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

                                    FORM 10-K

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



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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000       COMMISSION FILE NUMBER 333-18723

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


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

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

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

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


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

                                      None.

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

                                      None.

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


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

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

      Number of shares of Common Stock outstanding at March 26, 2001: 1,000

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

                      DOCUMENTS INCORPORATED BY REFERENCE:

                                 Not applicable.
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                                TABLE OF CONTENTS


                                     PART I

   Item 1.    Business
                  General
                  Forest Products Operations
                  Aluminum Operations

   Item 2.    Properties

   Item 3.    Legal Proceedings

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

                                     PART II

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

   Item 6.    Selected Financial Data

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

   Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

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

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

                                    PART III

   Items
      10-13.  Not applicable.

                                     PART IV

   Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K



ITEM 1.         BUSINESS

GENERAL

      MAXXAM Group Holdings Inc. (the "COMPANY" or "MGHI") is a wholly owned
subsidiary of MAXXAM Inc. ("MAXXAM"). The Company's wholly owned subsidiary,
MAXXAM Group Inc. ("MGI"), and MGI's wholly owned subsidiaries, The Pacific
Lumber Company ("PACIFIC LUMBER") and Britt Lumber Co., Inc. ("BRITT"), are
engaged in forest products operations. Pacific Lumber's principal wholly owned
subsidiaries are Scotia Pacific Company LLC ("SCOTIA LLC") and Salmon Creek LLC
("SALMON CREEK"). As used herein, the terms "Company," "MGHI," "MGI," "Pacific
Lumber," "Kaiser" or "MAXXAM" refer to the respective companies and their
subsidiaries, unless otherwise noted or the context indicates otherwise.

      Pacific Lumber, which has been in continuous operation for over 130 years,
engages in several principal aspects of the lumber industry--the growing and
harvesting of redwood and Douglas-fir timber, the milling of logs into lumber
products and the manufacturing of lumber into a variety of value-added finished
products. Britt manufactures redwood fencing and decking products from small
diameter logs, a substantial portion of which Britt acquires from Pacific Lumber
(as Pacific Lumber cannot efficiently process them in its own mills). The
Company also owns 27,938,250 shares of the common stock of Kaiser Aluminum
Corporation ("KAISER"), representing a 35.1% interest in Kaiser. In addition,
MAXXAM has a direct interest in Kaiser of 27.8%. Kaiser is a publicly traded
company (New York Stock Exchange trading symbol "KLU") which operates in several
principal aspects of the aluminum industry--the mining of bauxite, the refining
of bauxite into alumina, the production of primary aluminum from alumina, and
the manufacture of fabricated (including semi-fabricated) aluminum products.

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

FOREST PRODUCTS OPERATIONS

   PACIFIC LUMBER OPERATIONS

     Timber and Timberlands
     Pacific Lumber owns and manages approximately 219,000 acres of virtually
contiguous commercial timberlands located in Humboldt County along the northern
California coast, an area which has very favorable soil and climate conditions
for growing timber. These timberlands contain approximately 67% redwood, 26%
Douglas-fir and 7% other timber, are located in close proximity to Pacific
Lumber's four sawmills and contain an extensive network of roads. Approximately
205,000 acres of Pacific Lumber's timberlands are owned by Scotia LLC (the
"SCOTIA LLC TIMBERLANDS"), and Scotia LLC has the exclusive right to harvest
(the "SCOTIA LLC TIMBER RIGHTS") approximately 12,200 acres of Pacific Lumber's
timberlands. The timber in respect of the Scotia LLC Timberlands and the Scotia
LLC Timber Rights is collectively referred to as the "SCOTIA LLC TIMBER."
Substantially all of Scotia LLC's assets are pledged as security for its $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 (collectively the "TIMBER
NOTES"). The Timber Notes are governed by an Indenture (the "TIMBER NOTES
INDENTURE"). Pacific Lumber harvests and purchases from Scotia LLC virtually all
of the logs harvested from the Scotia LLC Timber. See "--Relationships with
Scotia LLC and Britt" below for a description of this and other relationships
among Pacific Lumber, Scotia LLC and Britt.

      On March 1, 1999, Pacific Lumber, Scotia LLC and Salmon Creek
(collectively, the "PALCO COMPANIES") consummated the Headwaters Agreement (the
"HEADWATERS AGREEMENT") with the United States and California, pursuant to which
approximately 5,600 acres of timberlands owned by the Palco Companies known as
the Headwaters Forest and the Elk Head Springs Forest (the "HEADWATERS
TIMBERLANDS") were transferred to the United States. A substantial portion of
the Headwaters Timberlands consists of virgin old growth timberlands. In
consideration for the transfer of the Headwaters Timberlands, Salmon Creek was
paid $299.9 million, Scotia LLC was paid $150,000 and approximately 7,700 acres
of timberlands known as the Elk River Timberlands (the "ELK RIVER TIMBERLANDS")
were transferred to Pacific Lumber (and subsequently transferred to Scotia LLC).
In addition, upon consummation of the Headwaters Agreement (i) habitat
conservation and sustained yield plans were approved covering the Scotia LLC
Timberlands (as defined below), (ii) the Palco Companies dismissed takings
litigation pending against the United States and California and (iii) California
agreed to purchase a portion of Pacific Lumber's Grizzly Creek grove, as well as
Scotia LLC's Owl Creek grove. Salmon Creek placed $169.0 million of the proceeds
from the sale of the Headwaters Timberlands into a Scheduled Amortization
Reserve Account ("SAR ACCOUNT") in order to support principal payments on Scotia
LLC's Timber Notes (as defined below). See "--Regulatory and Environmental
Factors" and Note 2 to the Consolidated Financial Statements.

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

      Pacific Lumber engages in extensive efforts to supplement the natural
regeneration of timber and increase the amount of timber on its timberlands.
Pacific Lumber is required to comply with California forestry regulations
regarding reforestation, which generally require that an area be reforested to
specified standards within an established period of time. Pursuant to the
Services Agreement described below (see "--Relationships with Scotia LLC and
Britt"), Pacific Lumber conducts regeneration activities on the Scotia LLC
Timberlands for Scotia LLC. Regeneration of redwood timber generally is
accomplished through the natural growth of new redwood sprouts from the stump
remaining after a redwood tree is harvested. Such new redwood sprouts grow
quickly, thriving on existing mature root systems. In addition, Pacific Lumber
supplements natural redwood regeneration by planting redwood seedlings.
Douglas-fir timber is regenerated almost entirely by planting seedlings. During
2000, Pacific Lumber planted an estimated 586,000 redwood and Douglas-fir
seedlings.

      California law requires timber owners such as Pacific Lumber to
demonstrate that their operations will not decrease the sustainable productivity
of their timberlands. A timber company may comply with this requirement by
submitting a sustained yield plan to the California Department of Forestry and
Fire Protection ("CDF") for review and approval. A sustained yield plan contains
a timber growth and yield assessment, which evaluates and calculates the amount
of timber and long-term production outlook for a company's timberlands, a fish
and wildlife assessment, which addresses the condition and management of
fisheries and wildlife in the area, and a watershed assessment, which addresses
the protection of aquatic resources. The relevant regulations require
determination of a long-term sustained yield ("LTSY") harvest level, which is
the average annual harvest level that the management area is capable of
sustaining in the last decade of a 100-year planning horizon. The LTSY is
determined based upon timber inventory, projected growth and harvesting
methodologies, as well as soil, water, air, wildlife and other relevant
considerations. A sustained yield plan must demonstrate that the average annual
harvest over any rolling ten-year period within the planning horizon does not
exceed the LTSY.

      Pacific Lumber is also subject to federal and state laws providing for the
protection and conservation of wildlife species which have been designated as
endangered or threatened, certain of which are found on Pacific Lumber's
timberlands. These laws generally prohibit certain adverse impacts on such
species (referred to as a "TAKE"), except for incidental takes which do not
jeopardize the continued existence of the affected species and which are made in
accordance with an approved habitat conservation plan and related incidental
take permit. A habitat conservation plan analyzes the impact of the incidental
take and specifies measures to monitor, minimize and mitigate such impact. As
part of the Headwaters Agreement, Scotia LLC and Pacific Lumber reached
agreement with various federal and state regulatory agencies with respect to a
sustained yield plan (the "SYP") and a multi-species habitat conservation plan
(the "HCP," together with the SYP, the "ENVIRONMENTAL PLANS"). See "--Regulatory
and Environmental Factors" below.

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

      The ability of Pacific Lumber to harvest timber will depend, in part, upon
its ability to obtain regulatory approval of timber harvesting plans ("THPS").
Prior to harvesting timber in California, companies are required to obtain the
CDF's approval of a detailed THP for the area to be harvested. A THP must be
submitted by a registered professional forester and must include information
regarding the method of proposed timber operations for a specified area, whether
the operations will have any adverse impact on the environment and, if so, the
mitigation measures to be used to reduce any such impact. The CDF's evaluation
of THPs incorporates review and analysis of such THPs by several California and
federal agencies and public comments received with respect to such THPs. An
approved THP is applicable to specific acreage and specifies the harvesting
method and other conditions relating to the harvesting of the timber covered by
such THP. The number of Scotia LLC's approved THPs and the amount of timber
covered by such THPs varies significantly from time to time, depending upon the
timing of agency review and other factors. Timber covered by an approved THP is
typically harvested within a one year period from the date harvesting first
begins. The Timber Notes Indenture requires Scotia LLC to use its best efforts
(consistent with prudent business practices) to maintain a number of pending
THPs which, together with THPs previously approved, would cover rights to
harvest a quantity of Scotia LLC Timber adequate to pay interest and principal
amortization based on the Minimum Principal Amortization Schedule for the Timber
Notes for the next succeeding twelve month period. Despite Scotia LLC's best
efforts, it has experienced an absence of a sufficient number of THPs available
for harvest to enable it to conduct its operations at levels it had experienced
prior to 1998 or at levels which meet its expectations. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Trends." However, Scotia LLC believes that the Environmental Plans
should in the long-term expedite the preparation and facilitate approval of its
THPs, although Scotia LLC continues to experience difficulties in the THP
approval process as it implements the Environmental Plans.

