contains
covenants substantially similar to those contained in the indenture
governing the Senior Notes.

          Capital expenditures during 1994 -- 1996 were made to improve
production efficiency, reduce operating costs and, to a lesser degree,
acquire additional timberlands.  The Company's capital expenditures were
$14.6 million, $9.1 million and $11.0 million for the years ended December
31, 1996, 1995 and 1994, respectively.  Capital expenditures, excluding
expenditures for timberlands, are expected to be $11.0 million in 1997 and
are estimated to be between $9.5 million and $14.5 million per year for the
1998 -- 1999 period.  The Company may purchase additional timberlands from
time to time as appropriate opportunities arise, and such purchases could
exceed the historically modest levels of such acquisitions.

          As of December 31, 1996, the Company had consolidated working
capital of $55.2 million and long-term debt of $525.6 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 $68.9
million and $540.4 million, respectively, at December 31, 1995.  The
decrease in long-term debt was primarily due to principal payments on the
Timber Notes.  The Company and its subsidiaries anticipate that cash from
operations, together with existing cash and available sources of financing,
will be sufficient to fund their working capital and capital expenditure
requirements for the next year.  With respect to their long-term liquidity,
the Company and its subsidiaries believe that their existing cash and cash
equivalents, together with its ability to generate sufficient cash from
operations and their ability to obtain both short and long-term financing,
should provide sufficient funds to meet their working capital and capital
expenditure requirements.  However, due to their highly leveraged
condition, the Company and its subsidiaries are more sensitive than less
leveraged companies to factors affecting their operations, including
governmental regulation affecting timber harvesting practices (see "--
Trends" below), increased competition from other lumber producers or
alternative building products and general economic conditions.

TRENDS

          This section contains statements which constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.  See Item 1. "Business--General" for cautionary
information with respect to such forward-looking statements.

          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.  Moreover, these
laws and regulations are modified from time to time and are subject to
judicial and administrative interpretation.  Compliance with such laws,
regulations and judicial and administrative interpretations, together with
the cost of litigation incurred in connection with certain timber
harvesting operations of the Company, have increased the cost of logging
operations.  The Company is subject to certain pending matters which could
have a material adverse effect on its consolidated financial position,
results of operations or liquidity.  There can be no assurance that these
pending matters or future governmental regulations, legislation or judicial
or administrative decisions would not materially and adversely affect the
Company.  See Item 1. "Business--Regulatory and Environmental Factors";
Item 3. "Legal Proceedings--Timber Harvesting Litigation" and Notes 8 and 9
to the Consolidated Financial Statements for further information regarding
regulatory and environmental factors affecting the Company's operations.
See also Item 1. "Business-Headwaters Agreement" for the recent agreement
to extend the Headwaters Agreement to February 17, 1998.

          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.

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTAL 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, 1996 and 1995, 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, 1996.  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, 1996 and
1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.


                                        ARTHUR ANDERSEN LLP


San Francisco, California
January 24, 1997

                THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES

                         CONSOLIDATED BALANCE SHEET
                         (IN THOUSANDS OF DOLLARS)

<TABLE>

<CAPTION>
                                                                                              DECEMBER 31,
                                                                                      ---------------------------
                                                                                           1996          1995
                                                                                      ------------- -------------
                                        ASSETS
<S>                                                                                   <C>           <C>
Current assets:
     Cash and cash equivalents                                                        $     26,027  $     26,480 
     Receivables:
          Trade                                                                             18,080        19,688 
          Other                                                                              2,514         1,565 
     Inventories                                                                            65,690        75,580 
     Prepaid expenses and other current assets                                               5,329         6,933 
                                                                                      ------------- -------------
               Total current assets                                                        117,640       130,246 
Timber and timberlands, net of accumulated depletion of $221,063 and $204,856,
      respectively                                                                         324,986       337,390 
Property, plant and equipment, net of accumulated depreciation of $73,772 and
     $65,276, respectively                                                                  95,515        93,726 
Deferred financing costs, net                                                               20,003        22,397 
Deferred income taxes                                                                       34,639        41,958 
Restricted cash                                                                             29,967        31,367 
Other assets                                                                                 6,424         5,502 
                                                                                      ------------- -------------
                                                                                      $    629,174  $    662,586 
                                                                                      ============= =============

                        LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
     Accounts payable                                                                 $      3,765  $      3,898 
     Accrued compensation and related benefits                                               9,673         9,241 
     Accrued interest                                                                       20,211        20,666 
     Deferred income taxes                                                                  10,173        10,244 
     Other accrued liabilities                                                               2,325         3,077 
     Long-term debt, current maturities                                                     16,258        14,195 
                                                                                      ------------- -------------
               Total current liabilities                                                    62,405        61,321 
Long-term debt, less current maturities                                                    555,596       571,812 
Other noncurrent liabilities                                                                25,887        33,613 
                                                                                      ------------- -------------
               Total liabilities                                                           643,888       666,746 
                                                                                      ------------- -------------

