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


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


                                    FORM 10-Q

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


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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999

                          Commission File Number 1-3924


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



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


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



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


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


  Number of shares of common stock outstanding at October 26, 1999: 7,000,916

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







                                TABLE OF CONTENTS


PART I. - FINANCIAL INFORMATION

      Item  1.    Financial Statements:
                  Consolidated Balance Sheet at September 30, 1999 and December
                        31, 1998
                  Consolidated Statement of Operations for the three and nine
                        months ended September 30, 1999 and 1998
                  Consolidated Statement of Cash Flows for the nine months ended
                        September 30, 1999 and 1998
                  Condensed Notes to Consolidated Financial Statements
      Item  2.    Management's Discussion and Analysis of Financial Condition
                        and Results of Operations
      Item  3.    Quantitative and Qualitative Disclosures About Market Risk


PART II. - OTHER INFORMATION

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

APPENDIX A - GLOSSARY OF DEFINED TERMS



                          MAXXAM INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>

                                                                                        SEPTEMBER 30, DECEMBER 31,
                                                                                             1999          1998
                                                                                        ------------- -------------
                                                                                          (UNAUDITED)
                                        ASSETS
<S>                                                                                     <C>           <C>
Current assets:
   Cash and cash equivalents........................................................... $      154.5  $      294.2
   Marketable securities...............................................................         54.6          19.4
   Receivables:
      Trade, net of allowance for doubtful accounts of  $6.2 and $6.4, respectively....        183.9         184.5
      Other............................................................................        126.4         122.6
   Inventories.........................................................................        595.1         587.5
   Prepaid expenses and other current assets...........................................        158.0         152.4
                                                                                        ------------- -------------
        Total current assets...........................................................      1,272.5       1,360.6
Property, plant and equipment, net of accumulated depreciation of $983.4 and
   $921.5, respectively................................................................      1,226.6       1,278.9
Timber and timberlands, net of accumulated depletion of $178.9 and $178.4,
   respectively........................................................................        255.7         302.3
Investments in and advances to unconsolidated affiliates...............................        112.6         146.5
Deferred income taxes..................................................................        544.2         555.8
Restricted cash........................................................................        294.4          17.5
Long-term receivables and other assets.................................................        591.2         413.6
                                                                                        ------------- -------------
                                                                                        $    4,297.2  $    4,075.2
                                                                                        ============= =============
                         LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
   Accounts payable.................................................................... $      208.0  $      182.9
   Accrued interest....................................................................         40.0          72.4
   Accrued compensation and related benefits...........................................        118.6         133.7
   Other accrued liabilities...........................................................        184.1         180.6
   Payable to affiliates...............................................................         83.3          77.1
   Short-term borrowings and current maturities of long-term debt......................         49.9          37.0
                                                                                        ------------- -------------
        Total current liabilities......................................................        683.9         683.7
Long-term debt, less current maturities................................................      1,978.0       1,971.7
Accrued postretirement medical benefits................................................        694.6         704.5
Other noncurrent liabilities...........................................................        813.9         604.8
                                                                                        ------------- -------------
        Total liabilities..............................................................      4,170.4       3,964.7
                                                                                        ------------- -------------
Commitments and contingencies
Minority interests.....................................................................        127.0         167.3
Stockholders' deficit:
   Preferred stock, $.50 par value; 12,500,000 shares authorized; Class A $.05
      Non-Cumulative Participating Convertible Preferred Stock; 669,435 shares
      issued...........................................................................          0.3           0.3
   Common stock, $.50 par value; 28,000,000 shares authorized; 10,063,359 shares
      issued...........................................................................          5.0           5.0
   Additional capital..................................................................        222.8         222.8
   Accumulated deficit.................................................................       (119.1)       (175.7)
   Treasury stock, at cost (shares held: preferred - 845; common - 3,062,496)..........       (109.2)       (109.2)
                                                                                        ------------- -------------
        Total stockholders' deficit....................................................         (0.2)        (56.8)
                                                                                        ------------- -------------
                                                                                        $    4,297.2  $    4,075.2
                                                                                        ============= =============

<FN>

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

</FN>
</TABLE>



                          MAXXAM INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>

                                                                       THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                          SEPTEMBER 30,            SEPTEMBER 30,
                                                                     -----------------------  ----------------------
                                                                        1999        1998         1999        1998
                                                                     ----------- -----------  ----------  ----------
                                                                                       (UNAUDITED)
<S>                                                                  <C>         <C>          <C>         <C>
Net sales:
   Aluminum operations...........................................    $    520.3  $    541.6   $ 1,524.7   $ 1,753.4
   Forest products operations....................................          49.0        65.9       137.1       181.3
   Real estate and racing operations.............................          16.0        21.3        57.1        57.7
                                                                     ----------- -----------  ----------  ----------
                                                                          585.3       628.8     1,718.9     1,992.4
                                                                     ----------- -----------  ----------  ----------

Costs and expenses:
   Cost of sales and operations:
      Aluminum operations........................................         463.9       458.2     1,397.7     1,458.8
      Forest products operations.................................          45.3        43.7       121.3       116.3
      Real estate and racing operations..........................          10.0        13.9        34.5        35.3
   Selling, general and administrative expenses..................          41.1        42.6       119.5       128.6
   Impairment of aluminum assets.................................          19.1           -        19.1           -
   Depreciation, depletion and amortization......................          25.0        30.0        83.7        90.7
                                                                     ----------- -----------  ----------  ----------
                                                                          604.4       588.4     1,775.8     1,829.7
                                                                     ----------- -----------  ----------  ----------


Operating income (loss)..........................................         (19.1)       40.4       (56.9)      162.7

Other income (expense):
   Gain on sale of Headwaters Timberlands........................             -           -       239.8           -
   Investment, interest and other income (expense)...............         (11.4)        2.8        13.1        24.6
   Interest expense..............................................         (49.1)      (52.3)     (147.7)     (158.7)
                                                                     ----------- -----------  ----------  ----------
Income (loss) before income taxes and minority interests.........         (79.6)       (9.1)       48.3        28.6
Credit (provision) for income taxes..............................          26.9        11.5       (28.9)       (1.9)
Minority interests...............................................          15.3        (4.4)       37.2       (14.4)
                                                                     ----------- -----------  ----------  ----------
Income (loss) before extraordinary item..........................         (37.4)       (2.0)       56.6        12.3
Extraordinary item:
   Loss on early extinguishment of debt, net of income
      tax benefit of $22.9.......................................             -       (42.5)          -       (42.5)
                                                                     ----------- -----------  ----------  ----------
Net income (loss)................................................    $    (37.4) $    (44.5)  $    56.6   $   (30.2)
                                                                     =========== ===========  ==========  ==========

Basic earnings (loss) per common share:
   Income (loss) before extraordinary item.......................    $    (5.35) $    (0.28)  $    8.08   $    1.76
   Extraordinary item............................................             -       (6.07)          -       (6.07)
                                                                     ----------- -----------  ----------  ----------
   Net income (loss).............................................    $    (5.35) $    (6.35)  $    8.08   $   (4.31)
                                                                     =========== ===========  ==========  ==========

Diluted earnings (loss) per common and common equivalent share:
   Income (loss) before extraordinary item.......................    $    (5.35) $    (0.28)  $    7.23   $    1.58
   Extraordinary item............................................             -       (6.07)          -       (5.44)
                                                                     ----------- -----------  ----------  ----------
   Net income (loss).............................................    $    (5.35) $    (6.35)  $    7.23   $   (3.86)
                                                                     =========== ===========  ==========  ==========

<FN>

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

</FN>
</TABLE>



                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>

                                                                                                 NINE MONTHS ENDED
                                                                                                   SEPTEMBER 30,
                                                                                              ----------------------
                                                                                                 1999        1998
                                                                                              ----------  ----------
                                                                                                    (UNAUDITED)
<S>                                                                                           <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)......................................................................    $    56.6   $   (30.2)
   Adjustments to reconcile net income (loss) to net cash provided by (used
      for) operating activities:
      Depreciation, depletion and amortization............................................         83.7        90.7
      Gain on sale of Headwaters Timberlands..............................................       (239.8)          -
      Impairment of aluminum assets.......................................................         19.1           -
      Extraordinary loss on early extinguishment of debt, net.............................            -        42.5
      Net gain on other asset dispositions................................................        (50.8)       (3.2)
      Net sales (purchases) of marketable securities......................................        (21.2)       62.2
      Net gain on marketable securities...................................................        (14.0)       (4.6)
      Minority interests..................................................................        (37.2)       14.4
      Amortization of deferred financing costs and discounts on long-term debt............          7.7        15.7
      Equity in earnings of unconsolidated affiliates, net of dividends received..........         (1.7)       (0.5)
      Increase (decrease) in cash resulting from changes in:
        Receivables.......................................................................          4.4        35.3
        Inventories.......................................................................         (9.5)       53.8
        Prepaid expenses and other assets.................................................        (21.5)       25.1
        Accounts payable..................................................................         25.8        (6.6)
        Accrued and deferred income taxes.................................................         20.0        (6.7)
        Payable to affiliates and other liabilities.......................................         (1.5)      (48.1)
        Accrued interest..................................................................        (32.4)      (28.4)
        Long-term assets..................................................................        (11.8)        3.9
        Long-term liabilities.............................................................         32.4       (29.5)
      Other...............................................................................          4.0         3.1
                                                                                              ----------  ----------
        Net cash provided by (used for) operating activities..............................       (187.7)      188.9
                                                                                              ----------  ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net proceeds from sale of Headwaters Timberlands.......................................        298.2           -
   Net proceeds from other dispositions of property and investments.......................         74.4        18.2
   Capital expenditures...................................................................        (63.2)      (80.0)
   Restricted cash withdrawals used to acquire timberlands................................         12.9         1.8
   Investment in subsidiaries and joint ventures..........................................            -       (10.6)
   Other..................................................................................         (3.3)        3.0
                                                                                              ----------  ----------
      Net cash provided by (used for) investing activities................................        319.0       (67.6)
                                                                                              ----------  ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of long-term debt...............................................          2.2       873.7
   Premium for early retirement of debt...................................................            -       (45.5)
   Redemptions, repurchases and principal payments on long-term debt......................        (12.5)     (800.8)
   Net borrowings under revolving and short-term credit facilities........................         29.4           -
   Redemption of preference stock.........................................................         (1.4)       (8.6)
   Restricted cash withdrawals (deposits), net............................................       (289.8)        6.4
   Treasury stock repurchases.............................................................            -       (35.1)
   Incurrence of deferred financing costs.................................................            -       (22.0)
   Other..................................................................................          1.1        (0.1)
                                                                                              ----------  ----------
      Net cash used for financing activities..............................................       (271.0)      (32.0)
                                                                                              ----------  ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................................       (139.7)       89.3
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..........................................        294.2       164.6
                                                                                              ----------  ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................    $   154.5   $   253.9
                                                                                              ==========  ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid, net of capitalized interest.............................................    $   172.4   $   171.5
   Income taxes paid......................................................................    $    11.4   $    12.7

</TABLE>



                          MAXXAM INC. AND SUBSIDIARIES

              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    GENERAL

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

      The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of the Company at September 30, 1999, the consolidated
results of operations for the three and nine months ended September 30, 1999 and
1998 and consolidated cash flows for the nine months ended September 30, 1999
and 1998. Certain reclassifications of prior period information have been made
to conform to the current presentation.

      There were no reconciling items between net income and comprehensive
income in either of the three and nine month periods ended September 30, 1999
and 1998.

      Labor Related Costs
      Kaiser is currently operating five of its United States facilities with
salaried employees and other workers as a result of the September 30, 1998
strike by the USWA and the subsequent "lock-out" by Kaiser in January 1999.
However, Kaiser has continued to accrue certain benefits for the USWA members
during the strike and subsequent lock-out. For purposes of computing the
benefit-related costs and liabilities to be reflected in the accompanying
consolidated financial statements, Kaiser has based its accruals on the terms of
the previously existing (expired) USWA contract. Any differences between any
amounts accrued and any amounts ultimately agreed to during the collective
bargaining process will be reflected in future results upon settlement or during
the term of any new contract.

      Impairment of Micromill Assets
      As previously announced, in early 1999, KACC began a search for a
strategic partner for the further development and deployment of its MicromillTM
technology. This change in strategic course was based on management's conclusion
that additional time and investment would be required to achieve a commercial
success. Given Kaiser's other strategic priorities, Kaiser believed that
introducing added commercial and financial resources was the appropriate course
of action for capturing the maximum long-term value. A number of third parties
were contacted regarding joint ventures or other arrangements. Based on
negotiations with these third parties, KACC now believes that a sale of the
Micromill assets and technology is more likely than a partnership and that any
such sales transaction would likely result in KACC receiving a combination of a
small up front payment and future payments based on the subsequent performance
and profitability of the Micromill technology. As a result of these
negotiations, KACC concluded that the carrying value of the Micromill assets
should be reduced by $19.1 million. Accordingly, KACC recorded a non-cash
impairment charge to reflect this write-down in the third quarter of 1999.

      Recent Accounting Pronouncements
      In June 1998, the FASB issued SFAS No. 133 which requires companies to
recognize all derivative instruments as assets or liabilities in the balance
sheet and to measure those instruments at fair value. Under SFAS No. 133, the
Company will be required to "mark-to-market" its hedging positions at each
period end in advance of the period of recognition for the transaction to which
the hedges relate. Changes in the fair value of the Company's open hedging
positions will be reflected as an increase or reduction in stockholders' equity
through comprehensive income. The impact of the changes in fair value of the
Company's hedging positions will be reversed from comprehensive income (net of
any fluctuations in other "open" positions) and will be reflected in traditional
net income upon the occurrence of the transactions to which the hedges relate.
Currently, the dollar amount of the Company's comprehensive income adjustments
is not significant so there is no significant difference between "traditional"
net income and comprehensive income. However, differences between comprehensive
income and traditional net income may become significant in future periods as
SFAS No. 133 will result in fluctuations in comprehensive income and
stockholders' equity in periods of price volatility, despite the fact that the
Company's cash flow and earnings will be "fixed" to the extent hedged.

      SFAS No. 133 initially required adoption on or before January 1, 2000.
However, in June 1999, the FASB issued SFAS No. 137 which delayed the required
implementation date of SFAS No. 133 to no later than January 1, 2001. The
Company is currently evaluating how and when to implement SFAS No. 133.

2.    GRAMERCY INCIDENT

      On July 5, 1999, KACC's Gramercy, Louisiana alumina refinery was
extensively damaged by an explosion in the digestion area of the plant.
Twenty-four employees were injured in the incident, several of them severely. As
a result of the incident, alumina production at the facility was completely
curtailed. Production at the plant is expected to remain curtailed until at
least mid-2000 when KACC expects to begin partial production. Based on
preliminary estimates, full production is currently expected to be achieved by
the end of 2000 or shortly thereafter. However, any delay in obtaining the
necessary permits or approvals to begin construction or operations would likely
delay these expected production dates. Shortly after the incident, KACC declared
force majeure with respect to certain of its third party alumina and hydrate
sales contracts and third party vendor purchase contracts. However, KACC
subsequently agreed to supply certain third party alumina customers. See
Business Interruption below.