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

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

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

      Pacific Lumber owns four highly mechanized sawmills and related facilities
located in Scotia, Fortuna and Carlotta, California. The sawmills historically
have been supplied almost entirely from timber harvested from Pacific Lumber's
timberlands. Since 1986, Pacific Lumber has implemented numerous technological
advances that have increased the operating efficiency of its production
facilities and the recovery of finished products from its timber. Pacific Lumber
produced approximately 205, 155 and 230 million board feet of lumber in 2000,
1999 and 1998, respectively. The Fortuna sawmill produces primarily common grade
lumber and during 2000 produced approximately 83 million board feet of lumber.
The Carlotta sawmill produces both common and upper grade redwood lumber and
during 2000, produced approximately 55 million board feet of lumber. Sawmills
"A" and "B" are both located in Scotia. Sawmill "A" processes Douglas-fir logs
and Sawmill "B" primarily processes large diameter redwood logs. During 2000,
Sawmills "A" and "B" produced approximately 57 million and 10 million board feet
of lumber, respectively. During 2000, Pacific Lumber partially curtailed
operations at all of its sawmills due to difficulties in supplying an adequate
number of logs. During the first two months of 2001, all of the sawmills have
continued to experience some curtailment due to inadequate log supply. See Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Trends."

      Britt owns a 46,000 square foot mill in Arcata, California. Britt's
primary business is the processing of small diameter redwood logs into fencing
products for sale to retail and wholesale customers. It operated as an
independent manufacturer of fence products until it was purchased by a
subsidiary of the Company in 1990. Britt purchases, primarily from Pacific
Lumber but also from other timberland owners, small diameter (6 to 15 inch)
redwood logs of varying lengths. Britt processes these logs at its mill into a
variety of fencing products, including "dog-eared" 1" by 6" fence stock in six
foot lengths, 4" by 4" fence posts in 6 through 12 foot lengths, and other
lumber products in 6 through 12 foot lengths. Britt's purchases of logs from
third parties are generally consummated pursuant to short-term contracts of 12
months or less. Britt's manufacturing operations are conducted on 12 acres of
land, ten acres of which are leased on a long-term fixed price basis from an
unrelated third party. An 18 acre log sorting and storage yard is located
one-quarter of a mile away. Britt's (single shift) mill capacity, assuming 40
production hours per week, is estimated at 37.4 million board feet of fencing
products per year. Britt constructed a 25,000 square foot remanufacturing
facility during 2000, which is expected to become operational in the second
quarter of 2001.

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

      Pacific Lumber dries the majority of its upper grade lumber before it is
sold. Upper grades of redwood lumber are generally air-dried for three to twelve
months and then kiln-dried for seven to twenty-four days to produce a
dimensionally stable and high quality product which generally commands higher
prices than "green" lumber (which is lumber sold before it has been dried).
Upper grade Douglas-fir lumber is generally kiln-dried immediately after it is
cut. Pacific Lumber owns and operates 34 kilns, having an annual capacity of
approximately 95 million board feet, to dry its upper grades of lumber
efficiently in order to produce a quality, premium product. Pacific Lumber also
maintains several large enclosed storage sheds which can hold approximately 27
million board feet of lumber.

      Pacific Lumber owns and operates a modern 25-megawatt cogeneration power
plant which is fueled almost entirely by the wood residue from Pacific Lumber's
milling and finishing operations. This power plant generates substantially all
of the energy requirements of Scotia, California, the town adjacent to Pacific
Lumber's timberlands where several of its manufacturing facilities are located.
Pacific Lumber sells surplus power to Pacific Gas and Electric Company. In 2000,
the sale of surplus power accounted for approximately 3% of Pacific Lumber's
total revenues.

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


                                               YEAR ENDED DECEMBER 31, 2000               YEAR ENDED DECEMBER 31, 1999
                                      -------------------------------------------  ------------------------------------------
                                      % OF TOTAL                                    % OF TOTAL
                                      LUMBER         % OF TOTAL                    LUMBER        % OF TOTAL
                                      PRODUCTION     LUMBER         % OF TOTAL     PRODUCTION    LUMBER          % OF TOTAL
              PRODUCT                 VOLUME         REVENUES       REVENUES       VOLUME        REVENUES        REVENUES
                                      ------------   ------------   ------------   ------------  -------------   ------------
Upper grade redwood lumber.........             7%            16%            14%             9%            23%            20%
Common grade redwood lumber........            59%            58%            51%            52%            51%            46%
                                      ------------   ------------   ------------   ------------   ------------   ------------
   Total redwood lumber............            66%            74%            65%            61%            74%            66%
                                      ------------   ------------   ------------   ------------   ------------   ------------
Upper grade Douglas-fir lumber.....             4%             9%             8%             5%             8%             7%
Common grade Douglas-fir lumber....            28%            16%            14%            29%            16%            14%
                                      ------------   ------------   ------------   ------------   ------------   ------------
   Total Douglas-fir lumber........            32%            25%            22%            34%            24%            21%
                                      ------------   ------------   ------------   ------------   ------------   ------------
Other grades of lumber.............             2%             1%             1%             5%             2%             2%
                                      ------------   ------------   ------------   ------------   ------------   ------------
      Total lumber.................           100%           100%            88%           100%           100%            89%
                                      ============   ============   ============   ============   ============   ============

Logs...............................                                           2%                                            -
                                                                     ===========                                 ============

Hardwood chips.....................                                           2%                                           3%
Softwood chips.....................                                           4%                                           4%
                                                                     -----------                                 ------------
   Total wood chips................                                           6%                                           7%
                                                                     ===========                                 ============

      In 2000, MGI sold approximately 253 million board feet of lumber, which
accounted for approximately 88% of its total revenues. Lumber products vary
greatly by the species and quality of the timber from which they are produced.
Lumber is sold not only by grade (such as "upper" grade versus "common" grade),
but also by board size and the drying process associated with the lumber.

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

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

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

       MGI does not have any significant contractual relationships with third
parties relating to the purchase of logs. During 2000, MGI purchased
approximately 40 million board feet of logs from third parties.

      Pacific Lumber uses a whole-log chipper to produce wood chips from
hardwood trees which would otherwise be left as waste. These chips are sold to
third parties primarily for the production of facsimile and other specialty
papers. Pacific Lumber also produces softwood chips from the wood residue from
its milling operations. These chips are sold to third parties for the production
of wood pulp and paper products. The Company also derives revenues from a soil
amendment operation and a concrete block manufacturing operation.

      Backlog and Seasonality
      MGI's backlog of sales orders at December 31, 2000 and 1999 was
approximately $15.7 million and approximately $19.0 million, respectively, the
substantial portion of which was delivered in the first quarter of the next
fiscal year. The decline in the sales backlog from 1999 to 2000 was principally
due to a diminished supply of THPs which reduced the volume of logs available
for the production of lumber products. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Trends." MGI has
historically experienced lower first quarter sales due largely to the general
decline in construction-related activity during the winter months. As a
consequence, MGI's results in any one quarter are not necessarily indicative of
results to be expected for the full year. See "--Regulatory and Environmental
Factors" below and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Background."

      Marketing
      The housing, construction and remodeling markets are the primary markets
for MGI's lumber products. MGI's policy is to maintain a wide distribution of
its products both geographically and in terms of the number of customers. MGI
sells its lumber products throughout the country to a variety of accounts, the
large majority of which are wholesalers, followed by retailers, industrial
users, exporters and manufacturers. Upper grades of redwood and Douglas-fir
lumber are sold throughout the entire United States, as well as to export
markets. Common grades of redwood lumber are sold principally west of the
Mississippi River, with California accounting for approximately 71.1% of these
sales in 2000. Common grades of Douglas-fir lumber are sold primarily in
California. In 2000, MGI had three customers which accounted for approximately
11.1%, 7.1% and 5.6%, respectively, of MGI's total net lumber sales. Exports of
lumber accounted for approximately 4.8% of MGI's total revenues in 2000. MGI
markets its products through its own sales staff which focuses primarily on
domestic sales.

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

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

      Employees
      As of March 1, 2001, MGI had approximately 1,430 employees, none of whom
are covered by a collective bargaining agreement.

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

      Scotia LLC and Pacific Lumber are parties to several agreements between
themselves, including a master purchase agreement and a services agreement,
relating to the conduct of their forest products' operations. The master
purchase agreement governs the sale to Pacific Lumber by Scotia LLC of logs
harvested from the Scotia LLC Timberlands. Under the services agreement, Pacific
Lumber provides operational, management and related services to Scotia LLC with
respect to the Scotia LLC Timberlands. Scotia LLC and Pacific Lumber are also
parties to agreements providing for reciprocal rights of ingress and egress
through their respective properties, the indemnification of Scotia LLC by
Pacific Lumber for environmental liabilities incurred in connection with the
Scotia LLC Timberlands, and certain services provided by Scotia LLC to Pacific
Lumber.

      Pacific Lumber is also a party to an agreement with Britt (the "BRITT
AGREEMENT") which governs the sale of logs by Pacific Lumber and Britt to each
other, the sale of hog fuel (wood residue) by Britt to Pacific Lumber for use in
Pacific Lumber's cogeneration plant, the sale of lumber by Pacific Lumber and
Britt to each other, and the provision by Pacific Lumber of certain
administrative services to Britt (including accounting, purchasing, data
processing, safety and human resources services).

   REGULATORY AND ENVIRONMENTAL FACTORS

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

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

      The Environmental Plans
      The Environmental Plans, consisting of the HCP and the SYP, were approved
by the applicable federal and state regulatory agencies upon the consummation of
the Headwaters Agreement. In connection with approval of the Environmental
Plans, incidental take permits ("PERMITS") were issued with respect to certain
threatened, endangered and other species found on the Scotia LLC Timberlands.
The Permits cover the 50-year term of the HCP and allow incidental takes of 17
different species covered by the HCP, including four species which are found on
the Scotia LLC Timberlands and had previously been listed as endangered or
threatened under the ESA and/or the CESA. The agreements which implement the
Environmental Plans also provide for various remedies (including the issuance of
written stop orders and liquidated damages) in the event of a breach by Scotia
LLC of these agreements or the Environmental Plans.