Contingencies

Stockholder's deficit:
     Common stock, $.01 par value, 100 shares authorized and issued                             --            -- 
     Additional capital                                                                    157,520       157,520 
     Accumulated deficit                                                                  (172,234)     (161,680)
                                                                                      ------------- -------------
               Total stockholder's deficit                                                 (14,714)       (4,160)
                                                                                      ------------- -------------
                                                                                      $    629,174  $    662,586 
                                                                                      ============= =============

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

</TABLE>

                THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES

                    CONSOLIDATED STATEMENT OF OPERATIONS
                         (IN THOUSANDS OF DOLLARS)

<TABLE>

<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                                       -----------------------------------------
                                                                            1996          1995          1994
                                                                       ------------- ------------- -------------
<S>                                                                    <C>           <C>           <C>
Net sales:
     Lumber and logs                                                   $    225,017  $    197,320  $    205,504 
     Other                                                                   19,832        24,619        21,875 
                                                                       ------------- ------------- -------------
                                                                            244,849       221,939       227,379 
                                                                       ------------- ------------- -------------
Operating expenses:
     Cost of goods sold (exclusive of depletion and depreciation)           136,335       116,445       116,316 
     Selling, general and administrative expenses                            14,570        14,992        15,190 
     Depletion and depreciation                                              27,644        25,927        25,485 
                                                                       ------------- ------------- -------------
                                                                            178,549       157,364       156,991 
                                                                       ------------- ------------- -------------

Operating income                                                             66,300        64,575        70,388 
Other income (expense):
     Investment, interest and other income                                    4,209         3,928        12,022 
     Interest expense                                                       (54,456)      (55,462)      (56,067)
                                                                       ------------- ------------- -------------
Income before income taxes and extraordinary item                            16,053        13,041        26,343 
Provision in lieu of income taxes                                            (6,107)       (6,480)       (1,429)
                                                                       ------------- ------------- -------------
Income before extraordinary item                                              9,946         6,561        24,914 
Extraordinary item:
     Loss on litigation settlement, net of related credit in lieu of
          income taxes of $6,312                                                 --            --       (14,866)
                                                                       ------------- ------------- -------------
Net income                                                             $      9,946  $      6,561  $     10,048 
                                                                       ============= ============= =============

<FN>
The accompanying notes are an integral part of these financial statements.
</TABLE>
                THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES

                    CONSOLIDATED STATEMENT OF CASH FLOWS
                         (IN THOUSANDS OF DOLLARS)

<TABLE>

<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                                       -----------------------------------------
                                                                            1996          1995          1994
                                                                       ------------- ------------- -------------
<S>                                                                    <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                                        $      9,946  $      6,561  $     10,048 
     Adjustments to reconcile net income to net cash provided by
          operating activities:
          Depletion and depreciation                                         27,644        25,927        25,485 
          Net sales of marketable securities                                     52           478         6,619 
          Amortization of deferred financing costs                            2,394         2,269         2,197 
          Net gains on marketable securities                                    (52)         (478)         (984)
          Net loss (gain) on asset dispositions                                   6           419          (830)
          Increase (decrease) in cash resulting from changes in:
               Accrued and deferred income taxes                              7,135         7,572         1,627 
               Accounts payable                                                (164)          589           949 
               Receivables                                                      803         5,913        (8,742)
               Other liabilities                                             (8,046)        7,406        (2,027)
               Inventories, net of depletion                                  7,304        (7,301)       (1,608)
               Prepaid expenses and other current assets                        682        (3,273)         (721)
               Accrued interest                                                (455)         (443)         (518)
          Other                                                                 (12)          423           706 
                                                                       ------------- ------------- -------------
               Net cash provided by operating activities                     47,237        46,062        32,201 
                                                                       ------------- ------------- -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Net proceeds from sale of assets                                           115            13         1,119 
     Capital expenditures                                                   (14,552)       (9,140)      (10,962)
                                                                       ------------- ------------- -------------
               Net cash used for investing activities                       (14,437)       (9,127)       (9,843)
                                                                       ------------- ------------- -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Dividends paid                                                         (20,500)      (22,000)      (24,500)
     Redemptions, repurchase of and principal payments on long-term
          debt                                                              (14,153)      (13,670)      (13,235)
     Incurrence of financing costs                                               --          (150)         (213)
     Restricted cash deposits, net                                            1,400         1,035         1,160 
                                                                       ------------- ------------- -------------
               Net cash used for financing activities                       (33,253)      (34,785)      (36,788)
                                                                       ------------- ------------- -------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           (453)        2,150       (14,430)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                               26,480        24,330        38,760 
                                                                       ------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                               $     26,027  $     26,480  $     24,330 
                                                                       ============= ============= =============


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

</TABLE>

                THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES

          CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
                         (IN THOUSANDS OF DOLLARS)