      The cause of the incident is under investigation by KACC and governmental
agencies. Depending on the outcome of the ongoing investigations by the various
government agencies, KACC could be subject to civil and/or criminal fines and
penalties. However, as more fully explained below, based on what is known to
date, Kaiser believes that the financial impact of this incident (in excess of
insurance deductibles and self-retention provisions) will be largely offset by
insurance coverage.

      KACC has significant amounts of insurance coverage related to the Gramercy
incident. Deductibles and self- retention provisions under the insurance
coverage for the incident total $5.0 million, which amounts have been charged to
cost of sales and operations during the quarter ended September 30, 1999. KACC's
insurance coverage has four separate components: property damage, business
interruption, liability and workers' compensation. These components are
discussed in the following paragraphs.

      Property Damage
      KACC's insurance policies provide that, if KACC rebuilds the facility
(which is KACC's current intention), KACC will be reimbursed for the costs of
repairing or rebuilding the damaged portion of the facility using new materials
of like kind and quality with no deduction for depreciation. KACC and its
engineers are in the process of developing construction alternatives and cost
projections to rebuild the facility. Once this process is complete, KACC will
have detailed discussions with the insurance carriers and their representatives
regarding the amount of reimbursement. KACC expects that it will be able to
reach an agreement with its insurance carriers as to a minimum amount of
property damage reimbursement during the fourth quarter of 1999. However, there
can be no assurance that the discussions with the insurance carriers and their
representatives will be completed by the end of the fourth quarter or that the
minimum amount of insurance proceeds will be known by that time. It is unclear
when KACC will reach a final agreement as to the ultimate amount of recoveries
KACC will receive. At September 30, 1999, KACC had accrued approximately $3.0
million for estimated property damage insurance recoveries.

      As the estimated amount of reimbursement becomes known to KACC, it will be
required under generally accepted accounting principles to recognize gains to
the extent that the estimated insurance proceeds exceed the carrying value of
the damaged property, which is approximately $15.0 million. Such gains may be
reflected beginning in the fourth quarter of 1999 and from time to time
thereafter as additional property reimbursements are agreed to by the insurance
carriers. The amount of such gains is expected to be significant. The overall
impact of recognizing the gains will be a significant increase in stockholders'
equity and an increase in depreciation expense in future years once production
is restored.

      Business Interruption. KACC's insurance policies provide for the
reimbursement of specified continuing expenses incurred during the interruption
period plus lost profits (or less expected losses) plus other expenses incurred
as a result of the incident. Operations at the Gramercy facility and a 49%-owned
facility in Jamaica, which supplies bauxite to Gramercy, will to incur operating
expenses until production at the Gramercy facility is restored. The Gramercy
facility will also incur incremental costs for clean up and other activities
during the remainder of 1999 and 2000. Additionally, KACC will incur increased
costs as a result of recent agreements to supply certain of Gramercy's major
customers with alumina, despite the fact that KACC had declared force majeure
with respect to the contracts shortly after the incident. KACC is purchasing
alumina from third parties, in excess of the amounts of alumina available from
other KACC-owned facilities, to supply these customers' needs as well as to meet
intersegment requirements. In consideration of all of the foregoing items, KACC
has recorded expected business interruption insurance recoveries totaling $22.0
million as a reduction of cost of sales and operations, which amount
substantially offsets actual expenses incurred during the quarter ended
September 30, 1999. However, the amount recorded represents an estimate of
KACC's business interruption coverage, based on preliminary discussions with the
insurance carriers and their representatives, and is, therefore, subject to
change. KACC believes that additional amounts may be recoverable. Any
adjustments to the recorded amounts of expected recovery will be reflected from
time to time as agreements with the insurance carriers are reached. The amounts
of such adjustments could be material.

      Since production has been completely curtailed at the Gramercy facility,
KACC has, for the time being, suspended depreciation of the facility.
Depreciation expense for the first six months of 1999 was approximately $6.0
million. However, KACC believes that the depreciation expense that would have
been incurred may be recoverable, at least in part, under its business
interruption insurance coverage.

      Liability
      The incident has also resulted in more than thirty lawsuits being filed
against KACC alleging, among other things, property damage and personal injury.
In addition, a claim for alleged business interruption losses has been made by a
neighboring business. The aggregate amount of damages sought in the lawsuits and
other claims cannot be determined at this time; however, KACC does not believe
the damages will exceed the amount of coverage under its liability policies.

      Workers' Compensation
      Claims relating to all of the injured employees are expected to be covered
under KACC's workers' compensation or liability policies. However, the aggregate
amount of workers' compensation claims cannot be determined at this time, and it
is possible that such claims could exceed KACC's coverage limitations. While it
is presently impossible to determine the aggregate amount of claims that may be
incurred, or whether they will exceed KACC's coverage limitations, KACC believes
that any amount in excess of the coverage limitations will not have a material
effect on Kaiser's consolidated financial position or liquidity. However, it is
possible that as additional facts become available, additional charges may be
required and such charges could be material to the period in which they are
recorded.

      Timing of Insurance Recoveries
      As of September 30, 1999, Kaiser has accrued receivables totaling
approximately $25.0 million for estimated recoveries under its property damage
and business interruption insurance coverage. KACC is currently working with the
insurance carriers to minimize, to the extent possible, the amount and period of
time between when KACC incurs costs and when it is reimbursed. Delays in
receiving insurance proceeds could have a temporary adverse impact on KACC's and
Kaiser's short-term liquidity and delay the rebuilding of the Gramercy facility.

3.    SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

      Headwaters Transactions
      As described in Note 8 below, on September 28, 1996, the Pacific Lumber
Parties entered into the Headwaters Agreement with the United States and
California which provided the framework for the acquisition by the United States
and California of the Headwaters Timberlands. A substantial portion of the
Headwaters Timberlands contains virgin old growth timber. Approximately 4,900 of
these acres were owned by Salmon Creek, with the remaining 700 acres being owned
by Scotia LLC (Pacific Lumber owned the timber and related timber harvesting
rights on this acreage). On March 1, 1999, the Pacific Lumber Parties, the
United States and California consummated the Headwaters Agreement. Salmon Creek
received $299.9 million for its 4,900 acres, and for its 700 acres, Pacific
Lumber received the 7,700 acre Elk River Timberlands which Pacific Lumber
contributed to Scotia LLC in June 1999. Of these proceeds, $285.0 million was
deposited into an escrow account to be made available as necessary to support
the Timber Notes, and may be released only under certain circumstances. As of
September 30, 1999, the Escrowed Funds were $288.6 million.

      As a result of the disposition of the Headwaters Timberlands, the Company
recognized a pre-tax gain of $239.8 million ($142.1 million net of deferred
taxes or $18.17 per share) in the first quarter of 1999. This amount represents
the gain attributable to the portion of the Headwaters Timberlands for which the
Company received $299.9 million in cash. With respect to the remaining portion
of the Headwaters Timberlands for which the Company received the Elk River
Timberlands, no gain has been recognized as this represented an exchange of
substantially similar productive assets. These timberlands have been reflected
in the Company's financial statements at an amount which represents the
Company's historical cost for the timberlands which were transferred to the
United States.

      Scotia LLC and Pacific Lumber also entered into the Owl Creek Agreement
and the Grizzly Creek Agreement with California regarding the future sale to
California of the Owl Creek and Grizzly Creek Groves. The Owl Creek Agreement
provides for Scotia LLC to sell the Owl Creek Grove to California, no later than
June 30, 2002, for the lesser of the appraised fair market value or $79.7
million. At California's option, 25% of the payment may be paid upon closing
with three equal annual installments thereafter and without interest. With
respect to the Grizzly Creek Agreement, California may purchase from Pacific
Lumber, no later than October 31, 2000, a portion of this grove for a purchase
price determined based on fair market value, but not to exceed $19.9 million.
The net proceeds from the Grizzly Creek Grove will be placed into an escrow
account (on the same basis as the net proceeds from the sale of the Headwaters
Timberlands) unless, at the time of receipt of such proceeds, the Escrowed Funds
are no longer held in an escrow account. California also has a five year option
under the Grizzly Creek Agreement to purchase additional property adjacent to
the Grizzly Creek Grove. The sale of the Owl Creek Grove or Grizzly Creek Grove
will not be reflected in the Company's financial statements until it has been
concluded.

      Acquisition of Remaining Minority Interest in KLHP
      In February 1999, KACC, through a subsidiary, completed the acquisition of
its joint venture partner's 45% interest in KLHP for a cash purchase price of
approximately $10.0 million. As KACC already owned 55% of KLHP, the results of
KLHP were already included in the Company's consolidated financial statements.

      Disposition of Interest in AKW
      On April 1, 1999, KACC completed the previously announced sale of its 50%
interest in AKW, an aluminum wheels joint venture, to its partner, Accuride
Corporation for $70.4 million. The sale resulted in the Company recognizing a
net pre-tax gain of $50.5 million in the second quarter of 1999. The Company's
equity in income of AKW for the nine-months ended September 30, 1999 was $2.5
million. The Company's equity in income of AKW for the quarter and nine-month
periods ended September 30, 1998 was $2.2 million and $5.6 million,
respectively.

4.    INVENTORIES

      Inventories consist of the following (in millions):

<TABLE>
<CAPTION>

                                                           SEPTEMBER 30, DECEMBER 31,
                                                               1999          1998
                                                           ------------  ------------
<S>                                                        <C>           <C>
Aluminum Operations:
   Finished fabricated aluminum products.................  $     138.3   $     112.4
   Primary aluminum and work in process..................        181.0         205.6
   Bauxite and alumina...................................        112.8         109.5
   Operating supplies and repair and maintenance parts...        122.1         116.0
                                                           ------------  ------------
                                                                 554.2         543.5
                                                           ------------  ------------
Forest Products Operations:
   Lumber................................................         25.1          36.0
   Logs..................................................         15.8           8.0
                                                           ------------  ------------
                                                                  40.9          44.0
                                                           ------------  ------------
                                                           $     595.1   $     587.5
                                                           ============  ============
</TABLE>

5.    RESTRICTED CASH

      Cash and cash equivalents include restricted cash held as security for
short positions in marketable securities and for debt service payments on the
Timber Notes of $40.1 million and $96.1 million at September 30, 1999 and
December 31, 1998, respectively.

      Long-term restricted cash at September 30, 1999 primarily consists of the
Escrowed Funds and funds held in the Prefunding Account. Long-term restricted
cash at December 31, 1998 primarily consists of funds held in the Prefunding
Account.

6.    LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                                        SEPTEMBER 30,  DECEMBER 31,
                                                                                            1999           1998
                                                                                       -------------- --------------
<S>                                                                                    <C>            <C>
12% MGHI Senior Secured Notes due August 1, 2003...................................    $       130.0  $       130.0
Pacific Lumber Credit Agreement....................................................              4.0              -
6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028...........            152.6          160.7
7.11% Scotia LLC Class A-2 Timber Collateralized Notes due July 20, 2028...........            243.2          243.2
7.71% Scotia LLC Class A-3 Timber Collateralized Notes due July 20, 2028...........            463.3          463.3
107/8% KACC Senior Notes due October 15, 2006, including premium...................            225.6          225.7
97/8% KACC Senior Notes due February 15, 2002, net of discount.....................            224.5          224.4
Alpart CARIFA Loans................................................................             60.0           60.0
12 3/4% KACC Senior Subordinated Notes due February 1, 2003........................            400.0          400.0
Other aluminum operations debt.....................................................             60.1           52.9
Other notes and contracts, primarily secured by receivables, buildings,
    real estate and equipment......................................................             47.0           30.0
                                                                                       -------------- --------------
                                                                                             2,010.3        1,990.2
      Less: current maturities.....................................................            (32.3)         (18.5)
                                                                                       -------------- --------------
                                                                                       $     1,978.0  $     1,971.7
                                                                                       ============== ==============

</TABLE>


7.    PER SHARE INFORMATION

      Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period including the weighted average impact of the shares of common stock
issued and treasury stock acquired during the year from the date of issuance or
repurchase. The weighted average common shares outstanding were 7,000,863 shares
and 7,000,597 shares for the three and nine months ended September 30, 1999 and
1998, respectively.

      Diluted earnings (loss) per share calculations also include the dilutive
effect of the Class A Preferred Stock (which is convertible into Common Stock)
as well as common and preferred stock options. The weighted average number of
common and common equivalent shares was 7,000,863 shares and 7,000,597 shares
for the three months ended September 30, 1999 and 1998, respectively, and
7,826,274 shares and 7,816,615 shares for the nine months ended September 30,
1999 and 1998, respectively. The impact of outstanding convertible stock and
stock options of 828,710 and 822,613 was excluded from the weighted average
share calculation for the three months ended September 30, 1999 and 1998,
respectively, as its effect would have been antidilutive.

8.    CONTINGENCIES

      Environmental Contingencies
      Kaiser and KACC are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of the
environmental laws and regulations, and to claims and litigation based upon such
laws. KACC is currently subject to a number of claims under CERCLA and, along
with certain other entities, has been named as a potentially responsible party
for remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA.

      Based on Kaiser's evaluation of these and other environmental matters,
Kaiser has established environmental accruals primarily related to potential
solid waste disposal and soil and groundwater remediation matters. At September
30, 1999, the balance of such accruals, which are primarily included in other
noncurrent liabilities, was $49.7 million. These environmental accruals
represent Kaiser's estimate of costs reasonably expected to be incurred based on
presently enacted laws and regulations, currently available facts, existing
technology and Kaiser's assessment of the likely remediation actions to be
taken. Kaiser expects that these remediation actions will be taken over the next
several years and estimates that annual expenditures to be charged to these
environmental accruals will be approximately $3.0 million to $7.0 million for
the years 1999 through 2004 and an aggregate of approximately $31.0 million
thereafter.

      As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. As the
resolution of these matters is subject to further regulatory review and
approval, no specific assurance can be given as to when the factors upon which a
substantial portion of this estimate is based can be expected to be resolved.
However, Kaiser is working to resolve these matters. Kaiser believes that KACC
has insurance coverage available to recover certain incurred and future
environmental costs and is actively pursuing claims in this regard. No
assurances can be given that Kaiser will be successful in its attempts to
recover incurred or future costs from insurers or that the amount of recoveries
received will ultimately be adequate to cover costs incurred. While
uncertainties are inherent in the final outcome of these environmental matters,
and it is impossible to determine the actual costs that ultimately may be
incurred, management believes that the resolution of such uncertainties should
not have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.

      Asbestos Contingencies
      KACC is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The lawsuits generally relate to
products KACC has not sold for at least 20 years. At September 30, 1999, the
number of claims pending was approximately 96,600, as compared to 86,400 at
December 31, 1998. During 1998, approximately 22,900 of such claims were
received and 13,900 were settled or dismissed. During the quarter and nine-month
periods ended September 30, 1999, approximately 6,700 and 23,000 of such claims
were received and 4,800 and 12,800 of such claims were settled or dismissed.
However, the foregoing claim and settlement figures as of and for the quarter
and nine-month periods ended September 30, 1999 do not reflect the fact that as
of September 30, 1999, KACC reached agreements under which it expects to settle
approximately 28,000 of the pending asbestos-related claims over an extended
period.