      Under the Environmental Plans, harvesting activities are prohibited or
restricted on certain areas of the Scotia LLC Timberlands. For a 50-year period,
harvesting activities are severely restricted in several areas (consisting of
substantial quantities of old growth redwood and Douglas-fir timber) to serve as
habitat conservation areas for the marbled murrelet, a coastal seabird, and
certain other species. Harvesting in certain other areas of the Scotia LLC
Timberlands is currently prohibited while these areas are evaluated for the
potential risk of landslide and the degree to which harvesting activities will
be prohibited or restricted in the future. Further, additional areas alongside
streamsides have been designated as buffers, in which harvesting is prohibited
or restricted, to protect aquatic and riparian habitat. These streamside buffers
may be adjusted up or down, subject to certain minimum and maximum buffers,
based upon an ongoing watershed analysis process, which the HCP requires be
completed within five years of its effective date. Pacific Lumber's analysis
of the Freshwater watershed has recently been released, and is subject to review
and approval by the applicable regulatory agencies. The analysis for two
additional watersheds is nearing completion, while the analyses for additional
watersheds are in various stages of completion.

      The HCP also imposes certain restrictions on the use of roads on the
timberlands covered by the HCP during several months of the year and during
periods of wet weather, except for certain limited situations. These
restrictions may restrict operations so that certain harvesting activities can
generally only be carried out from June through October of any particular
harvest year, and then only if wet weather conditions do not exist. However,
Pacific Lumber anticipates that some harvesting will be able to be conducted
during the other months. The HCP also requires that 75 miles of roads be
stormproofed on an annual basis. Certain other roads must be built or repaired.
The HCP requires the stormproofing to be done between May 2 and October 14 of
each year, while the road building and repair is to be accomplished between June
2 and October 14 of each year. The road stormproofing and building and repair is
also required to be suspended if certain wet weather conditions exist.

      The HCP contains an adaptive management provision, which various
regulatory agencies have clarified will be implemented on a timely and efficient
basis, and in a manner which will be both biologically and economically sound.
This provision allows the Palco Companies to propose changes to any of the HCP
prescriptions based on, among other things, certain economic considerations. The
regulatory agencies have also clarified that in applying this adaptive
management provision, to the extent the changes proposed do not result in the
jeopardy of a particular species, the regulatory agencies will consider the
practicality of the suggested changes, including the cost and economic
feasibility and viability.

      Owl Creek and Grizzly Creek Agreements
      In connection with the consummation of the Headwaters Agreement,
California entered into agreements with respect to the future purchase of the
Owl Creek grove (the "OWL CREEK AGREEMENT") and a portion of the Grizzly Creek
grove (the "GRIZZLY CREEK AGREEMENT").

      Under the Owl Creek Agreement, Scotia LLC agreed to sell the Owl Creek
grove to the state of California for consideration consisting of the lesser of
the appraised fair market value or $79.7 million. On December 29, 2000, the
state of California purchased the Owl Creek grove for $67.0 million in cash.

      With respect to the potential future sale of a portion of the Grizzly
Creek grove, Pacific Lumber and the California Wildlife Conservation Board
("CWCB") agreed that Pacific Lumber would transfer a portion of the Grizzly
Creek grove to the state of California at a purchase price not to exceed $19.9
million. The Grizzly Creek Agreement provided that California must purchase a
portion of the Grizzly Creek grove by October 31, 2000, but such date has been
mutually extended to December 31, 2001. Consummation of the purchase is also
subject to typical real estate title and other closing conditions. Also pursuant
to the terms of the Grizzly Creek Agreement, Pacific Lumber granted the state of
California a five-year option to purchase, at fair market value, additional
property within the Grizzly Creek grove. Pacific Lumber is continuing to work
with California to consummate the sale of a portion of the Grizzly Creek grove.

     Water Quality
     Under the Federal Clean Water Act, the Environmental Protection Agency (the
"EPA") is required to establish total maximum daily load limits ("TMDLS") in
water courses that have been declared to be "water quality impaired." The EPA
and the North Coast Regional Water Quality Control Board (the "WATER BOARD") are
in the process of establishing TMDLs for 17 northern California rivers and
certain of their tributaries, including certain water courses that flow within
the Scotia LLC Timberlands. The Company expects this process to continue into
2010. In the December 1999 EPA report dealing with TMDLs on two of the nine
water courses, the agency indicated that the requirements under the HCP would
significantly address the sediment issues that resulted in TMDL requirements for
these water courses. However, the September 2000 report by the staff of the
Water Board proposed various actions, including restrictions on harvesting
beyond those required under the HCP. Dates for hearings concerning these matters
have not been scheduled. Establishment of the final TMDL requirements applicable
to the Company's timberlands will be a lengthy process, and the final TMDL
requirements applicable to the Company's timberlands may require aquatic
protection measures that are different from or in addition to the prescriptions
to be developed pursuant to the watershed analysis process provided for in the
HCP.

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

      Timber Operator's License
      Historically, Pacific Lumber has conducted logging operations on the
Scotia LLC Timberlands with its own staff of logging personnel as well as
through contract loggers. In order to conduct logging operations in California,
a logging company must obtain from the CDF a Timber Operator's License. In
January 2000, Pacific Lumber was granted a Timber Operator's License for the
years 2000 and 2001.

ALUMINUM OPERATIONS

   GENERAL

      The Company owns 27,938,250 shares of the common stock of Kaiser,
representing a 35.1% interest in Kaiser. Kaiser operates in several principal
aspects of the aluminum industry through its wholly owned subsidiary, Kaiser
Aluminum & Chemical Corporation ("KACC")--the mining of bauxite, the refining of
bauxite into alumina, the production of primary aluminum from alumina, and the
manufacture of fabricated (including semi-fabricated) aluminum products. In
addition to the production utilized by Kaiser in its operations, Kaiser sells
significant amounts of alumina and primary aluminum in domestic and
international markets. References in this report to tons refers to metric tons
of 2,204.6 pounds. The following table sets forth production and third party
purchases of bauxite, alumina and primary aluminum and third party shipments and
intersegment transfers of bauxite, alumina, primary aluminum and fabricated
products for the years ended December 31, 2000, 1999 and 1998:


                                                                Sources(1)                       Uses(1)
                                                         --------------------------   ----------------------------
                                                                        Third Party    Third Party    Intersegment
                                                         Production      Purchases      Shipments       Transfers
                                                         -----------   ------------   ------------    ------------
                                                                              (In thousands of tons)
Bauxite
   2000................................................      4,305.0              -        2,007.0         2,342.0
   1999................................................      5,261.0              -        1,497.0         3,515.0
   1998................................................      6,656.0              -        1,659.0         4,639.0
Alumina
   2000................................................      2,042.9          322.0        1,927.1           751.9
   1999................................................      2,524.0          395.0        2,093.9           757.3
   1998................................................      2,964.0              -        2,250.0           750.7
Primary Aluminum
   2000................................................        411.4          206.5          672.4 (2)           -
   1999................................................        426.4          260.1          684.6 (2)           -
   1998................................................        387.0          251.3          668.2 (2)           -
-------------------

(1) Sources and uses will not be equal due to the impact of inventory changes
    and alumina and metal swaps.
(2) Includes both primary aluminum shipments and pounds of aluminum contained
    in fabricated aluminum product shipments.

      Consistent with its previously disclosed strategy, Kaiser is considering
the possible sale of part or all of its interests in certain operating assets.
The contemplated transactions are in various stages of development. Kaiser
expects that at least one operating asset will be sold. Kaiser has multiple
transactions underway. It is unlikely, however, that it would consummate all of
the transactions under consideration. Further, there can be no assurance as to
the likelihood, timing, or terms of such sales. Kaiser would expect to use the
proceeds from any such sales for debt reduction, capital spending or some
combination thereof.

   BUSINESS OPERATIONS

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

      Kaiser's operations are conducted through five main business units
(bauxite and alumina, primary aluminum, commodities marketing, flat-rolled
products and engineered products), each of which is discussed below.

      Bauxite and Alumina Business Unit
      The following table lists Kaiser's bauxite mining and alumina refining
facilities as of December 31, 2000:


                                                                                                        ANNUAL
                                                                                                      PRODUCTION            TOTAL
                                                                                                       CAPACITY            ANNUAL
                                                                                      COMPANY        AVAILABLE TO        PRODUCTION
                ACTIVITY                        FACILITY           LOCATION          OWNERSHIP        THE COMPANY         CAPACITY
----------------------------------------      -------------      -------------     -------------     -------------     -------------
                                                                                                         (IN THOUSANDS OF TONS)

Bauxite Mining:                               KJBC(1)            Jamaica                49.0%              4,500.0           4,500.0
                                              Alpart(2)          Jamaica                65.0%              1,032.9           3,650.0
                                                                                                     -------------     -------------
                                                                                                           6,775.0           8,000.0
                                                                                                     =============     =============

Alumina Refining:                             Gramercy(3)        Louisiana             100.0%              1,250.0           1,250.0
                                              Alpart             Jamaica                65.0%                942.5           1,450.0
                                              QAL(4)             Australia              28.3%              1,032.9           3,650.0
                                                                                                     -------------     -------------
                                                                                                           3,225.4           6,350.0
                                                                                                     =============     =============

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

(1)   Kaiser Jamaica Bauxite Company ("KJBC").
(2)   Alumina Partners of Jamaica ("ALPART") bauxite is refined into alumina at the Alpart
      alumina refinery.
(3)   Production was completely curtailed from July 1999 until the middle of December 2000.
(4)   Queensland Alumina Limited ("QAL").

      Kaiser is a major producer of alumina and sells significant amounts of its
alumina production in domestic and international markets. Kaiser's strategy is
to sell a substantial portion of the alumina available to it in excess of its
internal smelting requirement under multi-year sales contracts with prices
linked to the price of primary aluminum. See "--Commodities Marketing Business
Unit" below.

      On July 5, 1999, Kaiser's Gramercy, Louisiana alumina refinery was
extensively damaged by an explosion in the digestion area of the plant. A number
of employees were injured in the incident, several of them severely. Production
at the facility was completely curtailed until the middle of December 2000 at
which time partial production commenced. The plant is expected to increase
production progressively to approximately 75% of its newly rated estimated
annual capacity of 1,250,000 tons by the end of March 2001, and construction of
the damaged part of the facility is expected to be completed during the third
quarter of 2001. At February 28, 2001, the plant was operating at 70% of
capacity. See Note 2 to the Consolidated Financial Statements of Kaiser, which
are included as Exhibit 99.3 hereto, for more detailed information regarding the
impact of the Gramercy incident.