<TABLE>

<CAPTION>
                                                       COMMON
                                                       STOCK       ADDITIONAL   ACCUMULATED
                                                     ($.01 PAR)     CAPITAL       DEFICIT        TOTAL
                                                   ------------- ------------- ------------- -------------
<S>                                                <C>           <C>           <C>           <C>
Balance, January 1, 1994                           $             $    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)
     Net income                                              --            --         9,946         9,946 
     Dividends                                               --            --       (20,500)      (20,500)
                                                   ------------- ------------- ------------- -------------
Balance, December 31, 1996                         $         --  $    157,520  $   (172,234) $    (14,714)
                                                   ============= ============= ============= =============

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

</TABLE>
                THE PACIFIC LUMBER COMPANY AND SUBSIDIARIES

                 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 Group Holdings Inc.  ("MGHI") which 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, including the growing and harvesting of redwood and Douglas-fir
timber, the milling of logs into lumber and the manufacture of lumber into
a variety of finished products.  Housing, construction and remodeling are
the principal markets for the Company's lumber products.  Export sales
generally constitute approximately 6% of the Company's sales.  A
significant portion of the Company's sales are made to third parties
located west of the Mississippi River.

     USE OF ESTIMATES AND ASSUMPTIONS

          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
Company's consolidated financial position, results of operations or
liquidity.

     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
          Marketable securities are carried at fair value.  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 two years
ended December 31, 1995 were:  1995 - net realized gains of $478; and 1994
- a decrease in net unrealized gains of $264 and net realized gains of
$1,248.  Net realized and unrealized gains (losses) for the year ended
December 31, 1996 were not significant.

          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 estimated term of the related borrowing.

          Restricted Cash and Concentrations of Credit Risk
          Restricted cash represents the amount 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, 1996, 1995 and 1994 includes
interest of approximately $2,865, $2,560 and $2,638, respectively,
attributable to an investment rate agreement (at 7.95% per annum) with the
financial institution which holds the Liquidity Account.

          At December 31, 1996 and 1995, cash and cash equivalents include
$17,600 and $19,742, 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 equivalents and restricted cash
approximate fair value. Marketable securities are carried at fair value
which is determined based on quoted market prices. As of December 31, 1996
and 1995, the estimated fair value of long-term debt, including current
maturities, was $579,102 and $590,594, respectively.  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.  Some of the Company's publicly traded debt issues 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.

2.        INVENTORIES

          Inventories consist of the following:

<TABLE>

<CAPTION>
                                                 DECEMBER 31,
                                         ---------------------------
                                              1996          1995
                                         ------------- -------------
<S>                                      <C>           <C>
Lumber                                   $      46,882 $      57,905
Logs                                            18,808        17,675
                                         ------------- -------------
                                         $      65,690 $      75,580
                                         ============= =============

</TABLE>

3.        PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>

<CAPTION>
                                                                         DECEMBER 31,
                                                     ESTIMATED   ---------------------------
                                                    Useful Lives      1996          1995
                                                   ------------- ------------- -------------
<S>                                                <C>           <C>           <C>
Machinery and equipment                            5 - 15 years  $    123,909  $    122,437 
Buildings                                              33 years        34,285        29,079 
Logging roads                                          15 years        11,093         7,486 
                                                                 ------------- -------------
                                                                      169,287       159,002 
Less:  accumulated depreciation                                       (73,772)      (65,276)
                                                                 ------------- -------------
                                                                 $     95,515  $     93,726 
                                                                 ============= =============

</TABLE>

          Depreciation expense for the years ended December 31, 1996, 1995
and 1994 was $8,850, $9,185 and $8,808, respectively.

4.        LONG-TERM DEBT

          Long-term debt consists of the following:

<TABLE>

<CAPTION>
                                                                               DECEMBER 31,
                                                                       ---------------------------
                                                                            1996          1995
                                                                       ------------- -------------
<S>                                                                    <C>           <C>
7.95% Scotia Pacific Timber Collateralized Notes due through
     July 20, 2015                                                     $    336,130  $    350,233 
10-1/2% Pacific Lumber Senior Notes due March 1, 2003                       235,000       235,000 
Other                                                                           724           774 
                                                                       ------------- -------------
                                                                            571,854       586,007 
Less: current maturities                                                    (16,258)      (14,195)
                                                                       ------------- -------------
                                                                       $    555,596  $    571,812 
                                                                       ============= =============

</TABLE>

          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 $165,970 of the Company's
consolidated balance at December 31, 1996), (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) 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.

          Principal and interest on the Timber Notes are payable semi-
annually on January 20 and July 20.  On January 21, 1997, Scotia Pacific
paid $8,712 of principal on the Timber Notes.  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 Senior Notes are unsecured and are senior
indebtedness of the Company; however, they are effectively subordinated to
the Timber Notes.  The indenture governing the Senior Notes contains
various covenants which, among other things, limit the Company's ability to
incur additional indebtedness and liens, to engage in transactions with
affiliates, to make investments and to pay dividends.