      Kaiser maintains a liability for estimated asbestos-related costs for
claims filed to date and an estimate of claims expected to be filed over a 10
year period (i.e., through 2009). Kaiser's estimate is based on Kaiser's view,
at each balance sheet date, of the current and anticipated number of
asbestos-related claims, the timing and amounts of asbestos- related payments,
the status of ongoing litigation and settlement initiatives and the advice of
Wharton Levin Ehrmantraut Klein & Nash, P.A., with respect to the current state
of the law related to asbestos claims. However, there are inherent uncertainties
involved in estimating asbestos-related costs, and Kaiser's actual costs could
exceed Kaiser's estimates due to changes in facts and circumstances after the
date of each estimate. Further, while Kaiser does not believe there is
a reasonable basis for estimating asbestos-related costs beyond 2009 and,
accordingly, no accrual has been recorded for any costs which may be incurred
beyond 2009, there is a reasonable possibility that such costs may continue
beyond 2009, and that such costs could be substantial. As of September 30, 1999,
an estimated asbestos-related cost accrual of $396.0 million, before
consideration of insurance recoveries, has been reflected in the accompanying
financial statements primarily in other noncurrent liabilities. Kaiser estimates
that annual future cash payments for asbestos-related costs will range from
approximately $50.0 million to $75.0 million in the years 2000 to 2003, and an
aggregate of approximately $121.0 million thereafter.

      Kaiser believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Although Kaiser has settled
asbestos-related coverage matters with certain of its insurance carriers, other
carriers have not yet agreed to settlements. The timing and amount of ultimate
recoveries from these insurance carriers will depend on the pace of claims
review and processing by such carriers and on the resolution of any disputes
regarding coverage under such policies. Kaiser believes that substantial
recoveries from the insurance carriers are probable. Kaiser reached this
conclusion after considering its prior insurance-related recoveries in respect
of asbestos-related claims, existing insurance policies and the advice of Heller
Ehrman White & McAuliffe with respect to applicable insurance coverage law
relating to the terms and conditions of those policies. Accordingly, an
estimated aggregate insurance recovery of $317.9 million, determined on the same
basis as the asbestos-related cost accrual, is recorded primarily in long-term
receivables and other assets at September 30, 1999. However, no assurances can
be given that KACC will be able to project similar recovery percentages for any
and all future asbestos-related claims or that the amounts related to future
asbestos-related claims will not exceed KACC's aggregate insurance coverage.

      Kaiser continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from
Kaiser's underlying assumptions. This process resulted in the Company reflecting
charges of $15.2 million and $53.2 million (included in other income (expense))
in the quarter and nine-month periods ended September 30, 1999, for
asbestos-related claims, net of expected insurance recoveries, based on recent
cost and other trends experienced by KACC and other companies. While
uncertainties are inherent in the final outcome of these asbestos matters and it
is presently impossible to determine the actual costs that ultimately may be
incurred and insurance recoveries that will be received, the Company believes
that, based on the factors discussed in the preceding paragraphs, the resolution
of asbestos-related uncertainties and the incurrence of asbestos-related costs
net of related insurance recoveries should not have a material adverse effect on
the Company's consolidated financial position, results of operations or
liquidity. However, as Kaiser's estimates are periodically reevaluated,
additional charges may be necessary and such charges could be material to the
results of the period in which they are recorded.

      Labor Matters
      In connection with the USWA strike and subsequent lock-out by KACC,
certain allegations of ULPs were filed with the NLRB by the USWA. KACC responded
to all such allegations and believed that they were without merit. In July 1999,
the Oakland, California, regional office of the NLRB dismissed all material
charges filed against KACC. In September 1999, the union filed an appeal of this
ruling with the NLRB general counsel's office in Washington, D.C. If the
original decision were to be reversed, the matter would be referred to an
administrative law judge for a hearing whose outcome would be subject to an
additional appeal either by the USWA or KACC. This process could take months or
years. Although KACC knows of no reason why the original decision would be
reversed on appeal, there can be no certainty that the original NLRB decision
will be upheld. If these proceedings eventually resulted in a definitive ruling
against KACC, it could be obligated to provide back pay to USWA members at the
five plants, and such amount could be significant. However, while uncertainties
are inherent in the final outcome of such matters, the Company believes that the
resolution of the alleged ULPs should not result in a material adverse effect on
the Company's consolidated financial position, results of operations, or
liquidity.

      Forest Products Operations
      The Company's forest products operations are conducted by MGI through
Pacific Lumber and Britt. Regulatory and environmental matters play a
significant role in the Company's business, which is subject to a variety of
California and federal laws and regulations, as well as the Final HCP, Final SYP
and Pacific Lumber's 1999 TOL, dealing with timber harvesting practices,
threatened and endangered species and habitat for such species, and air and
water quality. While regulatory and environmental concerns have resulted in
restrictions on the geographic scope and timing of the Company's timber
operations, increased operational costs and engendered litigation and other
challenges to the Company's operations, prior to 1998 they had not had a
significant adverse effect on the Company's financial position, results of
operations or liquidity. However, the Company's results of operations for 1998
and for 1999 through the date of this report have been adversely affected by
certain regulatory and environmental matters, including during the second half
of 1998 through the date of this report, the absence of a sufficient number of
available THPs to enable the Company to conduct its operations at historic
levels.

      On September 28, 1996, the Pacific Lumber Parties entered into the
Headwaters Agreement with the United States and California which provided the
framework for the acquisition of the Headwaters Timberlands by the United States
and California. Consummation of the Headwaters Agreement was conditioned upon,
among other things, approval of an SYP, approval of a Multi-Species HCP and
issuance of the Permits. As further described in Note 3 "Significant
Acquisitions and Dispositions," on March 1, 1999, the Pacific Lumber Parties,
the United States and California consummated the Headwaters Agreement. In
addition to the transfer of the Headwaters Timberlands by the Pacific Lumber
Parties described in Note 3, the Final SYP and the Final HCP were approved and
the Permits were issued. The Pacific Lumber Parties and California also executed
the California Agreement.

       The Final SYP complies with certain California Board of Forestry
regulations requiring timber companies to project timber growth and harvest on
their timberlands over a 100-year planning period and establish an LTSY harvest
level. An SYP must demonstrate that the average annual harvest over any rolling
ten-year period will not exceed the LTSY harvest level and that a timber
company's projected timber inventory is capable of sustaining the LTSY harvest
level in the last decade of the 100-year planning period. The Final SYP is
effective for 10 years and may be amended by Pacific Lumber, subject to approval
by the CDF. The Final SYP is subject to review after five years. Revised SYPs
would be prepared every decade that address the LTSY harvest level based upon
reassessment of changes in the resource base and other factors.

      Several species located on the Company's timberlands, including the
northern spotted owl, the marbled murrelet, the coho salmon and the steelhead
trout, have been listed as endangered or threatened under the ESA and/or the
CESA. The Final HCP and the Permits allow incidental "take" of these and certain
other listed species so long as there is no "jeopardy" to the continued
existence of such species. The Final HCP identifies the measures to be
instituted in order to minimize and mitigate the anticipated level of take to
the greatest extent practicable. The Final HCP not only provides for the
Company's compliance with habitat requirements for the northern spotted owl, the
marbled murrelet, the coho salmon and the steelhead trout, it also provides for
issuance of Permits for thirteen additional species that are or may be listed in
the future. The Final HCP and related Permits have a term of 50 years, and,
among other things, include the following protective measures: (i) setting aside
timberlands as marbled murrelet conservation areas; (ii) establishing streamside
"no-cut" and limited cut buffers and identifying mass wasting areas of concern
based on an assessment of each of the Company's watersheds to be completed
within five years; (iii) limiting harvesting activities during certain times of
the year and during wet weather conditions; and (iv) making certain specified
improvements to the Company's roads. The Final SYP is also subject to the
foregoing provisions. The Company believes that the Final SYP and the Final HCP
should in the long-term expedite the preparation and facilitate approval of its
THPs, although the Company is experiencing difficulties in the THP approval
process as it implements these agreements.

      Under the Federal Clean Water Act, the EPA is required to establish TMDLs
in water courses that have been declared to be "water quality impaired." The EPA
and the North Coast Regional Water Quality Control Board are in the process of
establishing TMDLs for seventeen northern California rivers and certain of their
tributaries, including certain water courses that flow within the Company's
timberlands. The final TMDL requirements applicable to the Company's timberlands
may require aquatic measures that are different from or in addition to the
prescriptions to be developed pursuant to the watershed analysis process
provided for in the Final HCP.

      Lawsuits are pending and threatened which seek to prevent the Company from
implementing the Final HCP and/or the Final SYP, implementing certain of the
Company's approved THPs or carrying out certain other operations. On or about
January 29, 1999, the Company received the EPIC Notice Letter which alleges
various violations of the ESA and challenges, among other things, the validity
and legality of the Permits. On or about May 21, 1999, EPIC and other
environmental groups sent the Supplemental EPIC Notice Letter, incorporating the
EPIC Notice Letter and threatening to sue the Company, Pacific Lumber, Scotia
LLC, Salmon Creek and various government agencies for alleged violations of the
ESA relating to various aspects of the Headwaters Agreement. Separately, on
March 31, 1999, the EPIC- SYP/Permits lawsuit was filed alleging various
violations of the CESA and CEQA, and challenging, among other things, the
validity and legality of the Permits issued by California and the Final SYP. On
March 31, 1999, the USWA lawsuit was filed also challenging the validity and
legality of the Final SYP. The Company believes that appropriate procedures were
followed throughout the public review and approval process concerning the Final
Plans, and the Company is working with the relevant state and federal agencies
to defend these challenges. Although uncertainties are inherent in the final
outcome of the EPIC Notice Letter, the Supplemental EPIC Notice Letter, the
EPIC-SYP/Permits lawsuit and the USWA lawsuit, the Company believes that the
resolution of these matters should not result in a material adverse effect on
its financial condition or results of operations or the ability to harvest
timber. While the Company expects environmentally focused objections and
lawsuits to continue, it believes that the Final HCP, Final SYP and the Permits
should enhance its position in connection with these continuing challenges and,
over time, reduce or minimize such challenges.

      OTS Contingency and Related Matters
      On December 26, 1995, the OTS initiated a formal administrative proceeding
against the Company and others by filing the Notice. The Notice alleges, among
other things, misconduct by the Company, Federated, Mr. Charles Hurwitz and
others (the "respondents") with respect to the failure of USAT, a wholly owned
subsidiary of UFG. At the time of receivership, the Company owned approximately
13% of the voting stock of UFG. The Notice claims that the Company was a savings
and loan holding company, that with others it controlled USAT, and that it was
therefore obligated to maintain the net worth of USAT. The Notice makes numerous
other allegations against the Company and the other respondents, including,
among other things, allegations that through USAT it was involved in prohibited
transactions with Drexel, Burnham, Lambert Inc. The hearing on the merits of
this matter commenced on September 22, 1997 and concluded on March 1, 1999. On
February 10, 1999, the OTS and FDIC settled with all of the respondents except
Mr. Hurwitz, the Company and Federated for $1.0 million and limited cease and
desist orders.

      Post-hearing briefing is expected to continue at least until December
1999. On October 4, 1999, the OTS filed its initial post-hearing brief. In its
brief, the OTS claims, among other things, that the remaining respondents, Mr.
Hurwitz, the Company and Federated, are jointly and severally liable to pay
either $821.3 million in restitution and reimbursement or $362.6 million for
alleged unjust enrichment. The OTS also claims that each remaining respondent
should be required to pay $4.6 million in civil money penalties, and that Mr.
Hurwitz should be prohibited from engaging in the banking industry. The
respondents' brief, which was also filed on October 4, 1999, claims that none of
them has any liability in this matter.

      A recommended decision by the Administrative Law Judge is not expected any
sooner than early 2000. A final agency decision would be issued by the OTS
Director thereafter. Such decision would then be subject to appeal by any of the
parties to the federal appellate court.

      On August 2, 1995, the FDIC filed the FDIC action in the U.S. District
Court for the Southern District of Texas. The original complaint against Mr.
Hurwitz alleged damages in excess of $250.0 million based on the allegation that
Mr. Hurwitz was a controlling shareholder, de facto senior officer and director
of USAT, and was involved in certain decisions which contributed to the
insolvency of USAT. The original complaint further alleged, among other things,
that Mr. Hurwitz was obligated to ensure that UFG, Federated and the Company
maintained the net worth of USAT. On January 15, 1997, the FDIC filed an amended
complaint which seeks, conditioned on the OTS prevailing in its administrative
proceeding, unspecified damages from Mr. Hurwitz relating to amounts the OTS
does not collect from the Company and Federated with respect to their alleged
obligations to maintain USAT's net worth.

      The Company's bylaws provide for indemnification of its officers and
directors to the fullest extent permitted by Delaware law. The Company is
obligated to advance defense costs to its officers and directors, subject to the
individual's obligation to repay such amount if it is ultimately determined that
the individual was not entitled to indemnification. In addition, the Company's
indemnity obligation can, under certain circumstances, include amounts other
than defense costs, including judgments and settlements. The Company has
concluded that it is unable to determine a reasonable estimate of the loss (or
range of loss), if any, that could result from these contingencies. Accordingly,
it is impossible to assess the ultimate outcome of the foregoing matters or
their potential impact on the Company; however, any adverse outcome of these
matters could have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.

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

9.     DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

      At September 30, 1999, the net unrealized loss on KACC's position in
aluminum forward sales and option contracts (excluding the impact of those
contracts discussed below which have been marked to market), energy forward
purchase and option contracts, and forward foreign exchange contracts was
approximately $36.6 million (based on comparisons to applicable quarter-end
published market prices). As KACC's hedging activities are generally designed to
lock-in a specified price or range of prices, gains or losses on the derivative
contracts utilized in these hedging activities will generally be offset by
losses or gains, respectively, on the transactions being hedged.

      Alumina and Aluminum
      Kaiser's earnings are sensitive to changes in the prices of alumina,
primary aluminum and fabricated aluminum products, and also depend to a
significant degree upon the volume and mix of all products sold. Primary
aluminum prices have historically been subject to significant cyclical
fluctuations. Since 1993, the AMT Price has ranged from approximately $.50 to
$1.00 per pound. Alumina prices as well as fabricated aluminum product prices
(which vary considerably among products) are significantly influenced by changes
in the price of primary aluminum but generally lag behind primary aluminum price
changes by up to three months.

      From time to time in the ordinary course of business, KACC enters into
hedging transactions to provide price risk management in respect of the net
exposure of earnings and cash flows resulting from (i) anticipated sales of
alumina, primary aluminum and fabricated aluminum products, less (ii) expected
purchases of certain items, such as aluminum scrap, rolling ingot, and bauxite,
whose prices fluctuate with the price of primary aluminum. Forward sales
contracts are used by KACC to effectively fix the price that KACC will receive
for its shipments. KACC also uses option contracts (i) to establish a minimum
price for its product shipments, (ii) to establish a "collar" or range of prices
for KACC's anticipated sales, and/or (iii) to permit KACC to realize possible
upside price movements. As of September 30, 1999, KACC had sold forward, at
fixed prices, approximately 6,000 tons of primary aluminum with respect to the
remainder of 1999. As of September 30, 1999, KACC had also entered into option
contracts that established a price range for an additional 65,000, 341,000 and
180,000 tons of primary aluminum for the remainder of 1999, 2000 and 2001,
respectively.