      Primary Aluminum Business Unit
      The following table lists Kaiser's primary aluminum smelting facilities as
of December 31, 2000:


                                                                                         ANNUAL
                                                                                          RATED             TOTAL
                                                                                        CAPACITY           ANNUAL           2000
                                                                       COMPANY        AVAILABLE TO          RATED         OPERATING
                  LOCATION                          FACILITY          OWNERSHIP        THE COMPANY        CAPACITY          RATE
---------------------------------------------      -----------      ------------      -------------      ----------      -----------
                                                                                         (IN THOUSANDS OF TONS)
Domestic:
      Washington                                   Mead                 100%                 200.0           200.0            85%(1)
      Washington                                   Tacoma               100%                  73.0            73.0            41%(1)
                                                                                      -------------      ----------
           Subtotal                                                                          273.0           273.0
                                                                                      -------------      ----------

International:
      Ghana                                        Valco                 90%                 180.0           200.0            78%
      Wales, United Kingdom                        Anglesey              49%                  66.2           135.0           106%
                                                                                      -------------      ----------
           Subtotal                                                                          246.2           335.0
                                                                                      -------------      ----------

           Total                                                                             519.2           608.0
                                                                                      =============      ==========


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

(1)  2000 operating rates were affected by high market prices for electric power
     in the Pacific Northwest. Both smelters were curtailed as of December 31,
     2000.

      In response to the unprecedented high market prices for power in the
Pacific Northwest, Kaiser temporarily curtailed primary aluminum production at
the Tacoma and Mead, Washington smelters during the second half of 2000 and sold
a portion of the power that it has under contract through September 30, 2001. As
a result of the curtailments, Kaiser avoided the need to purchase power on a
variable market price basis and will receive cash proceeds sufficient to more
than offset the cash impact of the potline curtailments over the period for
which the power was sold. Kaiser has made additional power sales in 2001. Both
the Mead and Tacoma, Washington smelters are expected to remain curtailed
through September 30, 2001.

      Also, during October 2000, Kaiser signed a new power contract with the
Bonneville Power Administration ("BPA") under which the BPA will provide
Kaiser's operations in the State of Washington with sufficient power to operate
Kaiser's Trentwood facility as well as approximately 40% of the combined
capacity of Kaiser's Mead and Tacoma aluminum smelting operations during the
period from October 2001 through September 2006. Power costs under the new
contract are expected to exceed the cost of power under Kaiser's current BPA
contract by between 20% to 60% and, perhaps, by as much as 100% in certain
periods, and other contract terms are less favorable than Kaiser's current BPA
contract. Kaiser does not have any remarketing rights under the new BPA
contract. See Note 7 to the Consolidated Financial Statements of Kaiser, which
are included as Exhibit 99.3 hereto, for additional information on these
matters.

      Commodities Marketing Business Unit
      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 upon the volume and mix of all products sold. Primary
aluminum prices have historically been subject to significant cyclical
fluctuations. 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 and generally lag behind primary
aluminum prices by up to three months. From time to time in the ordinary course
of business, Kaiser enters into hedging transactions to provide risk management
in respect of its net exposure of earnings and cash flow related to primary
aluminum price changes. Given the significance of primary aluminum hedging
activities, Kaiser has begun (starting with the year ended December 31, 2000)
reporting its primary aluminum-related hedging activities as a separate segment.
Primary aluminum-related hedging activities are managed centrally on behalf of
all of Kaiser's business segments to minimize transaction costs, monitor
consolidated net exposures and to allow for increased responsiveness to changes
in market factors. See Item 7A. "Quantitative and Qualitative Disclosures about
Market Risk" and Notes 1 and 10 to the Consolidated Financial Statements of
Kaiser, which are included as Exhibit 99.3 hereto, for further information.

      Hedging activities conducted in respect of Kaiser's cost exposure to
energy prices and foreign exchange rates are not considered a part of the
commodities marketing segment. Rather, such activities are included in the
results of the business unit to which they relate.

      Flat-Rolled Products Business Unit
      Kaiser manufactures and markets fabricated aluminum products for the
transportation, packaging, construction and consumer durables markets in the
United States and abroad. The flat-rolled product business unit operates the
Trentwood, Washington, rolling mill. The business unit sells to the aerospace,
transportation and industrial ("ATI") markets (producing heat treat sheet and
plate products and automotive brazing sheet) and the beverage container market
(producing lid and tab stock) both directly and through distributors. During
2000, Kaiser shifted the product mix of its Trentwood rolling mill toward higher
value added product lines, such as heat treat sheet and plate, automotive
brazing sheet and beverage can lid and tab stock, and away from beverage can
body stock, wheel and common alloy tread products in an effort to enhance its
profitability.

      Engineered Products Business Unit
      The engineered products business unit operates soft-alloy extrusion
facilities in Los Angeles, California; Sherman, Texas; Tulsa, Oklahoma;
Richmond, Virginia; and London, Ontario, Canada; rod and bar extrusion
facilities in Newark, Ohio, and Jackson, Tennessee, which produce screw machine
stock, redraw rod, forging stock, and billet; and a facility in Richland,
Washington, which produces seamless tubing in both hard and soft alloys for the
automotive, other transportation, export, recreation, agriculture and other
industrial markets. The business unit also produces drawn tube in both hard and
soft alloys at a facility in Chandler, Arizona, that it purchased in May 2000.

      The business unit also operates forging facilities at Oxnard, California
and Greenwood, South Carolina. The business unit sells forged parts to customers
in the automotive, commercial vehicle and ordnance markets.

   COMPETITION

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

      Kaiser competes globally with producers of bauxite, alumina, primary
aluminum, and fabricated aluminum products. Many of Kaiser's competitors have
greater financial resources than Kaiser. Primary aluminum and, to some degree,
alumina are commodities with generally standard qualities, and competition in
the sale of these commodities is based primarily upon price, quality and
availability. Aluminum competes in many markets with steel, copper, glass,
plastic, and other materials. Kaiser competes with numerous domestic and
international fabricators in the sale of fabricated aluminum products. Kaiser
manufactures and markets fabricated aluminum products for the transportation,
packaging, construction, and consumer durables markets in the United States and
abroad. Sales in these markets are made directly and through distributors to a
large number of customers. Competition in the sale of fabricated products is
based upon quality, availability, price and service, including delivery
performance. Kaiser concentrates its fabricating operations on selected products
in which it believes it has production expertise, high-quality capability, and
geographic and other competitive advantages. Kaiser believes that, assuming the
current relationship between worldwide supply and demand for alumina and primary
aluminum does not change materially, the loss of any one of Kaiser's customers,
including intermediaries, would not have a material adverse effect on its
financial condition or results of operations. See also the description of the
business units above.

      LABOR MATTERS

      As a result of the September 1998 strike by the United Steelworkers of
America ("USWA") and the subsequent "lock-out" by Kaiser in January 1999, and
prior to the settlement in September 2000, Kaiser was operating five of its U.S.
facilities with salaried employees and other employees. Under the terms of the
settlement, USWA members generally returned to the affected plants during
October 2000. Although the USWA dispute has been settled and the workers have
returned to the facilities, two allegations of unfair labor practices ("ULPS")
remain in connection with the USWA strike and subsequent lock-out. Kaiser
believes that these charges are without merit. See Note 12 to the Consolidated
Financial Statements of Kaiser, which are included as Exhibit 99.3 hereto, for a
discussion of the ULPs.

      ASBESTOS-RELATED LIABILITY AND EXPECTED RECOVERIES

      Kaiser is a defendant in a number of asbestos lawsuits that generally
relate to products it has not sold for more than 20 years. Kaiser believes that
it has insurance coverage available to recover a substantial portion of its
asbestos-related costs. For the year ended December 31, 2000, a total of
approximately $99.5 million of asbestos-related settlements and defense costs
were paid and partial insurance reimbursements for asbestos-related matters
totaling approximately $62.8 million were received. See Note 12 to the
Consolidated Financial Statements of Kaiser, which are included as Exhibit 99.3
hereto, for additional information.

   MISCELLANEOUS

      For further information concerning the business and financial condition of
Kaiser, see Kaiser's Consolidated Financial Statements and the notes thereto
(Exhibit 99.3 hereto), as well as Kaiser's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999. Such Exhibit and Form 10-K are available at
no charge by writing to the following address: Kaiser Aluminum Corporation,
Shareholder Services Department, 5847 San Felipe, Suite 2600, Houston, Texas
77057.

ITEM 2.         PROPERTIES

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


ITEM 3.         LEGAL PROCEEDINGS

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

TIMBER HARVESTING LITIGATION

      On January 28, 1997, an action was filed against Pacific Lumber entitled
Ecological Rights Foundation, Mateel Environmental v. Pacific Lumber (the "ERF
LAWSUIT") in the U.S. District Court in the Northern District of California (No.
97-0292). This action alleges that Pacific Lumber has discharged pollutants into
federal waterways, and plaintiffs are seeking to enjoin Pacific Lumber from
continuing such actions, civil penalties of up to $25,000 per day for each
violation, remediation and other damages. This case was dismissed by the
District Court on August 19, 1999, but the dismissal was reversed by the U.S.
Court of Appeals for the Ninth Circuit on October 30, 2000 and the case was
remanded to the District Court, but no further proceedings have occurred. The
Company believes that it has strong factual and legal defenses with respect to
the ERF lawsuit; however, there can be no assurance that it will not have a
material adverse effect on its financial position, results of operations or
liquidity.

      On March 5, 2001, the parties reached an agreement to settle the lawsuit
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, et al. (No. 9700400) (the "ROLLINS
LAWSUIT") filed in the Superior Court of Humboldt County. Substantially all of
the amounts to be paid to the plaintiffs will be paid by the Company's insurers.
Still pending is a similar 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, et al. (No. 9700399) (the "WRIGLEY LAWSUIT") filed on December 2, 1997 in
the Superior Court of Humboldt County. This action alleges, among other things,
that defendants' logging practices have contributed to an increase in flooding
and damage to domestic water systems in a portion of the Elk River watershed.
Plaintiffs further allege that in order to have THPs approved in connection with
these areas, the defendants submitted false information to the CDF in violation
of California's business and professions code and the Racketeering Influence and
Corrupt Practices Act. The Company believes that it has strong factual and legal
defenses with respect to the Wrigley lawsuit; however, there can be no assurance
that it will not have a material adverse effect on its consolidated financial
position, results of operations or liquidity.