          The Company has a revolving credit agreement with a bank (as
amended and restated, the "Revolving Credit Agreement") which expires on
May 31, 1999.  Borrowings under the Revolving Credit Agreement are secured
by the Company's trade receivables and inventories, with interest currently
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, 1996, $46,992 of borrowings was available under the
Revolving Credit Agreement, of which $4,732 was available for letters of
credit and $30,000 was restricted to timberland acquisitions.  No
borrowings were outstanding as of December 31, 1996, and letters of credit
outstanding amounted to $10,268.  The Revolving Credit Agreement contains
covenants substantially similar to those contained in the indenture
governing the Senior Notes.

          As of December 31, 1996, under the most restrictive covenants
contained in the indentures governing the Senior Notes, the Timber Notes
and the Revolving Credit Agreement, the Company could pay approximately
$17,200 of dividends.

          Scheduled maturities of long-term debt outstanding at December
31, 1996, using the Scheduled Amortization for the Timber Notes, are as
follows:  years ending December 31, 1997 - $16,258; 1998 - $19,430; 1999 -
$21,745; 2000 - $24,065; 2001 - $24,827; thereafter - $465,529.

5.        PROVISION IN LIEU OF INCOME TAXES

          Income taxes are determined using an asset and liability approach
which 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 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 (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
connected 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.

          The provision in lieu of income taxes on income before income
taxes and extraordinary item consists of the following:

<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                             -----------------------------------------
                                                                  1996          1995          1994
                                                             ------------- ------------- -------------
<S>                                                          <C>           <C>           <C>
Current:
     Federal credit (provision) in lieu of income taxes      $       (189) $       (239) $         -- 
     State and local                                                  (28)          (61)          (50)
                                                             ------------- ------------- -------------
                                                                     (217)         (300)          (50)
                                                             ------------- ------------- -------------
Deferred:
     Federal credit (provision) in lieu of income taxes            (5,613)       (4,755)       (1,748)
     State and local                                                 (277)       (1,425)          369 
                                                             ------------- ------------- -------------
                                                                   (5,890)       (6,180)       (1,379)
                                                             ------------- ------------- -------------
                                                             $     (6,107) $     (6,480) $     (1,429)
                                                             ============= ============= =============

</TABLE>

          A reconciliation between the provision in lieu of income taxes
and the amount computed by applying the federal statutory income tax rate
to income before income taxes and extraordinary item is as follows:

<TABLE>

<CAPTION>
                                                                                          YEARS ENDED DECEMBER 31,
                                                                                 -----------------------------------------
                                                                                      1996          1995          1994
                                                                                 ------------- ------------- -------------
<S>                                                                              <C>           <C>           <C>
Income before income taxes and extraordinary item                                $     16,053  $     13,041  $     26,343 
                                                                                 ============= ============= =============

Amount of federal income tax based upon the statutory
     rate                                                                        $     (5,619) $     (4,564) $     (9,220)
Revision of prior years' tax estimates and other changes in
     valuation allowances                                                                 981          (651)        7,148 
State and local taxes, net of federal tax effect                                       (1,080)         (966)          207 
Expenses for which no federal tax benefit is available                                   (489)           --            -- 
Other                                                                                     100          (299)          436 
                                                                                 ------------- ------------- -------------
                                                                                 $     (6,107) $     (6,480) $     (1,429)
                                                                                 ============= ============= =============

</TABLE>

          Revision of prior years' tax estimates and other changes in
valuation allowances as shown in the table above include amounts for the
reversal of reserves which the Company no longer believes are necessary,
other changes in prior year tax estimates and changes in valuation
allowances with respect to deferred income tax assets.  Generally, the
reversal of reserves relates to the expiration of the relevant statute of
limitations with respect to certain income tax returns or the resolution of
specific income tax matters with the relevant tax authorities.  For the
years ended December 31, 1996, 1995 and 1994, the reversal of reserves
which the Company believes are no longer necessary resulted in a credit to
the income tax provision of $883, $127 and $7,048, respectively.

          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 10).  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.

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

<TABLE>

<CAPTION>
                                                                     DECEMBER 31,
                                                             ---------------------------
                                                                  1996          1995
                                                             ------------- -------------
<S>                                                          <C>           <C>
Deferred income tax assets:
     Timber and timberlands                                  $     28,992  $     32,528 
     Loss and credit carryforwards                                 22,089        25,408 
     Other liabilities and other                                    8,468        10,344 
     Valuation allowances                                          (1,884)       (2,825)
                                                             ------------- -------------
          Total deferred income tax assets, net                    57,665        65,455 
                                                             ------------- -------------

Deferred income tax liabilities:
     Inventories                                                  (15,102)      (16,056)
     Property, plant and equipment                                (15,917)      (15,023)
     Other                                                         (2,180)       (2,662)
                                                             ------------- -------------
          Total deferred income tax liabilities                   (33,199)      (33,741)
                                                             ------------- -------------

Net deferred income tax assets                               $     24,466  $     31,714 
                                                             ============= =============

</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 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
$22,586 and $28,199 at December 31, 1996 and 1995, 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, 1996.