      Additionally, through September 30, 1999, KACC had entered into a series
of transactions with a counterparty that will provide KACC with a premium over
the forward market prices at the date of the transaction for 4,000 tons of
primary aluminum per month during the period October 1999 through June 2001.
KACC also contracted with the counterparty to receive certain fixed prices (also
above the forward market prices at the date of the transaction) on 8,000 tons of
primary aluminum per month over a three year period commencing October 2001,
unless market prices during certain periods decline below a stipulated "floor"
price, in which case, the fixed price sales portion of the transactions
terminate. The price at which the October 2001 and later transactions terminate
is well below current market prices. While Kaiser believes that the October 2001
and later transactions are consistent with its stated hedging objectives, these
positions do not qualify for treatment as a "hedge" under current accounting
guidelines. Accordingly, these positions are "marked to market" each period. For
the quarter and nine-month periods ended September 30, 1999, Kaiser recorded
mark-to-market charges of $5.9 million and $20.0 million in other income
(expense) associated with the transactions described in this paragraph.

      As of September 30, 1999, virtually all of KACC's sales of alumina to
third parties for 1999, 2000 and 2001 are indexed to future prices of primary
aluminum.

      Energy
   KACC is exposed to energy price risk from fluctuating prices for fuel oil and
diesel fuel consumed in the production process. KACC from time to time in the
ordinary course of business enters into hedging transactions with major
suppliers of energy and energy related financial instruments. As of September
30, 1999, KACC held a combination of fixed price purchase and option contracts
for an average of 249,000 and 232,000 barrels per month of fuel oil and diesel
fuel for 1999 and 2000, respectively.

      Foreign Currency
      KACC enters into forward exchange contracts to hedge material cash
commitments in respect of foreign subsidiaries or affiliates. At September 30,
1999, KACC had net forward foreign exchange contracts totaling approximately
$113.1 million for the purchase of 170.0 million Australian dollars from October
1999 through May 2001, in respect of its Australian dollar-denominated
commitments for the remainder of 1999 through May 2001. In addition, KACC has
entered into an option contract to purchase 42.0 million Australian dollars for
the period from January 2000 through June 2001.

10.     SEGMENT INFORMATION

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

<TABLE>
<CAPTION>


                                                       FOREST      REAL       RACING                  CONSOLIDATED
                                         ALUMINUM     PRODUCTS    ESTATE    OPERATIONS   CORPORATE        TOTAL
                                       ------------  ----------  --------  ------------ -----------  --------------

<S>                                    <C>           <C>         <C>       <C>          <C>          <C>
Net sales to unaffiliated customers
   for the three months ended:
      September 30, 1999.............  $     520.3   $    49.0   $   9.2   $       6.8  $        -   $       585.3
      September 30, 1998.............        541.6        65.9      15.2           6.1           -           628.8

Operating income (loss) for the
   three months ended:
      September 30, 1999.............        (10.6)       (3.8)     (2.9)          0.3        (2.1)          (19.1)
      September 30, 1998.............         32.3        12.9      (0.9)            -        (3.9)           40.4

Depreciation, depletion and
amortization for the three months
   ended:
      September 30, 1999.............         19.4         3.7       1.5           0.2         0.2            25.0
      September 30, 1998.............         23.0         5.9       0.9           0.2          -             30.0

Net sales to unaffiliated customers
   for the nine months ended:
      September 30, 1999.............      1,524.7       137.1      37.4          19.7           -         1,718.9
      September 30, 1998.............      1,753.4       181.3      41.0          16.7           -         1,992.4

Operating income (loss) for the
   nine months ended:
      September 30, 1999.............        (39.9)       (8.5)     (4.2)          2.5        (6.8)          (56.9)
      September 30, 1998.............        135.4        37.7      (0.7)          0.6       (10.3)          162.7

Depreciation, depletion and
amortization for the nine months
   ended:
      September 30, 1999.............         64.9        12.9       4.7           0.8         0.4            83.7
      September 30, 1998.............         70.3        17.3       2.0           0.7         0.4            90.7

Total assets as of:
      September 30, 1999.............      3,037.3       867.7     191.6          37.9       162.7         4,297.2
      December 31, 1998..............      2,928.7       682.6     194.6          36.3       233.0         4,075.2

</TABLE>


      Operating income (loss) in the column entitled "Corporate" represents
corporate general and administrative expenses not directly attributable to the
reportable segments. This column also serves to reconcile the total of the
reportable segments' amounts to totals in the Company's consolidated financial
statements. The reconciling amounts for total assets for September 30, 1999 and
December 31, 1998 are primarily related to deferred tax assets. The increase in
assets for the forest products segment between periods is primarily due to the
deposit of $285.0 million of Escrowed Funds related to the sale of the
Headwaters Timberlands.

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

      The following should be read in conjunction with the response to Part I,
Item 1 of this Report and Items 7 and 8 of the Form 10-K. Any capitalized terms
used but not defined in this Item are defined in the "Glossary of Defined Terms"
contained in Appendix A.

      This Quarterly Report on Form 10-Q contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places in
this section, in Item 3. "Quantitative and Qualitative Disclosures About Market
Risk" and in Part II. Item 1. "Legal Proceedings." Such statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Readers are cautioned that any such forward- looking
statements are not guarantees of future performance and involve significant
risks and uncertainties, and that actual results may vary materially from 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 Form 10-Q and the Form 10-K identify 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.

RESULTS OF OPERATIONS

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

   ALUMINUM OPERATIONS

      Aluminum operations account for a substantial portion of the Company's
revenues and operating results. Kaiser, through its principal subsidiary KACC,
operates in four business segments: bauxite and alumina, primary aluminum,
flat-rolled products and engineered products. Kaiser uses a portion of its
bauxite, alumina and primary aluminum production for additional processing at
certain of its downstream facilities. Intersegment transfers are valued at
estimated market prices.

      Recent Events and Developments

      Incident at Gramercy Facility
      On July 5, 1999, KACC's Gramercy, Louisiana alumina refinery was
extensively damaged by an explosion in the digestion area of the plant.
Twenty-four employees were injured in the incident, several of them severely. As
a result of the incident, alumina production at the facility was completely
curtailed. Production at the plant is expected to remain curtailed until at
least mid-2000 when KACC expects to begin partial production. Based on
preliminary estimates, full production is expected to be achieved by the end of
2000 or shortly thereafter. However, any delay in obtaining the necessary
permits or approvals to begin construction or operations would likely delay
these expected production dates. Shortly after the incident, KACC declared force
majeure with respect to certain of its third party alumina and hydrate sales
contracts and third party vendor purchase contracts. However, KACC subsequently
agreed to supply certain third party alumina customers. See Business
Interruption below.

      The cause of the incident is under investigation by KACC and governmental
agencies. Depending on the outcome of the ongoing investigations by the various
government agencies, KACC could be subject to civil and/or criminal fines and
penalties. However, as more fully explained below, based on what is known to
date, Kaiser believes that the financial impact of this incident (in excess of
insurance deductibles and self-retention provisions) will be largely offset by
insurance coverage.

      KACC has significant amounts of insurance coverage related to the Gramercy
incident. Deductibles and self- retention provisions under the insurance
coverage for the incident total $5.0 million, which amounts have been charged to
cost of sales and operations during the quarter ended September 30, 1999. KACC's
insurance coverage has four separate components: property damage, business
interruption, liability and workers' compensation. These components are
discussed in the following paragraphs.

      Property Damage. KACC's insurance policies provide that, if KACC rebuilds
the facility (which is KACC's current intention), KACC will be reimbursed for
the costs of repairing or rebuilding the damaged portion of the facility using
new materials of like kind and quality with no deduction for depreciation. KACC
and its engineers are in the process of developing construction alternatives and
cost projections to rebuild the facility. Once this process is complete, KACC
will have detailed discussions with the insurance carriers and their
representatives regarding the amount of reimbursement. KACC expects that it will
be able to reach an agreement with its insurance carriers as to a minimum amount
of property damage reimbursement during the fourth quarter of 1999. However,
there can be no assurance that the discussions with the insurance carriers and
their representatives will be completed by the end of the fourth quarter or that
the minimum amount of insurance proceeds will be known by that time. It is
unclear when KACC will reach a final agreement as to the ultimate amount of
recoveries KACC will receive. At September 30, 1999, KACC had accrued
approximately $3.0 million for estimated property damage insurance recoveries.

      As the estimated amount of reimbursement becomes known to KACC, it will be
required under generally accepted accounting principles to recognize gains to
the extent that the estimated insurance proceeds exceed the carrying value of
the damaged property, which is approximately $15.0 million. Such gains may be
reflected beginning in the fourth quarter of 1999 and from time to time
thereafter as additional property reimbursements are agreed to by the insurance
carriers. The amount of such gains is expected to be significant. The overall
impact of recognizing the gains will be a significant increase in stockholders'
equity and an increase in depreciation expense in future years once production
is restored.

      Business Interruption. KACC's insurance policies provide for the
reimbursement of specified continuing expenses incurred during the interruption
period plus lost profits (or less expected losses) plus other expenses incurred
as a result of the incident. Operations at the Gramercy facility and a 49%-owned
facility in Jamaica, which supplies bauxite to Gramercy, will continue to incur
operating expenses until production at the Gramercy facility is restored. The
Gramercy facility will also incur incremental costs for clean up and other
activities during the remainder of 1999 and 2000. Additionally, KACC will incur
increased costs as a result of recent agreements to supply certain of Gramercy's
major customers with alumina, despite the fact that KACC had declared force
majeure with respect to the contracts shortly after the incident. KACC is
purchasing alumina from third parties, in excess of the amounts of alumina
available from other KACC-owned facilities, to supply these customers' needs as
well as to meet intersegment requirements. In consideration of all of the
foregoing items, KACC has recorded expected business interruption insurance
recoveries totaling $22.0 million as a reduction of cost of sales and
operations, which amount substantially offsets actual expenses incurred during
the quarter ended September 30, 1999. However, the amount recorded represents an
estimate of KACC's business interruption coverage, based on preliminary
discussions with the insurance carriers and their representatives, and is,
therefore, subject to change. KACC believes that additional amounts may be
recoverable. Any adjustments to the recorded amounts of expected recovery will
be reflected from time to time as agreements with the insurance carriers are
reached. The amounts of such adjustments could be material.

      Since production has been completely curtailed at the Gramercy facility,
KACC has, for the time being, suspended depreciation of the facility.
Depreciation expense for the first six months of 1999 was approximately $6.0
million. However, KACC believes that the depreciation expense that would have
been incurred may be recoverable, at least in part, under its business
interruption insurance coverage.

      Liability. The incident has also resulted in more than thirty lawsuits
being filed against KACC alleging, among other things, property damage and
personal injury. In addition, a claim for alleged business interruption losses
has been made by a neighboring business. The aggregate amount of damages sought
in the lawsuits and other claims cannot be determined at this time; however,
KACC does not believe the damages will exceed the amount of coverage under its
liability policies.

      Workers' Compensation. Claims relating to all of the injured employees are
expected to be covered under KACC's workers' compensation or liability policies.
However, the aggregate amount of workers' compensation claims cannot be
determined at this time, and it is possible that such claims could exceed KACC's
coverage limitations. While it is presently impossible to determine the
aggregate amount of claims that may be incurred, or whether they will exceed
KACC's coverage limitations, KACC believes that any amount in excess of the
coverage limitations will not have a material effect on Kaiser's consolidated
financial position or liquidity. However, it is possible that as additional
facts become available, additional charges may be required and such charges
could be material to the period in which they are recorded.

      Timing of Insurance Recoveries. As of September 30, 1999, Kaiser has
accrued receivables totaling approximately $25.0 million for estimated
recoveries under its property damage and business interruption insurance
coverage. KACC is currently working with the insurance carriers to minimize, to
the extent possible, the amount and period of time between when KACC incurs
costs and when it is reimbursed. Delays in receiving insurance proceeds could
have a temporary adverse impact on KACC's and Kaiser's short-term liquidity and
delay the rebuilding of the Gramercy facility.

      Labor Matters
      Substantially all of KACC's hourly workforce at its Gramercy, Louisiana,
alumina refinery, Mead and Tacoma, Washington, aluminum smelters, Trentwood,
Washington, rolling mill, and Newark, Ohio, extrusion facility were covered by a
master labor agreement with the USWA which expired on September 30, 1998. The
parties did not reach an agreement prior to the expiration of the master
agreement and the USWA chose to strike. In January 1999, KACC declined an offer
by the USWA to have the striking workers return to work at the five plants
without a new agreement. KACC imposed a lock-out to support its bargaining
position and continues to operate the plants with salaried employees and other
workers as it has since the strike began.

      As a result of the USWA strike, KACC temporarily curtailed three out of a
total of eleven potlines at its Mead and Tacoma, Washington, aluminum smelters
at September 30, 1998 (representing approximately 70,000 tons per year of
production capacity out of a total combined production capacity of 273,000 tons
per year at the facilities). The first of the two Mead potline restarts was
completed during the second quarter of 1999. Restart activities on the second of
the two Mead potlines were completed in August 1999. The timing for any restart
of the Tacoma potline has yet to be determined and will depend upon market
conditions and other factors.

      While Kaiser initially experienced an adverse strike-related impact on its
profitability, Kaiser believes that KACC's operations at the affected facilities
have been substantially stabilized and will be able to run at, or near, full
capacity, and that the effect of the incremental costs associated with operating
the affected plants during the dispute was eliminated or substantially reduced
as of January 1999 (excluding the impacts of the restart costs discussed above
and the effect of market factors such as the continued market-related
curtailment at the Tacoma smelter). However, no assurances can be given that
KACC's efforts to run the plants on a sustained basis, without a significant
business interruption or material adverse impact on Kaiser's operating results,
will be successful.

      KACC and the USWA continue to communicate. The objective of KACC has been,
and continues to be, to negotiate a fair labor contract that is consistent with
its business strategy and the commercial realities of the marketplace.

      Strategic Initiatives
      Kaiser has devoted significant efforts toward analyzing its existing asset
portfolio with the intent of focusing its efforts and capital in sectors of the
industry that are considered most attractive, and in which Kaiser believes it is
well positioned to capture value. The initial steps of this process resulted in
the June 1997 acquisition of the Bellwood extrusion facility, the May 1997
formation of AKW, the rationalization of certain of Kaiser's engineered products
operations, Kaiser's investment to expand its production capacity for heat treat
flat-rolled products at its Trentwood, Washington, rolling mill, and Kaiser's
fourth quarter 1998 decision to seek a strategic partner for further development
and deployment of KACC's Micromill(TM) technology (see, however, "Impairment of
Micromill Assets" below). This process has continued in 1999. In February 1999,
KACC completed the acquisition of the remaining 45% interest in KLHP, an alumina
marketing venture, from its joint venture partner for a cash purchase price of
approximately $10.0 million. Additionally, in April 1999, KACC completed the
sale of its interest in AKW, an aluminum wheel joint venture, to its partner,
Accuride Corporation for $70.4 million. The cash sale represents a continuation
of Kaiser's strategy to focus its resources and efforts in industry segments
that are considered most attractive and in which it believes it is well
positioned to capture value.