      On March 31, 1999, an action entitled Environmental Protection Information
Association, Sierra Club v. California Department of Forestry and Fire
Protection, California Department of Fish and Game, The Pacific Lumber Company,
Scotia Pacific Company LLC, Salmon Creek Corporation, et al. (No. 99CS00639)
(the "EPIC-SYP/PERMITS LAWSUIT") was filed alleging, among other things, that
the CDF and the CDFG violated the CEQA and the CESA with respect to the SYP and
the Permits issued by California. This action is now pending in Humboldt County,
California (No. CV-990445). The plaintiffs seek, among other things, injunctive
relief to set aside the CDF's and the CDFG's decisions approving the SYP and the
Permits issued by California. On March 31, 1999, 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) (the "USWA
LAWSUIT") was filed alleging, among other things, violations of the Forest
Practice Act in connection with the CDF's approval of the SYP. This action is
now pending in Humboldt County, California (No. CV- 990452). The plaintiffs seek
to prohibit the CDF from approving any THPs relying on the SYP. The EPIC-
SYP/Permits lawsuit and the USWA lawsuit have been set for trial in November
2001. The Company believes that appropriate procedures were followed throughout
the public review and approval process concerning the Environmental Plans, and
the Company is working with the relevant government agencies to defend the USWA
lawsuit and the EPIC- SYP/Permits lawsuit.

      On March 10, 2000, a lawsuit entitled Environmental Protection Information
Center, Sierra Club v. California Department of Fish and Game, The Pacific
Lumber Company and Does XI-XX (THP 520) (No. CV-00170) (the "EPIC/THP 97-520
LAWSUIT") was filed in the Superior Court of Humboldt County. Plaintiffs allege,
among other things, that the CDF violated the Forest Practice Act and the
California Public Resources Code by approving an amendment to THP 97-520 (which
covers approximately 700 acres of timberlands adjoining the Headwaters
Timberlands) as a "minor" amendment. The plaintiffs seek an order requiring the
CDF to withdraw its approval of the minor amendment to THP 97-520, and enjoining
Pacific Lumber from harvesting under THP 97-520. In July 2000, the Court issued
a preliminary injunction enjoining Pacific Lumber from harvesting under THP
97-520. The EPIC/THP 97-520 lawsuit was supposed to begin trial on March 5,
2001, but was postponed and a new trial date has not been set. On March 6, 2001,
the CDF approved a "major" amendment of THP 97-520 which allows for winter
operations and restates the changes in the minor amendment. As a result of this
approval, the Company believes that it should be able to obtain relief from the
injunction and begin harvesting. Therefore, although the EPIC/THP 97-520 lawsuit
has yet to conclude, the Company believes it will not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.

      In February 2001, Pacific Lumber received a letter from the Environmental
Protection Information Association of its 60-day notice of intent to sue Pacific
Lumber under the federal Clean Water Act ("CWA"). The letter alleges a number of
violations of the CWA by Pacific Lumber in certain watersheds since 1990. If
filed, the lawsuit will purportedly seek declarative and injunction relief for
past violations and to prevent future violations, as well as civil penalties.
Such civil penalties could be up to $25,000 per day for each continuing
violation. The Company does not know when or if a lawsuit will be filed
regarding this matter, or if a lawsuit is filed, the ultimate impact of such
lawsuit on its consolidated financial condition or results of operations.

HUNSAKER ACTION

      On November 24, 1998, an action entitled William Hunsaker, et al. v.
Charles E. Hurwitz, Pacific Lumber, MAXXAM Group Inc., MXM Corp., Federated
Development Company and Does I-50 (No. C 98-4515) was filed in the United States
District Court for the Northern District of California (the "HUNSAKER ACTION").
This action alleges, among other things, that a class consisting of the vested
employees and retirees of the former Pacific Lumber Company (Maine) ("OLD
PALCO") is entitled to recover approximately $60.0 million of surplus funds
allegedly obtained through deceit and fraudulent acts from the Old Palco
retirement plan that was terminated in 1986 following acquisition by MAXXAM of
Pacific Lumber. Plaintiffs further allege that defendants violated RICO and
engaged in numerous acts of unfair business practices in violation of
California's business and professions code. In addition to seeking the surplus
funds, plaintiffs also seek, among other things, a constructive trust on the
assets traceable from the surplus funds, plus interest, trebling of damages for
violation of RICO, punitive damages, and injunctive and other relief. 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, and on February 13, 2001, the
U.S. Ninth Circuit Court of Appeals heard such appeal, but has not yet rendered
a decision. The Company believes that it has strong factual and legal defenses
with respect to the Hunsaker action, and does not believe that the resolution of
this matter will result in a material adverse effect on its financial position,
results of operations or liquidity.

   OTHER LITIGATION MATTERS

      Kaiser is involved in significant legal proceedings, including asbestos
and environmental litigation as well as litigation involving the Gramercy
incident and the USWA strike. For further information, see Item 1.
"Business--Aluminum Operations--Business Operations," "--Labor Matters,"
"--Asbestos-Related Liquidity and Expected Recoveries" and "--Miscellaneous" as
well as Notes 2, 5 and 12 to Kaiser's Consolidated Financial Statements (Exhibit
99.3 hereto).

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


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

      Not applicable.

                                     PART II


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

      All of the Company's common stock is owned by MAXXAM. Accordingly, the
Company's common stock is not traded on any stock exchange and has no
established public trading market. The 12% Senior Secured Notes due 2003 of the
Company (the "MGHI NOTES") are secured by the common stock of MGI, the Pledged
Kaiser Shares and a note receivable from MAXXAM. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition and Investing and Financing Activities" and Note
7 to the Consolidated Financial Statements appearing in Item 8.


ITEM 6.         SELECTED FINANCIAL DATA

      Not applicable.

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

BACKGROUND

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

      The Company's wholly owned subsidiary, MGI, and its operating
subsidiaries, Pacific Lumber and Britt, are engaged in forest products
operations. The Company's business is somewhat seasonal, and its net sales have
historically been higher in the months of April through November than in the
months of December through March. Management expects that the Company's revenues
and cash flows will continue to be seasonal. The following should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto appearing in Item 8.

      Due to Pacific Lumber's difficulties in implementing the Environmental
Plans and the resulting lower harvests on its property, Pacific Lumber's
production of redwood lumber has decreased. Furthermore, logging costs have
increased due to the harvest of smaller diameter logs and compliance with
environmental regulations and the Environmental Plans. Pacific Lumber has been
able to lessen the impact of these factors by instituting a number of measures
at its sawmills during the past several years designed to enhance the efficiency
of its operations, such as modernization and expansion of its manufactured
lumber facilities and other improvements in lumber recovery. See also
"--Trends."

      The Company also owns 27,938,250 shares of Kaiser common stock (the
"KAISER SHARES") representing a 35.1% interest in Kaiser on a fully diluted
basis as of December 31, 2000. The Company follows the equity method of
accounting for its investment in Kaiser. See Note 6 to the Notes to the
Consolidated Financial Statements for further information, including summarized
financial information of Kaiser.

   RESULTS OF OPERATIONS

      The following table presents selected operational and financial
information for the years ended December 31, 2000, 1999 and 1998:


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------
                                                                                        (IN MILLIONS OF DOLLARS,
                                                                                      EXCEPT SHIPMENTS AND PRICES)
Shipments:
   Lumber: (1)
      Redwood upper grades.........................................................      15.8      24.6       41.9
      Redwood common grades........................................................     143.8     137.4      230.1
      Douglas-fir upper grades.....................................................      11.5      10.4        6.9
      Douglas-fir common grades....................................................      76.1      61.5       47.5
      Other........................................................................       5.9       8.7        7.0
                                                                                     --------- ---------  ---------
        Total lumber...............................................................     253.1     242.6      333.4
                                                                                     ========= =========  =========
   Wood chips (2)..................................................................     169.5     163.7      176.7
                                                                                     ========= =========  =========

Average sales price:
   Lumber: (3)
      Redwood upper grades.........................................................  $  1,798  $  1,531   $  1,478
      Redwood common grades........................................................       712       629        540
      Douglas-fir upper grades.....................................................     1,352     1,290      1,280
      Douglas-fir common grades....................................................       376       430        346
   Wood chips (4)..................................................................        67        77         70

Net sales:
   Lumber, net of discount.........................................................  $  175.3  $  165.3   $  211.6
   Wood chips......................................................................      11.3      12.5       12.3
   Cogeneration power(8)...........................................................       6.0       3.8        3.9
   Other...........................................................................       7.5       6.2        5.8
                                                                                     --------- ---------  ---------
      Total net sales..............................................................  $  200.1  $  187.8   $  233.6
                                                                                     ========= =========  =========
Operating income (loss)............................................................  $    7.3  $   (4.4)  $   40.6
                                                                                     ========= =========  =========
Operating cash flow (5)............................................................  $   27.0  $   12.6   $   63.1
                                                                                     ========= =========  =========
Income (loss) before income taxes(6)...............................................  $   39.3  $  177.9   $  (27.3)
                                                                                     ========= =========  =========
Net income (loss)(7)...............................................................  $   30.1  $  100.0   $  (59.8)
                                                                                     ========= =========  =========
--------------------

(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)   2000 results include a $60.0 million gain on the sale of the Owl Creek
      grove, and 1999 results include a $239.8 million gain on the sale of the
      Headwaters Timberlands.
(7)   2000 results include an extraordinary gain of $4.2 million, net of tax,
      on the repurchases of debt and 1998 results include an extraordinary loss
      of $41.8 million, net of tax, for the early extinguishment of debt.
(8)   As of December 31, 2000, the Company had receivables from Pacific Gas &
      Electric Company ("PG&E") of $2.2 million. PG&E is currently experiencing
      financial difficulties in connection with the power shortages in
      California, and therefore the collectibility of the receivables is
      uncertain. As of March 15, 2001, $0.9 million of this balance had been
      collected. Additional sales of power to PG&E have been made during the
      first quarter of 2001. As of March 15, 2001, the uncollected receivable
      balance attributable to sales made in 2000 and 2001 was $4.2 million.