<TABLE>

<CAPTION>
                                                                 EXPIRING
                                                                 THROUGH
                                                              -------------
<S>                                             <C>           <C>
Regular Tax Attribute Carryforwards:
     Net operating losses                       $      56,386      2011    
     Minimum tax credit                                   364    Indefinite
                                                                           
Alternative Minimum Tax Attribute                                          
Carryforwards:
     Net operating losses                       $       9,608       2011   

</TABLE>

6.        EMPLOYEE BENEFIT PLANS

     RETIREMENT PLAN

          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,
                                                             -----------------------------------------
                                                                  1996          1995          1994
                                                             ------------- ------------- -------------
<S>                                                          <C>           <C>           <C>
Service cost - benefits earned during the year               $      1,903  $      1,483  $      1,643 
Interest cost on projected benefit obligation                       1,682         1,693         1,263 
Actual loss (gain) on plan assets                                  (2,762)       (3,900)           10 
Net amortization and deferral                                       1,448         2,460          (859)
                                                             ------------- ------------- -------------
Net periodic pension cost                                    $      2,271  $      1,736  $      2,057 
                                                             ============= ============= =============

</TABLE>

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

<TABLE>

<CAPTION>
                                                                               DECEMBER 31,
                                                                       ---------------------------
                                                                            1996          1995
                                                                       ------------- -------------
<S>                                                                    <C>           <C>
Actuarial present value of accumulated plan benefits:
     Vested benefit obligation                                         $     18,506  $     16,910 
     Non-vested benefit obligation                                            1,371         1,214 
                                                                       ------------- -------------
          Total accumulated benefit obligation                         $     19,877  $     18,124 
                                                                       ============= =============

Projected benefit obligation                                           $     23,582  $     21,841 
Plan assets at fair value, primarily equity and debt securities             (21,800)      (18,363)
                                                                       ------------- -------------
Projected benefit obligation in excess of plan assets                         1,782         3,478 
Unrecognized net transition asset                                                18            24 
Unrecognized net gain (loss)                                                  2,855           (27)
Unrecognized prior service cost                                                 (39)          (45)
                                                                       ------------- -------------
          Accrued pension liability                                    $      4,616  $      3,430 
                                                                       ============= =============

</TABLE>

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

<TABLE>

<CAPTION>
                                                                  1996          1995          1994
                                                             ------------- ------------- -------------
<S>                                                          <C>           <C>           <C>
Rate of increase in compensation levels                               5.0%          5.0%          5.0%
Discount rate                                                         7.5%         7.25%          8.5%
Expected long-term rate of return on assets                           8.0%          8.0%          8.0%

</TABLE>

     POSTRETIREMENT MEDICAL BENEFITS

          The Company has an unfunded defined benefit plan for certain
postretirement medical 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 expected costs of postretirement
medical benefits are accrued over the period the employees provide services
to the date of their full eligibility for such benefits.

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

<TABLE>

<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                             -----------------------------------------
                                                                  1996          1995          1994
                                                             ------------- ------------- -------------
<S>                                                          <C>           <C>           <C>
Service cost - medical benefits earned during the year       $        332  $        228  $        216 
Interest cost on accumulated postretirement medical benefit
     obligation                                                       415           317           294 
Net amortization and deferral                                          --           (53)           (7)
                                                             ------------- ------------- -------------
Net periodic postretirement medical benefit cost             $        747  $        492  $        503 
                                                             ============= ============= =============

</TABLE>

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

<TABLE>

<CAPTION>
                                                                     DECEMBER 31,
                                                             ---------------------------
                                                                  1996          1995
                                                             ------------- -------------
<S>                                                          <C>           <C>
Retirees                                                     $      1,182  $         634
Actives eligible for benefits                                         905            726
Actives not eligible for benefits                                   3,818          3,317
                                                             ------------- -------------
     Accumulated postretirement medical benefit obligation          5,905          4,677
Unrecognized net gain (loss)                                          (86)           553
                                                             ------------- -------------
     Postretirement medical benefit liability                $      5,819  $       5,230
                                                             ============= =============

</TABLE>

          The annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 10.5% for 1997 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 medical
benefit obligation as of December 31, 1996 by approximately $810 and the
aggregate of the service and interest cost components of net periodic
postretirement medical benefit cost by approximately $130.

          The discount rates used in determining the accumulated
postretirement medical benefit obligation were 7.5% and 7.25% at December
31, 1996 and 1995, respectively.

     EMPLOYEE SAVINGS PLAN

          The Company's employees are 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.  The
cost to the Company of this plan was $1,388, $1,281 and $1,215 for the
years ended December 31, 1996, 1995 and 1994, respectively.