      Another area of emphasis has been a continuing focus on managing Kaiser's
legacy liabilities, including Kaiser's active pursuit of claims in respect of
insurance coverage for certain incurred and future environmental costs, as
evidenced by KACC's fourth quarter 1998 receipt of recoveries totaling
approximately $35.0 million related to current and future claims against certain
of its insurers.

      Impairment of Micromill Assets
      As previously announced, in early 1999, KACC began a search for a
strategic partner for the further development and deployment of its Micromill
technology. This change in strategic course was based on management's conclusion
that additional time and investment would be required to achieve a commercial
success. Given Kaiser's other strategic priorities, Kaiser believed that
introducing added commercial and financial resources was the appropriate course
of action for capturing the maximum long-term value. A number of third parties
were contacted regarding joint ventures or other arrangements. Based on
negotiations with these third parties, KACC now believes that a sale of the
Micromill assets and technology is more likely than a partnership and that any
such sales transaction would likely result in KACC receiving a combination of a
small up front payment and future payments based on the subsequent performance
and profitability of the Micromill technology. As a result of these
negotiations, KACC concluded that the carrying value of the Micromill assets
should be reduced by $19.1 million. Accordingly, KACC recorded a non-cash
impairment charge to reflect this write-down in the third quarter of 1999.

      Valco Operating Level
      KACC's 90%-owned Valco smelter operated only one of its five potlines
during most of 1998. Each of Valco's potlines is capable of producing
approximately 40,000 tons per year of primary aluminum. Valco earned
compensation in 1998 (in the form of energy credits to be utilized over the last
half of 1998 and during 1999) from the VRA in lieu of the power necessary to run
two of the potlines that were curtailed during 1998. The compensation
substantially mitigated the financial impact in 1998 of the curtailment of such
lines. However, Valco did not receive any compensation from the VRA for one
additional potline which was curtailed in January 1998. Valco's power allocation
for 1999 was sufficient for the smelter to increase its operations from one
potline to three potlines as of January 1, 1999. However, production was well
below this level in the first half of the year due to the timing of restarts for
the two incremental potlines. Consequently, to compensate for low production the
first half of the year, Valco has operated above an equivalent three-potline
annual rate during the third quarter of 1999 and is expected to continue this
production rate during the fourth quarter of 1999. Valco is not expected to
receive notice of its 2000 power allocation until sometime in the fourth quarter
of 1999. However, taking into account the strong rains in the region and the
current lake level, Kaiser expects that Valco may be allocated sufficient power
to operate at least four potlines throughout 2000. However, there can be no
assurances that Valco will be allocated sufficient power to run four potlines or
that Valco will, in fact, operate at that level. Valco has notified the VRA that
it believes it had the contractual rights at the beginning of 1998 and 1999 to
sufficient energy to run four and one-half potlines for the balance of both
years. Valco continues to seek compensation from the VRA with respect to the
1998 and 1999 reductions in its power allocation. Valco and the VRA also are in
continuing discussions concerning other matters, including steps that might be
taken to reduce the likelihood of power curtailments in the future. No
assurances can be given as to the success of these discussions.

     Electric Power Contract - Anglesey
     Electric power for the Anglesey smelter is supplied under a contract which
expires in 2001. Anglesey expects to enter into a new power agreement in the
fourth quarter of 1999 under which the existing contract would terminate early,
in April 2000, and the new agreement would replace it for the period April 2000
through September 2005. Kaiser expects that the price of power under the new
agreement will be greater than the price under the present contract, which will
reduce KACC's earnings associated with the Anglesey smelter. However, Anglesey
has ongoing initiatives to offset the impact of increased energy costs through
cost reduction and revenue enhancement initiatives by 2001. However, no
assurance can be given that these initiatives will be successful in offsetting
such increased energy costs.

     Summary
     The following table presents selected operational and financial information
for the three and nine months ended September 30, 1999 and 1998.

<TABLE>
<CAPTION>


                                                                       THREE MONTHS ENDED       NINE MONTHS ENDED
                                                                          SEPTEMBER 30,           SEPTEMBER 30,
                                                                     ----------------------  -----------------------
                                                                        1999        1998        1999        1998
                                                                     ----------  ----------  ----------- -----------
                                                                  (IN MILLION OF DOLLARS, EXCEPT SHIPMENTS AND PRICES)
<S>                                                                  <C>         <C>         <C>         <C>
Shipments: (1)
   Alumina:
      Third party................................................        572.4       644.6      1,670.8     1,721.7
       Intersegment..............................................        191.4       123.8        531.0       536.2
                                                                     ----------  ----------  ----------- -----------
        Total alumina............................................        763.8       768.4      2,201.8     2,257.9
                                                                     ----------  ----------  ----------- -----------
   Primary aluminum:
      Third party................................................         75.4        61.5        207.3       210.3
      Intersegment...............................................         44.6        48.8        130.4       134.9
                                                                     ----------  ----------  ----------- -----------
        Total primary aluminum...................................        120.0       110.3        337.7       345.2
                                                                     ----------  ----------  ----------- -----------
   Flat-rolled products..........................................         54.3        57.0        165.8       180.3
                                                                     ----------  ----------  ----------- -----------
   Engineered products...........................................         42.9        40.7        127.8       130.7
                                                                     ----------  ----------  ----------- -----------
Average realized third party sales price: (2)
   Alumina (per ton).............................................    $     177   $     190   $      173  $      195
   Primary aluminum (per pound)..................................    $     .68   $     .70   $      .66  $      .70
Net sales:
   Bauxite and alumina:
      Third party (includes net sales of bauxite)................    $   108.3   $   129.3   $    308.8  $    359.5
      Intersegment...............................................         33.7        21.2         86.3        99.5
                                                                     ----------  ----------  ----------- -----------
        Total bauxite and alumina................................        142.0       150.5        395.1       459.0
                                                                     ----------  ----------  ----------- -----------
   Primary aluminum:
      Third party................................................        113.5        94.6        303.1       326.6
      Intersegment...............................................         65.7        66.9        177.9       194.7
                                                                     ----------  ----------  ----------- -----------
           Total primary aluminum................................        179.2       161.5        481.0       521.3
                                                                     ----------  ----------  ----------- -----------
   Flat-rolled products..........................................        140.8       166.2        444.4       557.5
   Engineered products...........................................        134.5       132.6        405.8       451.2
   Minority interests............................................         23.2        18.8         62.6        58.6
   Eliminations..................................................        (99.4)      (88.0)      (264.2)     (294.2)
                                                                     ----------  ----------  ----------- -----------
        Total net sales..........................................    $   520.3   $   541.6   $   1,524.7 $  1,753.4
                                                                     ==========  ==========  =========== ===========
Operating income (loss)..........................................    $   (10.6)  $    32.3   $    (39.9) $    135.4
                                                                     ==========  ==========  =========== ===========
Income (loss) before income taxes and minority interests.........    $   (59.7)  $     5.9   $   (141.6) $     52.2
                                                                     ==========  ==========  =========== ===========
Capital expenditures and investments in
   unconsolidated affiliates.....................................    $    10.0   $    15.6   $     40.3  $     52.3
                                                                     ==========  ==========  =========== ===========
<FN>
---------------------------

(1)   Shipments are expressed in thousands of metric tons.  A metric ton is
      equivalent to 2,204.6 pounds.
(2)   Average realized prices for Kaiser's flat-rolled products and engineered
      products segments are not presented as such prices are subject to
      fluctuations due to changes in product mix. Average realized third party
      sales prices for alumina and primary aluminum include the impact of
      hedging activities.
</FN>
</TABLE>


      Overview
      Kaiser's operating results are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products, and also depend to a
significant degree on the volume and mix of all products sold and on KACC's
hedging strategies. Primary aluminum prices have historically been subject to
significant cyclical fluctuations. See Note 9 to the Consolidated Financial
Statements for a discussion of KACC's hedging activities.

      Changes in global, regional, or country-specific economic conditions can
have a significant impact on overall demand for aluminum-intensive fabricated
products in the transportation, distribution, and packaging markets. Such
changes in demand can directly affect Kaiser's earnings by impacting the overall
volume and mix of such products sold. To the extent that these end-use markets
weaken, demand can also diminish for what Kaiser sometimes refers to as the
"upstream" products: alumina and primary aluminum.

      During 1998, the AMT Price experienced a steady decline during the year,
beginning the year in the $.70 to $.75 per pound range and ending the year in
the low $.60 per pound range. During the first nine months of 1999, the AMT
Price increased from a per pound range of $.57 to $.67 during the first six
months to a $.67 to $.72 per pound range during the third quarter. The AMT Price
for the week ended October 15, 1999 was approximately $.71 per pound.

      The operating loss before income taxes and minority interests for the
quarter and nine months ended September 30, 1999 included a non-cash pre-tax
charge of $19.1 million to reduce the carrying value of KACC's Micromill assets.
The loss before income taxes and minority interests for the quarter ended
September 30, 1999 included a non-cash pre-tax charge of $15.2 million for
asbestos-related claims and a pre-tax charge of $5.9 million to reflect
mark-to-market adjustments on certain primary aluminum hedging transactions. The
loss before income taxes and minority interests for the nine-month period ended
September 30, 1999 included a pre-tax charge of $20.0 million to reflect
mark-to-market adjustments on certain primary aluminum hedging transactions and
a non-cash pre-tax charge of $53.2 million for asbestos-related claims. The
charges for the nine-month period were offset by a pre-tax gain of $50.5 million
on the sale of Kaiser's interests in AKW.

      Operating income for the quarter and nine-month periods ended September
30, 1998 included a non-recurring unfavorable gross profit impact of preparing
for a strike by employees represented by the USWA at five locations.

      Net sales

      Bauxite and alumina. Third party net sales of alumina declined 16% for the
quarter ended September 30, 1999, as compared to the same period in 1998 as a
result of a 7% decline in third party average realized price and an 11% decline
in third party alumina shipments. While the per ton amount realized from third
party sales of alumina under KACC's primary-aluminum-linked alumina sales
contracts actually rose quarter over quarter, Kaiser's average realized third
party prices declined due to a decrease in net gains from the KACC hedging
activities. While primary aluminum prices have increased by approximately 7% in
the third quarter of 1999 over second quarter 1999 prices, this increase in
prices will not be reflected in the segment's sales or operating results until
the following quarter as most of KACC's alumina sales contracts are linked to
metal prices on a lagged basis of up to three months. The decline in third party
shipments of alumina between the third quarter of 1999 and 1998 resulted
primarily from differences in the timing of shipments and, to a lesser extent,
the net effect of the Gramercy incident, after considering the 190,000 tons of
alumina purchased by KACC from third parties to fulfill third party sales
contracts.

      Intersegment net sales of bauxite and alumina for the third quarter of
1999 increased by 59% as compared to the same period in 1998. The increase in
net sales was due to a 55% increase in intersegment shipments of alumina,
primarily resulting from the impact of Valco operating three potlines in 1999 as
compared to one potline in 1998 and a 3% increase in the intersegment average
realized price due to higher primary aluminum prices in 1999 over the same
period in 1998.

      For the nine-month period ended September 30, 1999, third party net sales
of alumina were 14% lower than the comparable period in 1998 as the result of an
11% decline in third party average realized prices and a 3% decrease in third
party shipments. The decline in average realized prices during the first nine
months of 1999 as compared to 1998 was attributable to lower realizations under
KACC's primary aluminum linked alumina sales contracts caused by lower primary
aluminum market prices as well as a decrease in net gains from KACC hedging
activities. The decrease in year- over-year shipments was due primarily to the
effect of the Gramercy incident described above.

      Intersegment net sales of bauxite and alumina for the nine-month period
ended September 30, 1999, declined by 13% as compared to the same period in
1998. The decline in net sales was primarily due to the 12% decline in
intersegment average realized price, due to lower primary aluminum prices, as
well as reduced intersegment shipments, resulting from potline curtailments at
Kaiser's Washington smelters.

      Primary aluminum. Third party net sales of primary aluminum for the third
quarter of 1999 were up 20% as compared to the same period in 1998 as a result
of a 23% increase in third party shipments offset, in part, by a 3% decrease in
the average realized third party sales prices. The increase in quarterly
shipments was primarily due to the favorable impact of Valco operating three
potlines in 1999, as compared to one potline in 1998, net of the unfavorable
impact of the curtailments of one potline at the Tacoma smelter and one potline
at the Mead smelter for a portion of the quarter. While average primary aluminum
market prices for the quarter ended September 30, 1999, were greater than those
in the third quarter of 1998, Kaiser experienced a reduction in
quarter-over-quarter average realized third party prices as a result of a
decrease in net gains from KACC hedging activities. Intersegment net sales in
the third quarter of 1999 decreased approximately 2% from 1998. Intersegment
shipments decreased 9% from the comparable prior year period while the average
realized price increased by 8%. The increase in the average realized price
resulted from higher primary aluminum prices for 1999 over the same period in
1998. The decrease in intersegment shipments between 1999 and 1998 was due to
the timing of shipments to Kaiser's fabricated business units as well as reduced
internal requirements, primarily at Kaiser's flat-rolled business units.

      For the nine-month period ended September 30, 1999, third party net sales
of primary aluminum declined approximately 7% from the comparable period in
1998, primarily as a result of a 6% decline in third party average realized
prices. Third party shipments were essentially flat. The decline in third party
average realized prices was attributable to both a decrease in primary aluminum
market prices and a decrease in net gains from KACC hedging activities.
Intersegment net sales for the first nine months of 1999 were down 9% as
compared to the same period in 1998. Intersegment average realized prices were
down 5% reflecting lower market prices for aluminum. Intersegment shipments
declined 3% due to the timing of shipments to Kaiser's fabricated business
units.

      Flat-rolled products. Net sales of flat-rolled products for the third
quarter of 1999 declined by 15% compared to the third quarter of 1998 as a
result of an 11% decline in average realized prices and a 5% decline in
shipments. The reduction in shipments was primarily due to reduced demand in
1999 for aerospace heat treat products offset, in small part, by increased
shipments of general engineering products. The decline in 1999 average realized
prices resulted primarily from a shift of product mix (from aerospace products,
which have a higher price and operating margin, to other products) and a
reduction in prices resulting from reduced demand for heat treat products.

      For the nine-month period ended September 30, 1999, net sales of
flat-rolled products declined by 20% from the comparable period in 1998 as a
result of a 13% decline in average realized price and an 8% decline in product
shipments. The declines in year-to-date 1999 prices and shipments as compared to
1998 were attributable to the same factors described above for the third quarter
of 1999.

      Engineered products. Third quarter 1999 net sales of engineered products
were slightly higher than those in the third quarter of 1998. A 5% increase in
product shipments was substantially offset by a 4% decline in average realized
prices. The increase in quarterly shipments was due to a strong increase in the
1999 demand for ground transportation products offset, in part, by a reduced
demand in 1999 for aerospace products. The reduction in average realized price
between periods was attributable to a change in product mix (higher ground
transportation shipments offset by lower aerospace shipments). For the
nine-month period ended September 30, 1999, net sales of engineered products
declined by approximately 10% from the comparable period in 1998, as a result of
an 8% decline in average realized prices and a 2% decline in product shipments.
The decline in year-to-date average prices was due to the change in product mix
as described above for the third quarter of 1999. On a year-to-date basis,
shipments of engineered products for 1999 declined slightly from 1998 as reduced
aerospace shipments were almost entirely offset by increased ground
transportation product shipments.