      Net Sales
      Net sales for the year ended December 31, 2000, increased over the
comparable prior year period primarily due to higher prices for redwood lumber
and higher shipments of common grade redwood and Douglas-fir lumber. These
improvements were offset in part by lower shipments of upper grade redwood
lumber due to continuing reductions in the volume of old growth logs available
for the production of lumber. The failure of government agencies to approve THPs
in a timely manner continues to adversely affect log supply resulting in lower
shipments and lower net sales. See "--Trends" below.

      Net sales declined from $233.6 million for the year ended December 31,
1998, to $187.8 million for the year ended December 31, 1999, primarily due to
lower shipments of redwood lumber offset somewhat by higher shipments of
Douglas-fir lumber and higher lumber prices. The decrease in redwood lumber
shipments is due to the reduction in the volume of logs available for the
production of lumber products. A diminished supply of approved THPs reduced log
supplies throughout 1999. Net sales for both 1999 and 1998 were also affected by
the seasonal restrictions on Pacific Lumber's logging operations during wet
weather and during the nesting seasons for both the northern spotted owl and the
marbled murrelet.

      Operating Income (Loss)
      The Company had operating income for the year ended December 31, 2000, as
compared to an operating loss for the comparable 1999 period, primarily due to
the increase in net sales discussed above.

      The Company had an operating loss for the year ended December 31, 1999, as
compared to operating income for the comparable 1998 period, primarily due to
the decrease in net sales discussed above. Results for 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
      Income before income taxes for the year ended December 31, 2000, decreased
from the comparable prior year period principally due to the 1999 gain on the
sale of the Headwaters Timberlands of $239.8 million ($142.1 million net of
deferred taxes). Included in 2000 is a gain on the sale of the Owl Creek grove
of $60.0 million ($35.6 million net of deferred taxes). Income before income
taxes for the year ended December 31, 2000, also reflects $5.9 million of equity
income from Kaiser as compared to $19.2 million of equity loss from Kaiser in
1999.

      Income before income taxes for the year ended December 31, 1999, increased
as compared to the 1998 period, primarily due to the gain on the sale of the
Headwaters Timberlands of $239.8 million offset by the operating loss discussed
above. Income before income taxes for the year ended December 31, 1999, also
reflects $19.2 million of equity loss from Kaiser, interest income earned from
investing the net proceeds from the sale of the Headwaters Timberlands and
higher earnings from marketable securities.

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

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

      Note 7 to the Consolidated Financial Statements contains additional
information concerning the Company's indebtedness and information concerning
certain restrictive debt covenants. "MGHI PARENT" is used in this section to
refer to the Company on a stand-alone basis without its subsidiaries.

      The following table summarizes certain data related to financial condition
and to investing and financing activities of the Company and its subsidiaries.



                                                         Scotia      Pacific     MGI and       MGHI
                                                          LLC        Lumber       Other       PARENT       TOTAL
                                                       ----------  ----------   ----------  ----------  ----------
                                                                             (IN MILLIONS)
DEBT AND CREDIT FACILITIES (NOT INCLUDING
   INTERCOMPANY NOTES)
Short-term borrowings and current
   maturities of long-term debt:
   December 31, 2000.................................  $    16.4   $    37.1    $       -   $       -   $    53.5
   December 31, 1999.................................       15.9         0.1            -           -        16.0

Long-term debt, excluding current maturities:
   December 31, 2000(1)..............................  $   767.2   $     0.6    $       -   $   118.8   $   886.6
   December 31, 1999.................................      843.5         0.7            -       125.2       969.4

Revolving credit facilities:
   Facility amounts..................................  $    62.0   $    60.0    $     2.5   $       -   $   124.5
   December 31, 2000:
      Borrowings.....................................          -        37.0            -           -        37.0
      Letters of credit..............................          -        12.5            -           -        12.5
      Unused and available
        credit.......................................       62.0           -          2.5           -        64.5

CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES AND
   OTHER INVESTMENTS
December 31, 2000:
   Current amounts restricted for debt service.......  $    45.8   $       -    $       -   $       -   $    45.8
   Other current amounts.............................       68.6         0.2         61.7        54.3       184.8
                                                       ----------  ----------   ----------  ----------  ----------
                                                           114.4         0.2         61.7        54.3       230.6
                                                       ----------  ----------   ----------  ----------  ----------

   Long-term amounts restricted for debt service(1)..       92.1           -            -           -        92.1
   Other long-term restricted amounts................        2.5           -          2.0           -         4.5
                                                       ----------  ----------   ----------  ----------  ----------
                                                            94.6           -          2.0           -        96.6
                                                       ----------  ----------   ----------  ----------  ----------
                                                       $   209.0   $     0.2    $    63.7   $     54.3   $  327.2
                                                       ==========  ==========   ==========  ==========  ==========

December 31, 1999:
   Current amounts restricted for debt service.......  $    15.9   $       -    $       -   $       -   $    15.9
   Other current amounts.............................        1.3        27.5        179.9         9.0       217.7
                                                       ----------  ----------   ----------  ----------  ----------
                                                            17.2        27.5        179.9         9.0       233.6
                                                       ----------  ----------   ----------  ----------  ----------

   Long-term amounts restricted for debt service.....      153.6           -            -           -       153.6
   Other long-term restricted amounts................        3.3           -          2.0           -         5.3
                                                       ----------  ----------   ----------  ----------  ----------
                                                           156.9           -          2.0           -       158.9
                                                       ----------  ----------   ----------  ----------  ----------
                                                       $   174.1   $    27.5    $   181.9   $     9.0   $   392.5
                                                       ==========  ==========   ==========  ==========  ==========

CHANGES IN CASH AND CASH EQUIVALENTS
Capital expenditures:
   December 31, 2000(3)..............................  $     8.2   $     4.1    $     1.7   $       -   $    14.0
   December 31, 1999(3)..............................       19.2         2.6          1.3           -        23.1
   December 31, 1998.................................       16.6         4.2          0.4           -        21.2

Net proceeds from dispositions of property and
   investments:
   December 31, 2000(4)..............................  $    67.0   $     0.3    $       -   $       -   $    67.3
   December 31, 1999(4)..............................        0.3           -        298.0           -       298.3
   December 31, 1998.................................          -         6.5          0.1           -         6.6

Borrowings (repayments) of debt and credit
   facilities, net of financing costs:
   December 31, 2000(1)..............................  $   (16.0)  $    37.0    $       -   $    (5.8)  $    15.2
   December 31, 1999(1)..............................       (9.0)       (0.1)        (4.7)         -        (13.8)
   December 31, 1998(2)..............................      488.9      (244.9)      (232.3)       (2.6)        9.1

Dividends and advances received (paid):
   December 31, 2000(5)..............................  $       -   $    23.7    $  (132.1)  $    63.4   $   (45.0)
   December 31, 1999.................................          -           -        (18.7)       18.7           -
   December 31, 1998(2)..............................     (532.8)      262.8        251.3        16.2        (2.5)
---------------------

(1)  The decrease in MGHI's and Scotia LLC's long-term debt between December 31,
     1999, and December 31, 2000, was due primarily to repurchases of debt. With
     respect to Scotia LLC, such repurchases were made using proceeds from the
     SAR Account, resulting in a decrease in long-term cash restricted for debt
     service. In addition, Scotia LLC made principal payments on the Timber
     Notes of $15.9 million and $8.2 million during the years ended December 31,
     2000 and 1999, respectively.
(2)  Scotia LLC issued the $867.2 million aggregate principal amount of Timber
     Notes on July 20, 1998. Proceeds from the offering of the Timber Notes were
     used primarily to prepay Scotia Pacific's 7.95% Timber Collateralized Notes
     due 2015 and to redeem the 10 1/2% Senior Notes due 2003 of Pacific Lumber,
     the 11 1/4% Senior Secured Notes due 2003 and the 12 1/4% Senior Secured
     Discount Notes due 2003 of MGI. On July 28, 1998, when the Timber Notes
     were issued, Scotia LLC paid a dividend of $526.1 million to Pacific
     Lumber, Pacific Lumber paid a dividend of $263.0 million to MGI, and MGI
     paid a dividend of $14.7 million to MGHI Parent.
(3)  Included in capital expenditures for 2000 and 1999 is $1.1 million and $13.2
     million, respectively, for timberland acquisitions.
(4)  Net proceeds from dispositions of property and investments includes $67.0
     million of proceeds in 2000 for Scotia LLC's sale of the Owl Creek grove and
     $299.9 million of gross proceeds in 1999 for Pacific Lumber's sale of the
     Headwaters Timberlands.
(5)  For the year ended December 31, 2000, $90.0 million of the dividends paid
     from MGI to MGHI were made using proceeds from the sale of the Headwaters
     Timberlands.  MGHI in turn paid a $45.0 million dividend to MAXXAM Parent.

      Subsequent to December 31, 2000, the Company repurchased $15.7 million
of the MGHI Notes for $12.8 million. The Company expects that interest payments
on the remaining $103.2 million of MGHI Notes will be paid with its existing
cash and dividends paid by MGI to MGHI. Dividends from MGI are expected to be at
least $14.9 million per year based on the minimum levels provided for under the
indenture for the MGHI Notes.

      Substantially all of the Company's consolidated assets are owned by
Pacific Lumber, and a significant portion of Pacific Lumber's consolidated
assets are owned by Scotia LLC. The holders of the Timber Notes have priority
over the claims of creditors of Pacific Lumber with respect to the assets and
cash flows of Scotia LLC. In the event Scotia LLC's cash flows are not
sufficient to generate distributable funds to Pacific Lumber, Pacific Lumber
would effectively be precluded from distributing funds to MGI and MGI in turn to
MGHI Parent.

      Proceeds from the sale of Owl Creek in December 2000 significantly
improved the liquidity of the Company. Excluding such proceeds, the Company did
not generate cash flows from operations in 2000 due principally to expenditures
for certain working capital items and the need to fund losses. With respect to
changes in working capital, $15.5 million of the decrease in cash and marketable
securities was a result of the following items: an increase in inventories as
the Company is rebuilding its lumber and log inventory levels and an increase in
prepaid expenses primarily related to THP preparation costs.