     WORKERS' COMPENSATION BENEFITS

          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
$8,000 and $8,900 at December 31, 1996 and 1995, respectively.  Workers'
compensation expenses amounted to $2,925, $3,302 and $3,698 for the years
ended December 31, 1996, 1995 and 1994, 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 $1,552, $1,694, and
$1,744 for the years ended December 31, 1996, 1995, and 1994, respectively. 
The Company believes that the services being rendered are on terms not less
favorable to the Company than those which would be obtainable from
unaffiliated third parties.

          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, 1996, 1995 and 1994 include revenues
of $14,710, $13,627 and $10,326, respectively, from Britt.  The Company
recognized operating income of $6,784, $5,527 and $5,571 on these revenues
for the years ended December 31, 1996, 1995 and 1994, respectively.  At
December 31, 1996 and 1995, receivables include $1,281 and $813,
respectively, related to these affiliate sales.

          All of the Company's issued and outstanding common stock is
pledged as collateral for MGI's $100,000 11-1/4% Senior Secured Notes due
2003 and $125,720 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 10, the Company paid approximately $3,185 to a law firm in which a
director of the Company is also a partner.

8.        CONTINGENCIES

          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.  Moreover, these
laws and regulations are modified from time to time and are subject to
judicial and administrative interpretation.  Compliance with such laws,
regulations and judicial and administrative interpretations, together with
the cost of litigation incurred in connection with certain timber harvesting
operations of the Company, have increased the cost of logging operations.
The Company is subject to certain pending matters described below which
could have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.  There can be no assurance
that certain pending or future governmental regulations, legislation,
judicial or administrative decisions or California ballot initiatives will
not have a material adverse effect on the Company.

          In May 1996, the United States Fish and Wildlife Service
("USFWS") published its final designation of critical habitat for the
marbled murrelet (the "Final Designation"), which designated over four
million acres as critical habitat for the marbled murrelet. Although nearly
all of the designated habitat is public land, approximately 33,000 acres of
the Company's timberlands are included in the Final Designation, the
substantial portion of such acreage being young growth timber. In order to
mitigate the impact of the Final Designation, particularly with respect to
timberlands occupied by the marbled murrelet, the Company over the last few
years has attempted to develop a habitat conservation plan for the marbled
murrelet (the "Murrelet HCP").  Due to, among other things, the unfavorable
response of the USFWS to the Company's initial Murrelet HCP efforts, the
Company and its subsidiaries filed two actions (the "Takings Litigation")
alleging that certain portions of their timberlands have been "taken" and
seeking just compensation.  Pursuant to an agreement entered into by the
Company, MAXXAM, the United States and California on September 28, 1996
(the "Headwaters Agreement") described in Note 9 below, the Takings
Litigation has been stayed at the request of the parties.

          It is impossible for the Company to determine the potential
adverse effect of the Final Designation on the Company's consolidated
financial position, results of operations or liquidity until such time as
various regulatory and  legal issues are resolved; however, if the Company
is unable to harvest, or is severely limited in harvesting, on timberlands
designated as critical habitat for the marbled murrelet, such effect could
be materially adverse to the Company.  If the Company is unable to harvest
or is severely limited in harvesting, it intends to seek just compensation
from the appropriate governmental agencies on the grounds that such
restrictions constitute a governmental taking. There continue to be other
regulatory actions and lawsuits seeking to have other species listed as
threatened or endangered under the federal Endangered Species Act ("ESA")
and/or the California Endangered Species Act ("CESA") and to designate
critical habitat for such species. For example, the National Marine
Fisheries Service has announced that by April 25, 1997 it will make a final
determination concerning whether to list the coho salmon under the ESA in
northern California, including, potentially, lands owned by the Company. It
is uncertain what impact, if any, such listings and/or designations of
critical habitat would have on the Company's consolidated financial
position, results of operations or liquidity.

          In 1994, the California Board of Forestry ("BOF") adopted certain
regulations regarding compliance with long-term sustained yield ("LTSY")
objectives. These regulations require that timber companies project timber
growth and harvest on their timberlands over a 100-year planning period and
establish a LTSY harvest level that takes into account environmental and
economic considerations. The sustained yield plan ("SYP") must demonstrate
that the average annual harvest over any rolling ten-year period will not
exceed the LTSY harvest level and that the Company's projected timber
inventory is capable of sustaining the LTSY harvest level in the last
decade of the 100-year planning period. On December 17, 1996, the Company
submitted a proposed SYP to the California Department of Forestry ("CDF").
The proposed SYP sets forth an LTSY harvest level substantially the same as
the Company's average annual timber harvest over the last six years. The
proposed SYP also indicates that the Company's average annual timber
harvest during the first decade of the SYP would approximate the LTSY
harvest level. During the second decade of the proposed SYP, the Company's
average annual timber harvest would be approximately 8% less than that
proposed for the first decade. The SYP, when approved, will be valid for
ten years. Thereafter, revised SYPs will be prepared every decade that will
address the LTSY harvest level based upon reassessment of changes in the
resource base and protection of public resources.