   Operating income (loss)

      Bauxite and alumina. Operating income for the quarter and nine-month
periods ended September 30, 1999 was down from the comparable periods of 1998
primarily as a result of the price and, to a lesser extent, the volume factors
discussed above. Operating income for the quarter and nine months ended
September 30, 1999 also reflects the net impact of the Gramercy incident (see
"Recent Events and Developments" above) after estimated insurance recoveries.
Operating income for the quarter and nine-month periods ended September 30, 1998
included the adverse impact of approximately $1.0 million of incremental
strike-related costs.

      Primary aluminum. Operating income for the quarter and nine-month periods
ended September 30, 1999 was down from the comparable periods of 1998. The most
significant component of this decline was the reduction in average realized
prices discussed above. However, also included in 1999 results was the adverse
impact of the Valco and Washington smelter potline curtailments (including the
fact that there is no mitigating compensation being earned in 1999 for the Valco
potline curtailments) and costs of approximately $1.9 million and $11.5 million
for the quarter and nine-month periods ended September 30, 1999, respectively,
associated with preparing and restarting potlines at the Valco and Washington
smelters. Operating income for the quarter and nine-month periods ended
September 30, 1998 included the adverse impact of approximately $5.0 million of
incremental strike-related costs.

      Flat-rolled products. Operating income decreased significantly in the
third quarter and first nine months of 1999 primarily as a result of the decline
in prices and shipments discussed above. Operating income for the quarter and
nine-month periods ended September 30, 1998 included the adverse impact of
approximately $3.0 million of incremental strike-related costs.

      Engineered products. Operating income for the third quarter 1999 increased
from the comparable period in 1998 due to the same factors affecting sales
discussed above. Operating income for the year-to-date period declined from the
comparable period in 1998 as a result of the reduced equity in earnings from AKW
(which partnership interests were sold in April 1999) as well as the product mix
shift discussed above. Operating income for the quarter and nine-month periods
ended September 30, 1998 included the adverse impact of approximately $1.0
million of incremental strike-related costs.

      Eliminations. Eliminations of intersegment profit vary from period to
period depending on fluctuations in market prices as well as the amount and
timing of the affected segments' production and sales.

      FOREST PRODUCTS OPERATIONS

      The Company's forest products operations are conducted by MGI through its
principal operating subsidiaries. MGI'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.
Accordingly, MGI's results for any one quarter are not necessarily indicative of
results to be expected for the full year.

      The following table presents selected operational and financial
information for the three and nine months ended September 30, 1999 and 1998.

<TABLE>
<CAPTION>

                                             THREE MONTHS ENDED        NINE MONTHS ENDED
                                                SEPTEMBER 30,            SEPTEMBER 30,
                                           ------------------------------------------------
                                              1999        1998         1999        1998
                                           ----------- -----------  ----------  -----------
                                                   (IN MILLIONS OF DOLLARS, EXCEPT
                                                        SHIPMENTS AND PRICES)
<S>                                        <C>         <C>          <C>         <C>
Shipments:
   Lumber: (1)
      Redwood upper grades..............          4.9        11.1        19.1         33.2
      Redwood common grades.............         33.4        63.6       101.0        177.1
      Douglas-fir upper grades..........          3.0         1.6         7.5          5.1
      Douglas-fir common grades.........         18.3        11.6        46.0         32.9
      Other.............................          1.8         0.7         6.2          6.4
                                           ----------- -----------  ----------  -----------
        Total lumber....................         61.4        88.6       179.8        254.7
                                           =========== ===========  ==========  ===========
   Wood chips (2).......................         48.1        58.8       124.7        139.6
                                           =========== ===========  ==========  ===========

Average sales price:
   Lumber: (3)
      Redwood upper grades..............   $    1,633  $    1,453   $   1,500   $    1,486
      Redwood common grades.............          646         560         607          540
      Douglas-fir upper grades..........        1,267       1,264       1,286        1,275
      Douglas-fir common grades.........          467         376         433          353
   Wood chips (4).......................           78          74          78           72

Net sales:
   Lumber, net of discount..............   $     42.3  $     57.9   $   120.5   $    163.7
   Wood chips...........................          3.8         4.3         9.7         10.0
   Cogeneration power...................          1.4         1.4         2.7          3.2
   Other................................          1.5         2.3         4.2          4.4
                                           ----------- -----------  ----------  -----------
        Total net sales.................   $     49.0  $     65.9   $   137.1   $    181.3
                                           =========== ===========  ==========  ===========
Operating income (loss).................   $     (3.8) $     12.9   $    (8.5)  $     37.7
                                           =========== ===========  ==========  ===========
Operating cash flow (5).................   $     (0.1) $     18.8   $     4.4   $     55.0
                                           =========== ===========  ==========  ===========
Income (loss) before income taxes (6)...   $    (14.6) $     (8.1)  $   201.9   $    (15.0)
                                           =========== ===========  ==========  ===========
Capital expenditures....................   $      2.4  $      4.4   $    20.0   $     10.4
                                           =========== ===========  ==========  ===========

<FN>

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

(1)   Lumber shipments are expressed in millions of board feet.
(2)   Wood chip shipments are expressed in thousands of bone dry units of
      2,400 pounds.
(3)   Dollars per thousand board feet.
(4)   Dollars per bone dry unit.
(5)   Operating income before depletion and depreciation, also referred to as
      "EBITDA."
(6)   1999 results include a $239.8 million gain on the sale of the
      Headwaters Timberlands.

</FN>
</TABLE>

      Net sales
        Net sales for the three and nine month periods ended September 30, 1999
decreased from the comparable 1998 periods due primarily to lower shipments of
upper and common grade redwood lumber offset somewhat by higher shipments of
Douglas-fir lumber and higher prices for redwood and Douglas-fir lumber. The
decrease in shipments of redwood lumber is largely due to continuing reductions
in the volume of logs available for the production of lumber products. As was
the case in the first half of 1999, the diminished supply of approved THPs
continued to affect log supplies in the third quarter. Net sales for the nine
months ended September 30, 1999 were also affected by seasonal restrictions on
logging operations. See "--Trends" for further discussion of the factors
affecting the supply of approved THPs.

        Operating income (loss)
      The Forest Products segment had an operating loss for the three and nine
months ended September 30, 1999 as compared to operating income for the
comparable 1998 periods primarily due to the decrease in net sales discussed
above. Results for the three and nine months ended September 30, 1999 were also
affected by higher costs and expenses due to higher logging costs as well as
manufacturing inefficiencies resulting from production curtailments at the
sawmills due to the lack of logs.

        Income (loss) before income taxes
        Loss before income taxes for the three months ended September 30, 1999
increased from the comparable 1998 period primarily due to the operating loss
discussed above. Income before income taxes for the nine months ended September
30, 1999 increased from the comparable prior year period principally due to the
gain on the sale of the Headwaters Timberlands of $239.8 million ($142.1 million
net of deferred taxes or $18.17 per share) offset by the operating loss
discussed above. Income (loss) before income taxes for the three and nine months
ended September 30, 1999 also reflects interest income as a result of investing
the net proceeds from the sale of the Headwaters Timberlands as well as higher
earnings from marketable securities.

   REAL ESTATE AND RACING OPERATIONS

      The Company, principally through its wholly owned subsidiaries, invests in
and develops residential and commercial real estate primarily in Puerto Rico,
Arizona and California. The Company, through its subsidiaries, also has majority
ownership in SHRP, Ltd., a Texas limited partnership, which owns and operates a
Class 1 horse racing facility in Houston, Texas.

<TABLE>
<CAPTION>


                                                                            THREE MONTHS ENDED    NINE MONTHS ENDED
                                                                               SEPTEMBER 30,        SEPTEMBER 30,
                                                                           --------------------  -------------------
                                                                              1999       1998      1999       1998
                                                                           ----------  --------  ---------  --------
                                                                                   (IN MILLIONS OF DOLLARS)
<S>                                                                        <C>         <C>       <C>        <C>
Net sales:
   Real estate.........................................................    $    9.2    $  15.2   $   37.4   $  41.0
   SHRP, Ltd..........................................................          6.8        6.1       19.7      16.7
                                                                           ----------  --------  ---------  --------
      Total net sales..................................................    $   16.0    $  21.3   $   57.1   $  57.7
                                                                           ==========  ========  =========  ========

Operating income (loss):
   Real estate.........................................................    $    (2.9)  $  (0.9)  $   (4.2)  $  (0.7)
   SHRP, Ltd...........................................................          0.3         -        2.5       0.6
                                                                           ----------  --------  ---------  --------
      Total operating loss.............................................    $    (2.6)  $  (0.9)  $   (1.7)  $  (0.1)
                                                                           ==========  ========  =========  ========

Income (loss) before income taxes and minority interests:
   Real estate.........................................................    $    (1.3)  $   1.2   $    1.5   $  11.8
   SHRP, Ltd...........................................................          0.1      (0.6)       2.1      (1.4)
                                                                           ----------  --------  ---------  --------
      Total income (loss) before income taxes and minority interests...    $    (1.2)  $   0.6   $    3.6   $  10.4
                                                                           ==========  ========  =========  ========

</TABLE>

        Net sales
        Net sales for the quarter and nine months ended September 30, 1999
decreased from the same prior year periods primarily due to lower revenues from
the Company's real estate development project in Puerto Rico offset by improved
results from SHRP, Ltd.

        Operating income (loss)
        Operating losses increased for the quarter and nine months ended
September 30, 1999 from the same periods in 1998 primarily due to lower sales
from the Company's real estate development in Puerto Rico.

        Income  before income taxes
        The Real Estate and Racing segments had a combined loss before income
taxes for the quarter ended September 30, 1999 as compared to income for the
same period in 1998 due to the operating loss discussed above. Income before
income taxes for the nine months ended September 30, 1999 decreased from the
comparable period in 1998 which included a gain on the sale of a portion of the
Company's Waterwood development project.

   OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS

<TABLE>
<CAPTION>

                                                                           THREE MONTHS ENDED              NINE MONTHS ENDED
                                                                              SEPTEMBER 30,                  SEPTEMBER 30,
                                                                       --------------------------     ---------------------------
                                                                          1999            1998           1999            1998
                                                                       ----------      ----------     -----------     -----------
                                                                                        (IN MILLIONS OF DOLLARS)
<S>                                                                    <C>             <C>            <C>             <C>
Operating loss...................................................      $    (2.1)      $    (3.9)     $     (6.8)     $    (10.3)
Loss before income taxes and minority interests..................           (4.1)           (7.5)          (15.6)          (19.0)

</TABLE>

      The operating losses represent corporate general and administrative
expenses that are not allocated to the Company's industry segments. Operating
losses were higher for the three and nine months ended September 30, 1998 due to
accruals for certain legal contingencies.

      The loss before income taxes and minority interests includes operating
losses, investment, interest and other income (expense) and interest expense,
including amortization of deferred financing costs, which are not attributable
to the Company's industry segments. In addition to the decline in operating
losses, the loss before income taxes and minority interests declined between the
three and nine month periods as a result of higher earnings on marketable
securities.

      Minority interests primarily represents the minority stockholders'
interest in the Company's aluminum operations and minority partners' interest in
SHRP, Ltd.

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

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

   PARENT COMPANY AND MGHI

      The various credit instruments of KACC, MGHI, Pacific Lumber and Scotia
LLC contain various covenants which, among other things, limit the ability of
such entities to incur additional indebtedness and liens, to engage in
transactions with affiliates, to pay dividends and to make investments. As of
September 30, 1999, no dividends could be paid by MGHI. Pursuant to the terms of
the KACC Credit Agreement, Kaiser and KACC are prohibited from paying any
dividends with respect to their common stock. As of September 30, 1999, the
Company's other subsidiaries (principally real estate) had an aggregate of
nonrestricted cash and unused borrowing availability of approximately $33.4
million which could have been paid to the Company.

      On August 18, 1999, the Company amended the Custodial Trust Agreement to
extend the maturity date of the borrowing by one year to October 2000.

      Kaiser has an effective shelf registration statement covering the offering
of up to 10 million shares of Kaiser common stock owned by the Company.

      As of September 30, 1999, the Company (excluding its subsidiaries) had
cash and marketable securities of approximately $36.7 million. The Company
believes that its existing resources, together with the cash available from
subsidiaries and financing sources, will be sufficient to fund its working
capital requirements for the next year. With respect to its long-term liquidity,
the Company believes that its existing cash and cash resources, together with
the cash proceeds that would be available from the sale of assets and
distributions from its subsidiaries should be sufficient to meet its working
capital requirements. However, there can be no assurance that the Company's cash
resources, together with the cash proceeds from the sale of assets,
distributions from its subsidiaries and other sources of financing, will be
sufficient for such purposes. Any materially adverse outcome of the litigation
described in Note 8 to the Consolidated Financial Statements could materially
adversely affect the Company's consolidated financial position, results of
operations or liquidity.

   ALUMINUM OPERATIONS

      At September 30, 1999, Kaiser had long-term debt of $970.0 million,
including $7.7 million outstanding under the revolving credit facility of the
KACC Credit Agreement, compared with $963.0 million at December 31, 1998.

      At September 30, 1999, $244.1 million (of which $54.7 million could have
been used for letters of credit) was available to KACC under the KACC Credit
Agreement. Loans under the KACC Credit Agreement bear interest at a spread
(which varies based on the results of a financial test) over either a base rate
or LIBOR, at Kaiser's option. During the quarter ended September 30, 1999, the
average per annum interest rate on loans outstanding under the KACC Credit
Agreement was approximately 9.75%.

      Kaiser has an effective shelf registration statement covering the offering
from time to time of up to $150.0 million of equity securities.

       Kaiser's capital expenditures during the nine months ended September 30,
1999 were $40.3 million. The only significant expenditure was the purchase of
the remaining 45% interest in KLHP for approximately $10.0 million. Total
capital expenditures (of which approximately 8% is expected to be funded by
Kaiser's minority partners in certain foreign joint ventures) are expected to be
between $60.0 million and $133.0 million per annum in each of 1999 through 2001,
prior to any consideration of plans to rebuild the Gramercy facility. The level
of capital expenditures may be adjusted from time to time depending on Kaiser's
price outlook for primary aluminum and other products, KACC's ability to assure
future cash flows through hedging or other means, Kaiser's financial position
and other factors.

      As of September 30, 1999, Kaiser had accrued receivables relating to the
Gramercy incident totaling approximately $25.0 million for estimated recoveries
under KACC's property damage and business interruption insurance coverage. KACC
is working with the insurance carriers to minimize, to the extent possible, the
amount and period of time between when KACC incurs costs and when it is
reimbursed. Delays in receiving insurance proceeds could have a temporary
adverse impact on KACC's and Kaiser's short-term liquidity and delay the
rebuilding of the Gramercy facility. However, Kaiser believes that its existing
cash resources, together with cash flow from operations and borrowings under the
KACC Credit Agreement, will be sufficient to meet its working capital and
capital expenditure requirements for the next year. KACC's ability to make
payments on and to refinance its debt depends on its ability to generate cash in
the future. This, to a certain extent, is subject to general economic,
financial, competitive, legislative, regulatory and other factors beyond KACC's
control. KACC will need to refinance all or a substantial portion of its debt on
or before maturity. No assurance can be given that KACC will be able to
refinance its debt on acceptable terms. However, with respect to its long-term
liquidity, Kaiser believes that operating cash flow, together with the ability
to obtain both short-and long-term financing, should provide sufficient funds to
meet KACC's and Kaiser's long-term working capital and capital expenditure
requirements.