      Scotia LLC has an agreement with a group of banks which allows it to
borrow up to one year's interest on the Timber Notes (the "SCOTIA LLC LINE OF
CREDIT"). This facility expires on July 15, 2001, but it is expected to be
renewed annually, subject to approval of the bank group. Pacific Lumber's
revolving credit agreement (the "PACIFIC LUMBER CREDIT AGREEMENT"), a senior
secured credit facility, expires on October 31, 2001, but it is expected to be
renewed.

      On the January 22, 2001, note payment date for the Timber Notes, Scotia
LLC had $40.8 million set aside in the note payment account to pay the $31.0
million of interest due as well as $9.8 million of principal. Scotia LLC repaid
an additional $3.3 million of principal on the Timber Notes using funds held in
the SAR Account, resulting in a total principal payment of $13.1 million, an
amount equal to Scheduled Amortization. In addition, Scotia LLC made a
distribution to Pacific Lumber of $73.1 million, $63.9 million of which was made
using funds from the sale of the Owl Creek grove and $9.2 million of which was
made using excess funds released from the SAR Account.

      Capital expenditures were made during the past three years to improve
production efficiency, reduce operating costs and acquire additional
timberlands. Capital expenditures, excluding expenditures for timberlands, are
estimated to be between $10.0 million and $13.0 million per year for the 2001 -
2003 period. Pacific Lumber and Scotia LLC may purchase additional timberlands
from time to time as appropriate opportunities arise.

      MGHI Parent believes that its existing resources, together with the cash
available from subsidiaries, will be sufficient to fund its debt service and
working capital requirements for the next year. With respect to its long-term
liquidity, MGHI Parent believes that its existing cash and cash resources,
together with distributions from its subsidiaries, should be sufficient to meet
its debt service and working capital requirements. However, there can be no
assurance that this will be the case. Any adverse outcome of the regulatory and
environmental matters described under "--Trends" below could materially
adversely affect cash available from subsidiaries and therefore MGHI Parent's
financial position, results of operations or liquidity.

      MGI and its subsidiaries anticipate that existing cash, cash equivalents,
marketable securities, funds available from the SAR Account and available
sources of financing will be sufficient to fund their working capital, debt
service and capital expenditure requirements for the next year. With respect to
their long-term liquidity, although MGI and its subsidiaries believe that their
existing cash and cash equivalents should provide sufficient funds to meet their
debt service and working capital requirements until such time as Pacific Lumber
has adequate cash flows from operations and/or dividends from Scotia LLC, 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 "--Trends" below and
Note 11 to the Consolidated Financial Statements), increased competition from
other lumber producers or alternative building products and general economic
conditions.

TRENDS

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

      Regulatory and environmental matters play a significant role in the
Company's operations. See Item 1. "Business--Forest Products
Operations--Regulatory and Environmental Factors" and Note 11 to the
Consolidated Financial Statements for a discussion of these matters. Regulatory
compliance and related litigation have increased the cost of logging operations,
and Pacific Lumber has also been adversely affected by a lack of available logs
as a result of a severely diminished supply of available THPs, resulting in
delayed or reduced harvest and in lower shipments of lumber and lower net sales.

      With the consummation of the Headwaters Agreement, Pacific Lumber has
completed its work in connection with preparation of the Environmental Plans;
however, significant additional work continues to be required in connection with
their implementation. As a result of the implementation process, 1999 was a
transition period for Pacific Lumber with respect to the filing and approval of
its THPs. The transition period continued into 2000 and is expected to continue
into 2001. Although the rate of submissions and approvals of THPs during 2000 is
higher than that for 1999, monthly submissions and approvals continue to be
slower than Pacific Lumber's expectations and slower than Pacific Lumber had
experienced prior to 1998, principally because government agencies have failed
to approve THPs in a timely manner. Nevertheless, Pacific Lumber anticipates
that after a transition period, the implementation of the Environmental 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 Item 3. "Legal
Proceedings" and Note 11 to the Consolidated Financial Statements for further
information regarding regulatory and legal proceedings affecting the Company's
operations.

ACCOUNTING PRONOUNCEMENTS

      See Note 1 to the Consolidated Financial Statements for a discussion of
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities-An Amendment of FASB Statement No. 133" which Kaiser, the
Company's equity investee implemented on January 1, 2001.

ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      This item is not applicable for the Company and its subsidiaries; however,
Kaiser, the Company's equity investee, utilizes hedging transactions to lock-in
a specified price or range of prices for certain products which it sells or
consumes and to mitigate its exposure to changes in foreign currency exchange
rates. See Item 7A. "Quantitative and Qualitative Disclosures About Market Risk"
from Kaiser's Annual Report on Form 10-K (included as Exhibit 99.4 hereto) for
information regarding Kaiser's hedging activities.

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To MAXXAM Group Holdings Inc.:

      We have audited the accompanying consolidated balance sheets of MAXXAM
Group Holdings Inc. (a Delaware corporation and a wholly owned subsidiary of
MAXXAM Inc.) and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholder's deficit and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MAXXAM Group
Holdings Inc. and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

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



                                                          ARTHUR ANDERSEN LLP


San Francisco, California
March 15, 2001


                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------
ASSETS:

Current assets:
   Cash and cash equivalents..............................................................  $   201.7   $    189.8
   Marketable securities..................................................................       28.9         43.8
   Receivables:
      Trade...............................................................................       10.4         10.9
      Receivables from MAXXAM Inc.........................................................        6.6          6.3
      Other...............................................................................        4.0          2.8
   Inventories............................................................................       55.1         44.6
   Prepaid expenses and other current assets..............................................       14.2         17.7
                                                                                            ----------  -----------
        Total current assets..............................................................      320.9        315.9
Property, plant and equipment, net of accumulated depreciation of $102.9 and
   $93.7, respectively....................................................................      100.0        100.4
Timber and timberlands, net of accumulated depletion of $183.8 and $180.6,
   respectively...........................................................................      244.3        254.1
Note receivable from MAXXAM Inc...........................................................      164.5        147.8
Investment in Kaiser Aluminum Corporation.................................................       27.6         21.9
Deferred financing costs, net.............................................................       19.8         23.6
Deferred income taxes.....................................................................       27.3        100.3
Restricted cash, marketable securities and other investments..............................       96.6        158.9
Other assets..............................................................................        7.9          8.8
                                                                                            ----------  -----------
                                                                                            $ 1,008.9   $  1,131.7
                                                                                            ==========  ===========

LIABILITIES AND STOCKHOLDER'S DEFICIT:

Current liabilities:
   Accounts payable.......................................................................  $     6.2   $      6.1
   Accrued interest.......................................................................       32.4         34.5
   Accrued compensation and related benefits..............................................        8.2          3.7
   Deferred income taxes..................................................................       10.0          7.0
   Other accrued liabilities..............................................................        3.6          5.3
   Short-term borrowings and current maturities of long-term debt.........................       53.5         16.0
                                                                                            ----------  -----------
        Total current liabilities.........................................................      113.9         72.6
Long-term debt, less current maturities...................................................      886.6        969.4
Deferred income taxes.....................................................................       31.2         78.8
Other noncurrent liabilities..............................................................       26.6         45.8
                                                                                            ----------  -----------
        Total liabilities.................................................................    1,058.3      1,166.6
                                                                                            ----------  -----------

Contingencies

Stockholder's deficit:
   Common stock, $1.00 par value; 3,000 shares authorized; 1,000 shares issued............          -            -
   Additional capital.....................................................................      123.2        123.2
   Accumulated deficit....................................................................     (172.6)      (157.7)
   Accumulated other comprehensive loss...................................................          -         (0.4)
                                                                                            ----------  -----------
        Total stockholder's deficit.......................................................      (49.4)       (34.9)
                                                                                            ----------  -----------
                                                                                            $ 1,008.9   $  1,131.7
                                                                                            ==========  ===========


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

                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
                            (IN MILLIONS OF DOLLARS)


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2000        1999        1998
                                                                                ----------  ----------  -----------
Net sales:
   Lumber and logs............................................................  $   178.8   $   165.5   $    213.1
   Other......................................................................       21.3        22.3         20.5
                                                                                ----------  ----------  -----------
                                                                                    200.1       187.8        233.6
                                                                                ----------  ----------  -----------

Operating expenses:
   Cost of goods sold.........................................................      157.4       159.5        155.3
   Selling, general and administrative expenses...............................       15.7        15.7         15.2
   Depletion and depreciation.................................................       19.7        17.0         22.5
                                                                                ----------  ----------  -----------
                                                                                    192.8       192.2        193.0
                                                                                ----------  ----------  -----------

Operating income (loss).......................................................        7.3        (4.4)        40.6

Other income (expense):
   Gains on sales of timberlands..............................................       60.0       239.8            -
   Equity in earnings (loss) of Kaiser Aluminum Corporation...................        5.9       (19.2)         0.1
   Investment, interest and other income (expense), net.......................       45.6        44.5         23.6
   Interest expense...........................................................      (79.5)      (82.8)       (91.6)
                                                                                ----------  ----------  -----------
Income (loss) before income taxes.............................................       39.3       177.9        (27.3)
Credit (provision) in lieu of income taxes....................................      (13.4)      (77.9)         9.3
                                                                                ----------  ----------  -----------
Income (loss) before extraordinary items......................................       25.9       100.0        (18.0)
Extraordinary items:
   Loss on early extinguishment of debt, net of
      credit in lieu of income taxes of $23.6.................................          -           -        (41.8)
   Gains on repurchases of debt, net of provision in lieu of income
      taxes of $2.4...........................................................        4.2           -            -
                                                                                ----------  ----------  -----------
Net income (loss).............................................................  $    30.1   $   100.0   $    (59.8)
                                                                                ==========  ==========  ===========


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

                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
              (IN MILLION OF DOLLARS, EXCEPT PER SHARE INFORMATION)