          The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement (see Note 9) will be consummated and that the
Multi-Species HCP (as defined in Note 9) will permit the Company to harvest
its timberlands (including over the next two decades a substantial portion
of its old growth timberlands not transferred pursuant to the Headwaters
Agreement) to achieve maximum sustained yield. The SYP is subject to review
and approval by the CDF, and there can be no assurance that the SYP will be
approved in its proposed form. Until the SYP is reviewed and approved, the
Company is unable to predict the impact that these regulations will have on
its future timber harvesting practices. It is possible that the results of
the review and approval process could require the Company to reduce its
timber harvest in future years from the harvest levels set forth in the
proposed SYP. The Company believes it would be able to mitigate the effect
of any required reduction in harvest level by acquisitions of additional
timberlands and making corresponding amendments to the SYP; however, there
can be no assurance that the Company would be able to do so and the amount
of such acquisitions would be limited by the Company's available financial
resources.  The Company is unable to predict the ultimate impact the
sustained yield regulations will have on its future financial position,
results of operations or liquidity.

          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 the Company's timber harvesting plans ("THPs") and
other timber harvesting operations, and the Company expects that such
groups and individuals will continue to file such objections. In addition,
lawsuits are pending or threatened which seek to prevent the Company from
implementing certain of its approved THPs or which challenge other
operations by the Company. These challenges have severely restricted the
Company's ability to harvest old growth timber on its property. To date,
challenges with respect to the Company's THPs relating to young growth
timber and to its other operations 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 timber
harvesting and other operations 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, they have not had a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity. Nevertheless, it is impossible to predict the
future nature or degree of such challenges or their ultimate impact on the
Company's consolidated financial position, results of operations or
liquidity.

          The Company is also involved in various claims, lawsuits and
proceedings.  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.        HEADWATERS AGREEMENT

          On September 28, 1996, the Company (on behalf of itself, its
subsidiaries and affiliates) and MAXXAM (collectively, the "Pacific Lumber
Parties") entered into the Headwaters Agreement with the United States and
California.  The Headwaters Agreement provides the framework for the
acquisition by the United States and California of approximately 5,600
acres of the Company's timberlands commonly referred to as the Headwaters
Forest and the Elk Head Springs Forest (the "Headwaters Timberlands").  A
substantial portion of the Headwaters Timberlands consists of virgin old
growth timberlands.  Approximately 4,900 of these acres are owned by Salmon
Creek and are part of the area commonly referred to as the "Headwaters
Forest." The remaining acreage is owned by Scotia Pacific (the Company
having harvesting rights on a portion of the acreage).  The Headwaters
Timberlands would be transferred in exchange for (a) property and other
consideration (possibly including cash) from the United States and
California having an aggregate fair market value of $300 million and (b)
approximately 7,755 acres of adjacent timberlands to be acquired by the
United States and California ( the "Elk River Timberlands") from a third
party.  The United States and California would also acquire and retain an
additional 1,900 acres of timberlands from such third party.

          The Headwaters Agreement also provides, among other things, for
the expedited processing by the United States of an incidental take permit
("Permit") to be based upon a habitat conservation plan for multiple
species ("Multiple-Species HCP") covering (a) the timberlands and timber
harvesting rights which the Company will own after consummation of the
Headwaters Agreement (the "Resulting Pacific Lumber Timber Property") and
(b) the Headwaters Timberlands and the 1,900 acres of Elk River Timberlands
retained by the United States and California (both as conserved habitat). 
The agreement also requires expedited processing by California of an SYP
covering such timberlands and timber harvesting rights.

          On December 5, 1996, the United States and California each
furnished a list of properties consisting of oil and gas interests,
timberlands and a variety of other real estate properties for the Company's
review and approval.  There have been ongoing discussions between the
Pacific Lumber Parties and the United States regarding the properties and
other consideration to be furnished by the United States.

          Closing of the Headwaters Agreement is subject to various
conditions, including (a) acquisition by the government of the Elk River
Timberlands from a third party, (b) approval of an  SYP and a Multi-Species
HCP and issuance of a Permit, each in form and substance satisfactory to
the Company, (c) the issuance by the Internal Revenue Service and the
California Franchise Tax Board of closing agreements in form and substance
sought by and satisfactory to the Pacific Lumber Parties, (d) the absence
of a judicial decision in any litigation brought by third parties that any
party reasonably believes will significantly delay or impair the
transactions described in the Headwaters Agreement, and (e) the dismissal
with prejudice at closing of the Takings Litigation.  The parties to the
Headwaters Agreement are working to satisfy these conditions; however,
there can be no assurance that the Headwaters Agreement will be
consummated.

10.       SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION

          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, the Company recorded reductions in cost of sales of
$1,527 resulting from business interruption insurance reimbursements for
higher operating costs and the related loss of revenues resulting from the
April 1992 earthquake.