   FOREST PRODUCTS OPERATIONS

      As of September 30, 1999, MGI and its subsidiaries had consolidated
long-term debt primarily related to the Timber Notes of $844.2 million (net of
current maturities) compared to $860.2 million at December 31, 1998. As of
September 30, 1999, $30.6 million of total availability existed under the
Pacific Lumber Credit Agreement, $4.0 million borrowings were outstanding and
letters of credit outstanding amounted to $12.4 million.

      During the nine months ended September 30, 1999, MGI paid $18.7 million in
dividends to MGHI. On September 16, 1999, Britt paid a dividend of $5.7 million
to MGI which in turn made a capital contribution to Pacific Lumber for the same
amount.

       The Escrowed Funds were $288.6 million as of September 30, 1999 and are
to be made available as necessary to support Scotia LLC's Timber Notes. The
Escrowed Funds may be released by the Escrow Agent only in accordance with the
terms of the Escrow Agreement.

      On July 16, 1999, Scotia LLC's Line of Credit Agreement was extended for
an additional year to July 16, 2000. Interest on initial borrowings outstanding
for less than six months was increased to the Base Rate (as defined in the
agreement) plus 0.25% or a one month or six month LIBOR rate plus 1%. As of
September 30, 1999, $17.7 million was outstanding under Scotia LLC's Line of
Credit Agreement.

      On the July 20, 1999 note payment date for the Timber Notes, Scotia LLC
had $6.5 million in cash available to pay the $31.6 million in interest due.
Scotia LLC borrowed the remaining $25.1 million in funds under the terms of the
Line of Credit Agreement. In addition, Scotia LLC paid approximately $2.8
million of principal on the Timber Notes (the amount equal to Scheduled
Amortization) using funds received as a capital contribution from Pacific
Lumber. Funds for the $2.8 million principal payment were provided from the
Escrowed Funds and were released in accordance with the terms of the Escrow
Agreement. The indenture governing the Timber Notes was amended to allow the
capital contribution from Pacific Lumber to be applied as a principal payment.

      The Company believes that Scotia LLC will not generate sufficient cash
from operations to pay all of the interest on the Timber Notes on the January
20, 2000 payment date. However, the Company expects that funds sufficient to
meet debt service obligations on the Timber Notes on such date will either be
made available from funds borrowed under Scotia LLC's Line of Credit Agreement,
through capital contributions from Pacific Lumber or a direct or indirect parent
corporation, or from the use of funds now held under the Escrow Agreement.

      MGI and its subsidiaries anticipate that existing cash, cash equivalents,
marketable securities, funds available under the Escrow Agreement 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, dividends from Scotia LLC to Pacific Lumber will be limited
for at least the next one to two years, and therefore, absent any release to
Pacific Lumber of the Escrowed Funds, Pacific Lumber will not have adequate
funds to support all of its working capital and capital expenditure
requirements, and it will require contributions from MGI to meet any
deficiencies. Although MGI and its subsidiaries (and in turn MGHI) believe that
their existing cash and cash equivalents should provide sufficient funds to meet
the working capital and capital expenditure requirements until such time as
Pacific Lumber has adequate cash flows from operations, dividends from Scotia
LLC and/or funds released from the Escrowed Funds, there can be no assurance
that this will be the case. Furthermore, due to its highly leveraged condition,
MGI is more sensitive than less leveraged companies to factors affecting its
operations, including governmental regulation and litigation affecting its
timber harvesting practices (see Note 8 to the Consolidated Financial
Statements), increased competition from other lumber producers or alternative
building products and general economic conditions.

   REAL ESTATE AND RACING OPERATIONS

      As of September 30, 1999, the Company's real estate subsidiaries had
approximately $10.3 million available for use under a $14.0 million revolving
bank credit facility. There were no outstanding borrowings, and letters of
credit outstanding amounted to $0.7 million. The Company believes that the
existing cash and credit facilities of its real estate subsidiaries are
sufficient to fund the working capital and capital expenditure requirements of
such subsidiaries for the next year. With respect to the long-term liquidity of
such subsidiaries, the Company believes that their ability to generate cash from
the sale of their existing real estate, together with their ability to obtain
financing, should provide sufficient funds to meet their working capital and
capital expenditure requirements.

      As of September 30, 1999, SHRP, Ltd. had cash and cash equivalents of
$11.2 million, $4.2 million which is restricted for payment of purses and
property taxes, and a $1.7 million line of credit available to fund its
operating activities. Long-term debt, excluding $53.4 million of debt held by
affiliates, was $1.4 million as of September 30, 1999. SHRP, Ltd. is able to
defer cash interest payments on its long-term debt until September 1, 2001 or
until certain conditions are met, and to defer the payment of management fees
until two consecutive interest payments on its long-term debt have been paid in
cash. The deferral of these items has significantly improved SHRP, Ltd.'s
liquidity.

      With respect to long-term liquidity, although only $1.7 million of SHRP,
Ltd.'s debt is owned by non-affiliates, there can be no assurance that SHRP,
Ltd. will be able to repay or refinance its long-term debt or that alternative
sources of funding will be available, if needed.

TRENDS

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

   FOREST PRODUCTS OPERATIONS

      The Company's forest products operations are conducted by MGI through
Pacific Lumber and Britt. Regulatory and environmental matters play a
significant role in Pacific Lumber's operations which are subject to a variety
of California and federal laws and regulations, as well as the Final HCP, Final
SYP and Pacific Lumber's 1999 TOL, dealing with timber harvesting practices,
threatened and endangered species and habitat for such species, 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,
and related litigation have increased the cost of logging operations. The
Company's forest products segment has also been adversely affected by a lack of
available logs as a result of a severely diminished supply of available THPs.
Prior to the consummation of the Headwaters Agreement on March 1, 1999, the
reduced number of approved THPs was attributable to several factors, including a
significantly reduced level of THPs submitted by Pacific Lumber to the CDF
during 1998 and during the first two months of 1999 due to (a) the extensive
amount of time devoted by Pacific Lumber's foresters, wildlife and fisheries
biologists and other personnel to (i) amending a significant number of
previously submitted THPs to incorporate various new requirements which Pacific
Lumber agreed to as part of the Pre- Permit Agreement, (ii) preparing the
Combined Plan and all the related data, responding to comments on the Combined
Plan, assessing and responding to federal and state proposals and changes
concerning the Combined Plan, and evaluating the Final Plans, (iii) responding
to comments received by Pacific Lumber from various federal and state
governmental agencies with respect to its filed THPs in light of the new and
more stringent requirements that Pacific Lumber agreed to observe pursuant to
the Pre-Permit Agreement, and (iv) responding to newly filed litigation
involving certain of Pacific Lumber's approved THPs and (b) implementation of a
provision contained in the Pre-Permit Agreement which required, for the first
time, a licensed geologist to review virtually all of Pacific Lumber's THPs
prior to submission to the CDF. Pacific Lumber also experienced an unexpected
significantly slower rate of review and approval with respect to its filed THPs
due, in large part, to the issues that emerged in applying the requirements
embodied in the Pre-Permit Agreement to Pacific Lumber's THPs, certain of which
requirements imposed new forestry practices that applied solely to Pacific
Lumber's operations.

      With the consummation of the Headwaters Agreement, Pacific Lumber has
completed its work in connection with preparation of the Final Plans; however,
significant additional work continues to be required in connection with their
implementation. As a result of the implementation process, 1999 has been a
transition period for Pacific Lumber with respect to the filing and approval of
its THPs. The transition period is expected to continue into 2000. Certain of
the THPs which were approved by the CDF prior to March 1, 1999 were
grandfathered under the Implementation Agreement, and are harvestable subject to
the harvesting restrictions prescribed under the THPs and satisfaction of
certain agreed conditions. The remaining THPs which were in the process of being
reviewed but were not yet approved by the CDF at the time of the consummation of
the Final Plans each require varying degrees of revisions. Pacific Lumber
believes that the rate of submissions of THPs during the fourth quarter will
increase. However, Pacific Lumber believes that the review and approval process
for THPs through at least the first quarter of 2000 will continue to be slower
than Pacific Lumber has historically experienced as Pacific Lumber, the CDF and
other agencies continue to develop procedures for implementing the Final Plans.
Nevertheless, Pacific Lumber anticipates that after a transition period, the
implementation of the Final Plans will streamline the process of preparing THPs
and potentially shorten the time to obtain approval of THPs.

      There can be no assurance that Pacific Lumber will not continue to
experience difficulties in receiving approvals of its THPs similar to those it
has been experiencing. Furthermore, there can be no assurance that certain
pending legal, regulatory and environmental matters or future governmental
regulations, legislation or judicial or administrative decisions, or adverse
weather conditions, would not have a material adverse effect on the Company's
financial position, results of operations or liquidity. See Part II. Item 1.
"Legal Proceedings" and Note 8 to the Consolidated Financial Statements for
further information regarding regulatory and legal proceedings affecting the
Company's operations.

YEAR 2000 READINESS

      The Company utilizes software and related technologies throughout its
business that will be affected by the date change to the year 2000. There may
also be technology embedded in certain of the equipment owned or used by the
Company that is susceptible to the year 2000 date change as well. Each of the
Company's segments has implemented programs to assess the impact of the year
2000 date change. Year 2000 progress and readiness has also been the subject of
the Company's normal, recurring internal audit function.

      Kaiser has implemented a company-wide program to coordinate the year 2000
efforts of its individual business units and to track their progress. The intent
of the program is to make sure that critical items are identified on a
sufficiently timely basis to assure that the necessary resources can be
committed to address any material risk areas that could prevent its systems and
assets from being able to meet Kaiser's business needs and objectives. Each of
Kaiser's business units has developed year 2000 plans specifically tailored to
its individual situation. A wide range of solutions is being implemented,
including modifying existing systems and, in limited cases where it is cost
effective, purchasing new systems. Spending related to these projects, which
began in 1997 and is expected to continue through 1999, is currently estimated
to be in the $10-15 million range. As of September 30, 1999, Kaiser estimates
that approximately $1.8 million of year 2000 expenditures are yet to be
incurred. Such remaining amounts are expected to be incurred during the fourth
quarter of 1999. System modification costs were expensed as incurred. Costs
associated with new systems are being capitalized and will be amortized over the
life of the system. In total, Kaiser believes that its remediation and testing
efforts are over 90% complete at September 30, 1999. The balance is expected to
be completed by November 1999. Kaiser plans to commit the necessary resources
for these efforts.

      In addition to addressing Kaiser's internal systems, its company-wide
program involved identification of key suppliers, customers, and other third
party relationships that could be impacted by year 2000 issues. A general survey
has been conducted of Kaiser's supplier and customer base. Direct contact has
been made with parties which are deemed to be particularly critical including
financial institutions, power suppliers and customers, with which Kaiser has a
material relationship.

      Each business unit, including the corporate group, has developed a
contingency plan covering the steps that would be taken if a year 2000 problem
were to occur despite Kaiser's best efforts to identify and remedy all critical
at-risk items. Formal contingency plans have been completed for approximately
85% of Kaiser's facilities and their individual systems as of September 30,
1999. Contingency plans for the remaining facilities and systems are expected to
be completed by October 31, 1999. When complete, each contingency plan will
address, among other things, matters such as alternative suppliers for critical
inputs, incremental standby labor requirements at the millennium to address any
problems as they occur, and backup processing capabilities for critical
equipment or processes. The goal of the contingency plans will be to minimize
any business disruption, such as power shortages and failures by major
suppliers, and the associated financial implications.

      MGI has established a team to address the potential impacts of the year
2000 on each of its critical business functions. The team has completed its
assessment of MGI's critical information technology and embedded technology,
including its geographic information system and the equipment and systems used
in operating its sawmills and cogeneration plant, and the required modifications
and testing have been completed. The modification costs were less than $100,000.
System modification costs were expensed as incurred. Costs associated with new
systems were capitalized and will be amortized over the life of the product.

      In addition to addressing MGI's internal systems, the team has identified
key vendors that could be impacted by year 2000 issues, and surveys have been
conducted regarding their compliance efforts. Management has evaluated the
responses to the surveys and made direct contact with parties which were deemed
to be critical. These inquiries were made by MGI's own staff, and the costs
associated with this program were minimal.

      The Company's real estate segment has completed the process of evaluating
its information technology systems, and had substantially completed the
modifications to make these systems compliant at the end of 1998. The costs were
not material. Other assets with embedded technology are not significant to the
business operations of this segment. Several financial institutions provide
various services to this segment which are critical to its business operations,
and inquiries as to the status of their year 2000 compliance evaluations have
been conducted.

      SHRP, Ltd. has assessed both its information technology systems and its
embedded technology in order to determine that they are, or will be, year 2000
compliant. Management has identified hardware, including embedded chip
technology, that was not year 2000 compliant and replaced it as part of the
routine upgrading of computer equipment. Application software has been upgraded
and has been certified or tested. SHRP, Ltd. believes that the total cost to
make these systems year 2000 compliant will not exceed $100,000. SHRP, Ltd. also
places significant reliance on totalisator (computerized wagering system) and
other systems which are provided and supported by outside vendors. SHRP, Ltd.'s
totalisator system provider has issued a letter certifying that it is year 2000
compliant. SHRP, Ltd. has either received a certification letter or is working
closely with other vendors to ensure year 2000 compliance prior to the end of
1999. Because SHRP, Ltd. derives a significant portion of its revenues from
customers at other racing organizations that are confronted with the same
technological issues, SHRP, Ltd. has been actively participating in an
industry-wide assessment and remedial efforts to address the year 2000 issue.
Recent tests indicate that communications between the three totalisator service
providers will function in the year 2000.

      While the Company believes that its programs are sufficient to identify
the critical issues and associated costs necessary to address possible year 2000
problems in a timely manner, there can be no assurance that the programs, or
underlying steps implemented, will be successful in resolving all such issues
prior to the year 2000. If the steps taken by the Company (or critical third
parties) are not made in a timely manner, or are not successful in identifying
and remedying all significant year 2000 issues, business interruptions or delays
could occur and could materially impact the Company's results and financial
condition. However, based on the information the Company has gathered to date
and its expectations of its ability to remedy problems encountered, the Company
believes that it will not experience significant business interruptions that
would materially impact its results or financial condition.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      See Part I. Item 7a. "Quantitative and Qualitative Disclosures About
Market Risk" in the Form 10-K.

      As a result of KACC's hedging activities through September 30, 1999,
approximately 50%, 70% and 30% of KACC's net hedgable volume with respect to the
fourth quarter of 1999, and the years 2000 and 2001, respectively, is subject to
minimum and maximum contract prices. The average minimum contract prices with
respect to the balance of 1999, and the years 2000 and 2001 range from
moderately below to significantly below the average AMT price for the week ended
October 15, 1999. The average maximum contract prices with respect to the fourth
quarter of 1999 and the year 2000 approximate the average AMT price for the week
ended October 15, 1999. The average maximum contract price with respect to 2001
is moderately above the average AMT price for the week ended October 15, 1999.
While the aforementioned hedging contracts lock in a range of prices for a
portion of KACC's net hedgable volume, KACC's average realized prices will
typically exceed the amounts realized on its hedging contracts due to location,
product and purity premiums on the physical metal sales.