          Extraordinary Item Related to Litigation Settlement
          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.

<TABLE>

<CAPTION>
                                                                                          YEARS ENDED DECEMBER 31,
                                                                                 -----------------------------------------
                                                                                      1996          1995          1994
                                                                                 ------------- ------------- -------------
<S>                                                                              <C>           <C>           <C>
Supplemental information on 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                                  $     52,517  $     53,636  $     54,388 
     Income taxes paid (refunded)                                                         221        (5,190)        1,170 
     Tax allocation payments to MAXXAM                                                    330            --            -- 

</TABLE>

11.       QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

          Summary quarterly financial information for the years ended
December 31, 1996 and 1995 is as follows:

<TABLE>

<CAPTION>
                                                  THREE MONTHS ENDED
                               -------------------------------------------------------
                                  MARCH 31      JUNE 30     SEPTEMBER 30  DECEMBER 31
                               ------------- ------------- ------------- -------------
<S>                            <C>           <C>           <C>           <C>
1996:
     Net sales                 $      54,903 $      65,299 $      62,965 $      61,682
     Operating income                 14,310        17,485        15,415        19,090
     Net income                          884         3,144         1,473         4,445

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

</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

(A)  INDEX TO FINANCIAL STATEMENTS                                     PAGE

     1.   FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):

          Report of Independent Public Accountants                      22 
          Consolidated balance sheet at December 31, 1996 and 1995      23 
          Consolidated statement of operations for the years ended
            December 31, 1996, 1995 and 1994                            24 
          Consolidated statement of cash flows for the years ended
            December 31, 1996, 1995 and 1994                            25 
          Consolidated statement of stockholder's equity (deficit)
            for the years ended December 31, 1996, 1995 and 1994        26 
          Notes to consolidated financial statements                    27 

     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

          There were no reports on Form 8-K during the fourth quarter of
1996.  However, on March 12, 1997, the Company filed a Current Report on
Form 8-K (under Item 5), dated March 11, 1997, concerning an agreement to
amend the Headwaters Agreement to extend the period of time during which
the closing conditions must be met to February 17, 1998.

(C)  EXHIBITS

          Reference is made to the Index of Exhibits immediately preceding
the exhibits hereto (beginning on page 43), 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, 1997                 By:  /s/ PAUL N. SCHWARTZ
                                          -----------------------
                                            Paul N. Schwartz
                                         Vice President, Chief
                                         Financial Officer and
                                                Director


Date:  March 28, 1997                 By:   /s/ GARY L. CLARK
                                          ----------------------
                                             Gary L. Clark
                                        Vice President - Finance
                                           and Administration


          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, 1997                 By:  /s/ JOHN A. CAMPBELL
                                          ----------------------
                                            John A. Campbell
                                       President, Chief Executive
                                          Officer and Director


Date:  March 28, 1997                 By:   /s/ PAUL N. SCHWARTZ
                                          ----------------------
                                            Paul N. Schwartz
                                         Vice President, Chief
                                         Financial Officer and
                                                Director
                                          (Principal Financial
                                                Officer)

Date:  March 28, 1997                 By:   /s/ JOHN T. LA DUC
                                          ----------------------
                                             John T. La Duc
                                      Vice President and Director


Date:  March 28, 1997                 By:   /s/ EZRA G. LEVIN
                                          ----------------------
                                             Ezra G. Levin
                                                Director


Date:  March 28, 1997                 By:  /s/ ANTHONY R. PIERNO
                                          ----------------------
                                           Anthony R. Pierno
                                            Vice President,
                                            General Counsel
                                              and Director


Date:  March 28, 1997                 By:  /s/ WILLIAM S. RIEGEL
                                          ----------------------
                                           William S. Riegel
                                       Vice President - Sales and
                                                Director


Date:  March 28, 1997                 By:    /s/ GARY L. CLARK
                                          ----------------------
                                             Gary L. Clark
                                        Vice President - Finance
                                           and Administration
                                         (Principal Accounting
                                                Officer)

                           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, (the "Scotia Pacific
          Indenture"), 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     First Amendment, dated February 10, 1997, to the Revolving Credit
          Agreement

          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     Form of Deed of Trust, Assignment of Rents, Grant of Easement and
          Fixture Filing with respect to the Revolving Credit Agreement
          (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)

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

 10.8     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)

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

 10.10    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)

 10.11    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)

 10.12    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)

 10.13    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)

 10.14    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)

 10.15    Agreement dated September 28, 1996 among MAXXAM Inc., The Pacific
          Lumber Company (on behalf of itself, its subsidiaries and its
          affiliates), the United States of America and the State of
          California (incorporated herein by reference to Exhibit 10.1 to
          MAXXAM  Inc.'s Form 8-K dated September 28, 1996; File No. 1-
          3924)

 *27      Financial Data Schedule

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

* Included with this filing.