                           PART II. OTHER INFORMATION


ITEM 1.    LEGAL PROCEEDINGS

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

MAXXAM INC. LITIGATION

      With respect to the OTS action described in the Form 10-K, the
post-hearing briefing is expected to continue at least until December 1999. On
October 4, 1999, the OTS filed its initial post-hearing brief. In its brief, the
OTS claims, among other things, that the remaining respondents, Mr. Hurwitz, the
Company and Federated, are jointly and severally liable to pay either $821.3
million in restitution and reimbursement or $362.6 million for alleged unjust
enrichment. The OTS also claims that each remaining respondent should be
required to pay $4.6 million in civil money penalties, and that Mr. Hurwitz
should be prohibited from engaging in the banking industry. The respondents'
brief, which was also filed on October 4, 1999, claims that none of them has any
liability in the OTS action.

      A recommended decision by the Administrative Law Judge is not expected any
sooner than early 2000. A final agency decision would be issued by the OTS
Director thereafter. Such decision would then be subject to appeal by any of the
parties to the federal appellate court.

KAISER LITIGATION

      KACC is a defendant in a number of lawsuits, some of which involve claims
of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with KACC or exposure to products
containing asbestos produced or sold by KACC. The portion of Note 8 to the
Consolidated Financial Statements contained in this report under the heading
"Asbestos Contingencies" is incorporated herein by reference. See Part I, Item
3. "Legal Proceedings--Kaiser Litigation--Asbestos-related Litigation" in the
Company's Form 10-K for the year ended December 31, 1998.

PACIFIC LUMBER LITIGATION

      With respect to the Mateel action, this case has been set for trial on
November 15, 1999.

      On March 31, 1999, the EPIC-SYP/Permits lawsuit was filed against Pacific
Lumber, Salmon Creek, Scotia LLC and others in the Superior Court of Sacramento
County (subsequently transferred to the Superior Court of Humboldt County
pursuant to Pacific Lumber's motion). This action alleges, among other things,
that the CDF and the CDFG violated the CEQA and the CESA with respect to the
Final SYP and the Permits issued by California. The plaintiffs seek, among other
things, injunctive relief to set aside the CDF's and the CDFG's decisions
approving the Final SYP and the Permits issued by California.

      On March 31, 1999, the USWA lawsuit was also filed against Pacific Lumber,
Salmon Creek and Scotia LLC in the California Superior Court of Sacramento
County (subsequently transferred to the Superior Court of Humboldt County
pursuant to Pacific Lumber's motion). This action alleges, among other things,
violations of the Forest Practice Act in connection with the CDF's approval of
the Final SYP. The plaintiffs seek to prohibit the CDF from approving any THPs
relying on the Final SYP.

      The Company believes that appropriate procedures were followed throughout
the public review and approval process concerning the Final Plans, and the
Company is working with the relevant state and federal agencies to defend the
USWA lawsuit and the EPIC-SYP/Permits lawsuit. Although uncertainties are
inherent in the final outcome of the EPIC-SYP/Permits lawsuit and the USWA
lawsuit, the Company believes that the resolution of these matters should not
result in a material adverse effect on its financial condition or results of
operations or the ability to harvest timber.

      In connection with the Rollins lawsuit described in the Form 10-K, on
September 27, 1999, the Court accepted the plaintiffs' amended complaint which,
among other things, eliminated the RICO claims and reduced the number of THPs
involved in this lawsuit from 343 to seven.

      In connection with the Wrigley lawsuit described in the Form 10-K, on
September 27, 1999, the plaintiffs filed an application seeking to eliminate
allegations concerning the seven THPs involved in the Rollins lawsuit reducing
to 336 the number of THPs involved in the Wrigley lawsuit.

      With respect to the Hunsaker action described in the Form 10-K, on March
30, 1999, the Court dismissed the lawsuit with prejudice and ordered the
plaintiffs to pay the defendants' costs with respect to the lawsuit. On April
30, 1999, the plaintiffs appealed the dismissal.

      With respect to the EPIC lawsuit described in the Form 10-K, on May 5,
1999, the Court dissolved the preliminary injunction, granted the defendants'
motion for summary judgment and dismissed the case as moot.

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

      A.        EXHIBITS:

        *4.1  Amendment No. 1, dated August 19, 1999, to the Loan and Pledge
              Agreement between the Company and Custodial Trust Company dated
              October 21, 1997

         4.2  Seventeenth Amendment to the KACC Credit Agreement, dated as of
              September 24, 1999, amending the KACC Credit Agreement, dated as
              February 15, 1994, as amended, among KACC, Kaiser, the financial
              institutions party thereto and BankAmerica Business Credit, as
              agent. (incorporated herein by reference to Exhibit 4.1 to
              Kaiser's Quarterly Report on Form 10-Q for the quarter ended
              September 30, 1999; File No. 1-9447)

        10.1  Second Amendment to Escrow Agreement dated October 6, 1999 among
              Pacific Lumber, Salmon Creek and Citibank, N.A. (incorporated
              herein by reference to Exhibit 10.1 to the Scotia LLC's Quarterly
              Report on Form 10-Q for the quarter ended September 30, 1999;
              Registration No. 333-63825)

         *27  Financial Data Schedule for the nine months ended September 30,
              1999

   *  Included with this filing

      B.        REPORTS ON FORM 8-K:

      On July 1, 1999,  the  Company  filed a current  report on Form 8-K (under
Item 5) dated June 29, 1999,  concerning a press  release  issued by Kaiser,  in
which the  Company,  directly or  indirectly,  holds an  approximate  63% voting
interest.

      On July 9, 1999, the Company filed a current report on Form 8-K (under
Item 5) dated July 5, 1999, concerning press statements issued by KACC, a
wholly owned subsidiary of Kaiser.


                                   SIGNATURES


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



                                                 MAXXAM INC.





Date: October 27, 1999   By:                  PAUL N. SCHWARTZ
                             ---------------------------------------------------
                                              Paul N. Schwartz
                               President, Chief Financial Officer and Director
                                        (Principal Financial Officer)



Date: October 27, 1999   By:                ELIZABETH D. BRUMLEY
                             ---------------------------------------------------
                                            Elizabeth D. Brumley
                                                 Controller
                                       (Principal Accounting Officer)



                                                                     APPENDIX A

                            GLOSSARY OF DEFINED TERMS

AKW:  AKW L.P., an aluminum wheels joint venture

AMT Price:  Average Midwest United States transaction price for primary aluminum

Anglesey: KACC's 49% owned Anglesey Aluminum Limited smelter in Wales

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

California Agreement: An agreement between the Pacific Lumber Parties and
California regarding the enforcement of the California bill which authorized
state funds for the purchase of the Headwaters Timberlands while imposing
certain environmental restrictions on the remaining timberlands held by the
Pacific Lumber Parties

CDF:  California Department of Forestry and Fire Protection

CDFG:  California Department of Fish and Game

CERCLA: Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986

CEQA:  California Environmental Quality Act

CESA:  California Endangered Species Act

Class A Preferred Stock: Class A $.05 Non-Cumulative Participating Convertible
Preferred Stock of the Company

Combined Plan: The Combined SYP and Multi-Species HCP released by Pacific Lumber
and Scotia LLC for public review and comment in July 1998

Common Stock:  $0.50 par value common stock of the Company

Company:  MAXXAM Inc.

Custodial Trust Agreement: The loan agreement between the Company and the
Custodial Trust Company providing for up to $25.0 million in borrowings, secured
by 7,915,000 shares of Kaiser common stock

Elk River Timberlands: The 7,700 acres of timberlands transferred to Pacific
Lumber upon the consummation of the Headwaters Agreement

EPA:  Environmental Protection Agency

EPIC:  Environmental Protection Information Center, Inc.

EPIC lawsuit: An action entitled Environmental Protection Information Center,
Inc., Sierra Club v. The Pacific Lumber Company, Scotia Pacific Holding Company
and Salmon Creek Corporation (No. C-98-3129) filed August 12, 1998 in the United
States District Court for the Northern District of California

EPIC Notice Letter: A notice received by the Company on or about January 29,
1999 from EPIC and the Sierra Club of their intent to sue Pacific Lumber and
several federal agencies under the ESA

EPIC-SYP/Permits lawsuit: An action entitled Environmental Protection
Information Association, Sierra Club v. California Department of Forestry and
Fire Protection, California Department of Fish and Game, The Pacific Lumber
Company, Scotia Pacific Company LLC, Salmon Creek Corporation, et al. (No.
99CS00639) filed March 31, 1999 in the Superior Court of Sacramento County and
transferred to the Superior Court of Humboldt County on July 13, 1999 (No.
CV-990445)

ESA:  The federal Endangered Species Act

Escrow Agent:  The agent holding the Escrowed Funds under the Escrow Agreement

Escrow Agreement:  The agreement covering the Escrowed Funds

Escrowed Funds: Proceeds of $285.0 million received by Salmon Creek in
connection with the sale of the Headwaters Timberlands, plus accrued interest,
which have been deposited into an escrow account pursuant to the Escrow
Agreement as necessary to support the Timber Notes

FASB:  The Financial Accounting Standards Board

FDIC:  Federal Deposit Insurance Corporation

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

Federated: Federated Development Company, a principal stockholder of the Company

Final HCP: The Multi-Species HCP approved on March 1, 1999 in connection with
the consummation of the Headwaters Agreement

Final Plans:  The Final HCP and the Final SYP

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

Forest Practice Act:  The California Forest Practice Act

Form 10-K: The Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1998

Grizzly Creek Agreement: The agreement entered into by Pacific Lumber with
California regarding the future sale of a portion of the Grizzly Creek Grove

Grizzly Creek Grove: A grove of approximately 1,000 acres of primarily old
growth timber owned by Pacific Lumber on land owned by Scotia LLC

Headwaters Agreement: The September 28, 1996 agreement between the Pacific
Lumber Parties, the United States and California which provided the framework
for the acquisition by the United States and California of the Headwaters
Timberlands

Headwaters Timberlands: Approximately 5,600 acres of Pacific Lumber timberlands
consisting of two forest groves commonly referred to as the Headwaters Forest
and the Elk Head Springs Forest which were sold to the United States and
California on March 1, 1999

Hunsaker action: An action entitled William Hunsaker, et al. v. Charles E.
Hurwitz, The Pacific Lumber Company, MAXXAM Group Inc., MXM Corp., Federated
Development Company and Does (1-50) (No. C98-4515) filed November 24, 1998 in
the United States District Court for the Northern District of California

Implementation Agreement: The Implementation Agreement with Regard to Habitat
Conservation Plan agreed to in connection with the consummation of the
Headwaters Agreement

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

KACC Credit Agreement: The credit facility between KACC and a group of lenders
under which KACC is able to borrow by means of revolving credit advances and
letters of credit (up to $125.0 million) in an aggregate amount equal to the
lesser of $325.0 million or a borrowing base relating to eligible accounts
receivable plus eligible inventory

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

KLHP:  Kaiser LaRoche Hydrate Partners

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

LTSY:  Long-term sustained yield

Mateel action: An action entitled Mateel Environmental Justice Foundation v.
Pacific Lumber, Scotia Pacific Holding Company, Salmon Creek Corporation and
MAXXAM Group Inc. (No. DR 980301) brought on May 27, 1998 in the Superior Court
of Humboldt County

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

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

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

Multi-Species HCP:  A habitat conservation plan covering multiple species

NLRB:  The National Labor Relations Board

Notice: A Notice of Charges filed on December 26, 1995 by the OTS against the
Company and others with respect to the failure of USAT

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

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

Owl Creek Agreement: The agreement entered into by Scotia LLC with California
regarding the future sale of the Owl Creek Grove

Owl Creek Grove: A grove of approximately 900 acres of primarily old growth
timber owned by Scotia LLC

Pacific Lumber: The Pacific Lumber Company, an indirect wholly owned subsidiary
of MGI

Pacific Lumber Credit Agreement: The revolving credit agreement between Pacific
Lumber and a bank which provides for borrowings of up to $60.0 million, all of
which may be used for revolving borrowings, $20.0 million of which may be used
for standby letters of credit and $30.0 million of which may be used for
timberland acquisitions.

Pacific Lumber Parties: Pacific Lumber, including its subsidiaries and
affiliates, and the Company

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

Prefunding Account: Restricted cash held in an account by the trustee under the
indenture governing the Timber Notes to enable Scotia LLC to acquire timberlands

Pre-Permit Agreement: The February 27, 1998 Pre-Permit Application Agreement in
Principle entered into by Pacific Lumber, the Company and various government
agencies regarding certain understandings that they had reached regarding the
Multi-Species HCP, the Permits and the SYP

RICO: Racketeering Influence and Corrupt Practices Act

Rollins lawsuit: An action entitled Jennie Rollins, et al. v. Charles Hurwitz,
John Campbell, Pacific Lumber, MAXXAM Group Holdings Inc., Scotia Pacific
Holding Company, MAXXAM Group Inc., MAXXAM Inc., Barnum Timber Company (No.
9700400) filed on December 2, 1997 in the Superior Court of Humboldt County

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

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

Scotia Pacific: Scotia Pacific Holding Company, a wholly owned subsidiary of
Pacific Lumber, which was merged into Scotia LLC on July 20, 1998

SFAS No. 133: Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities"

SFAS No. 137: Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of SFAS No. 133"

SHRP, Ltd.: Sam Houston Race Park, Ltd., a 98.2%-owned subsidiary of the Company

Supplemental EPIC Notice Letter: A notice sent to the Company, Pacific Lumber,
Scotia LLC, Salmon Creek and various government agencies on or about May 21,
1999 from EPIC, the Sierra Club and other environmental groups incorporating the
EPIC Notice Letter and alleging violations of the ESA relating to various
aspects of the Headwaters Agreement

SYP: Sustained yield plan establishing long-term sustained yield harvest levels
for a company's timberlands

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

Timber Notes: Scotia LLC's $867.2 million original aggregate principal amount of
6.55% Series B Class A-1 Timber Collateralized Notes, 7.11% Series B Class A-2
Timber Collateralized Notes and 7.71% Series B Class A-3 Timber Collateralized
Notes due July 20, 2028

TMDLs:  Total maximum daily load limits

TOL: Timber operator's license allowing the holder to conduct timber harvesting
operations

UFG:  United Financial Group, Inc.

ULPs:  Unfair labor practices

USAT:  United Savings Association of Texas

USWA:  United Steelworkers of America

USWA lawsuit: An action entitled United Steelworkers of America, AFL-CIO, CLC,
and Donald Kegley v. California Department of Forestry and Fire Protection, The
Pacific Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation
(No. 99CS00626) filed on March 31, 1999 in the Superior Court of Sacramento
County and transferred to the Superior Court of Humboldt County on July 13, 1999
(No. CV-990452)

Valco: Volta Aluminium Company Limited, KACC's 90%-owned entity which owns a
smelter facility in Ghana

VRA:  Volta River Authority, an electric power supplier to Valco

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