                                                                                    ACCUMU-
                                                                                     LATED
                                                                                     OTHER
                                                                                    COMPRE-                 COMPRE-
                                                  COMMON      ADDI-     ACCUM-      HENSIVE                 HENSIVE
                                                   STOCK     TIONAL     ULATED       INCOME                 INCOME
                                                ($1.00 PAR)  CAPITAL    DEFICIT      (LOSS)      TOTAL      (LOSS)
                                                ---------- ----------  ----------  ----------  ----------  ----------
Balance, December 31, 1997....................  $       -  $   123.2   $  (195.4)  $     1.0   $   (71.2)
   Net loss...................................          -          -       (59.8)          -       (59.8)  $   (59.8)
   Equity in Kaiser Aluminum Corporation's
      reduction of pension liability reversal.          -          -           -        (1.0)       (1.0)       (1.0)
                                                                                                           ----------
   Comprehensive loss.........................                                                             $   (60.8)
                                                                                                           ==========
   Dividend...................................          -          -        (2.5)          -        (2.5)
                                                ---------- ----------  ----------  ----------  ----------
Balance, December 31, 1998....................          -      123.2      (257.7)          -      (134.5)
   Net income.................................          -          -       100.0           -       100.0   $   100.0
   Equity in Kaiser Aluminum
      Corporation's additional minimum
      pension liability.......................          -          -           -        (0.4)       (0.4)       (0.4)
                                                                                                           ----------
   Comprehensive income.......................                                                             $    99.6
                                                ---------- ----------  ----------  ----------  ----------  ==========
Balance, December 31, 1999....................          -      123.2      (157.7)       (0.4)      (34.9)
   Net income.................................          -          -        30.1           -        30.1   $    30.1
   Equity in Kaiser Aluminum
      Corporation's additional minimum
      pension liability.......................          -          -           -        (0.2)       (0.2)       (0.2)
   Change in value of available-for-sale
   investments................................          -          -           -         0.6         0.6         0.6
                                                                                                           ----------
   Comprehensive income.......................                                                             $    30.5
                                                                                                           ==========
   Dividend...................................          -          -       (45.0)          -      (45.0)
                                                ---------- ----------  ----------  ----------  ---------
Balance, December 31, 2000....................  $       -  $   123.2   $  (172.6)  $       -   $  (49.4)
                                                ========== ==========  ==========  ==========  =========


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

                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

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


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)................................................................ $   30.1  $  100.0   $  (59.8)
   Adjustments to reconcile net income (loss) to net cash provided by (used for)
      operating activities:
      Depletion and depreciation....................................................     19.7      17.0       22.5
      Gains on sales of timberlands.................................................    (60.0)   (239.8)         -
      Extraordinary loss (gains) on early extinguishments (repurchases) of debt, net     (4.2)        -       41.8
      Equity in undistributed loss (earnings) of Kaiser Aluminum Corporation........     (5.9)     19.2       (0.1)
      Amortization of deferred financing costs and discounts on long-term debt......      2.3       2.4       11.5
      Net gains on marketable securities............................................    (15.1)    (11.5)      (2.9)
      Deferral of interest payment on note receivable from MAXXAM Inc...............    (16.7)    (15.0)      (7.8)
   Increase (decrease) in cash resulting from changes in:
      Receivables...................................................................     (1.5)     (2.8)       1.0
      Inventories, net of depletion.................................................    (12.2)     (2.1)      14.0
      Prepaid expenses and other assets.............................................     (3.3)     (2.8)      (2.7)
      Accounts payable..............................................................      0.1       2.7       (0.3)
      Accrued interest..............................................................     (2.1)     (0.3)       4.0
      Other accrued liabilities.....................................................      0.1      (0.7)       1.3
      Accrued and deferred income taxes.............................................     13.9      76.3      (10.5)
      Long-term assets and long-term liabilities....................................      2.1      (2.1)       0.7
                                                                                     --------- ---------  ---------
        Net cash provided by (used for) operating activities........................    (52.7)    (59.5)      12.7
                                                                                     --------- ---------  ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net proceeds from dispositions of property and investments.......................     67.3     298.3        6.6
   Net sales (purchases) of marketable securities...................................     30.5      (4.7)      42.6
   Capital expenditures.............................................................    (14.0)    (23.1)     (21.2)
   Restricted cash withdrawals used to acquire timberlands..........................      0.8      12.9        8.9
                                                                                     --------- ---------  ---------
        Net cash provided by investing activities...................................     84.6     283.4       36.9
                                                                                     --------- ---------  ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of long-term debt.........................................        -         -      867.2
   Premiums for early retirement of debt............................................        -         -      (45.5)
   Net borrowings under revolving credit agreements.................................     37.0         -          -
   Incurrence of deferred financing costs...........................................        -      (0.7)     (22.4)
   Redemptions, repurchases of and principal payments on long-term debt.............    (21.8)    (13.1)    (796.8)
   Dividends paid to stockholder....................................................    (45.0)        -       (2.5)
   Other restricted cash withdrawals (deposits), net................................      9.8    (171.1)       9.4
                                                                                     --------- ---------  ---------
        Net cash provided by (used for) financing activities........................    (20.0)   (184.9)       9.4
                                                                                     --------- ---------  ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS...........................................     11.9      39.0       59.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................................    189.8     150.8       91.8
                                                                                     --------- ---------  ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................................ $  201.7  $  189.8   $  150.8
                                                                                     ========= =========  =========



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

                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PRESENTATION

      The consolidated financial statements include the accounts of MAXXAM Group
Holdings Inc. and its wholly owned subsidiaries. All references to the "COMPANY"
or "MGHI" include MAXXAM Group Holdings Inc. and its wholly owned subsidiaries,
unless otherwise indicated or the context indicates otherwise. MGHI is a wholly
owned subsidiary of MAXXAM Inc. ("MAXXAM"). Intercompany balances and
transactions have been eliminated. Certain reclassifications have been made to
prior years' financial statements to be consistent with the current year's
presentation.

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

      In addition, the Company has 27,938,250 shares of the common stock of
Kaiser Aluminum Corporation ("KAISER") which represented a 35.1% equity interest
in Kaiser at December 31, 2000.

   USE OF ESTIMATES AND ASSUMPTIONS

      The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) the
disclosure of contingent assets and liabilities known to exist as of the date
the financial statements are published and (iii) the reported amount of revenues
and expenses recognized during each period presented. The Company reviews all
significant estimates affecting its consolidated financial statements on a
recurring basis and records the effect of any necessary adjustments prior to
filing the consolidated financial statements with the Securities and Exchange
Commission. Adjustments made using estimates often relate to improved
information not previously available. Uncertainties regarding such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, actual results could differ from estimates,
and it is possible that the subsequent resolution of any one of the contingent
matters described in Note 11 could differ materially from current estimates. The
results of an adverse resolution of such uncertainties could have a material
effect on the Company's consolidated financial position, results of operations
or liquidity.

   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

      Concentrations of Credit Risk
      Cash equivalents and restricted marketable securities are invested
primarily in commercial paper as well as other types of corporate and government
debt obligations. The Company has mitigated its concentration of credit risk
with respect to these investments by purchasing high grade investments (ratings
of A1/P1 short-term or at least AA/aa long- term debt). No more than 10% is
invested in the same issue. Unrestricted marketable securities are invested in
corporate common stocks and option contracts. These investments are managed by a
financial institution, and investments are limited to no more than 4.9% of an
individual company's stock.

      The Company had three customers which accounted for 11.1%, 7.1% and 5.6%
of total net lumber sales for the year ended December 31, 2000. Trade
receivables from these customers totaled $1.3 million as of December 31, 2000.
As of December 31, 2000, the Company had receivables from Pacific Gas & Electric
Company ("PG&E") of $2.2 million. PG&E is currently experiencing financial
difficulties in connection with the power shortages in California, and therefore
the collectibility of the receivables is uncertain. As of March 15, 2001, $0.9
million of this balance had been collected. Additional sales of power to PG&E
have been made during the first quarter of 2001. As of March 15, 2001, the
uncollected receivable balance attributable to sales made in 2000 and 2001 was
$4.2 million.

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

      Deferred Financing Costs
      Costs incurred to obtain debt financing are deferred and amortized over
the estimated term of the related borrowing. The amortization of deferred
financing costs expense is included in interest expense on the income statement.

      Accounting Pronouncements for Derivative Financial Instruments - Kaiser
      Beginning with the quarterly period ending March 31, 2001, Kaiser will
begin reporting derivative activities consistent with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Financial Instruments
and Hedging Activities" ("SFAS NO. 133"). Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivatives and Certain Hedging
Activities-An Amendment of FASB Statement No. 133" ("SFAS NO. 138"), which
amends certain requirements of SFAS No. 133, was issued in June 2000. SFAS No.
133 requires companies to recognize all derivative instruments as assets or
liabilities in the balance sheet and to measure those instruments at fair value.
Kaiser, the Company's equity investee, has hedging programs which use various
derivative products to "lock- in" a price (or range of prices) for products sold
or used so that earnings and cash flows are subject to a reduced risk of
volatility. Changes in the market value of Kaiser's derivative instruments
represent unrealized gains or losses. Such unrealized gains or losses will
change based on prevailing market prices at each subsequent balance sheet date,
until the transaction occurs. Under SFAS No. 133, these changes are reflected as
an increase or reduction in stockholders' equity through either other
comprehensive income or net income, depending on the nature of the hedging
instrument used and its effectiveness at offsetting changes in market prices for
the hedged item. To the extent that changes in the market value of Kaiser's
hedging positions are initially recorded in other comprehensive income, such
changes are reversed from other comprehensive income (net of any fluctuations in
other "open hedging" positions) and are reflected in traditional net income upon
the occurrence of the transactions to which the hedges relate. Under the equity
method of accounting which the Company follows in accounting for its investment
in Kaiser, the Company will reflect its equity share of Kaiser's adjustments
through either other comprehensive income or traditional net income, as
appropriate.

      SFAS No. 133 requires that as of the date of the initial adoption, the
difference between the market value of derivative instruments and the previous
carrying amount of those derivatives recorded on Kaiser's consolidated balance
sheet be reported in net income or other comprehensive income, as appropriate,
as the cumulative effect of a change in accounting principle. As previously
discussed, this impact will be reflected in Kaiser's first quarter 2001
financial statements, and in turn the Company's equity share of the impact will
be reflected in its first quarter 2001 financial statements. The adoption of
SFAS No. 133 resulted in a pre-tax benefit of $7.4 million to other
comprehensive income and a pre-tax charge of $6.6 million to earnings.

2.    SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

      Headwaters Transactions
      On March 1, 1999, the United States and California acquired the Headwaters
Timberlands, approximately 5,600 acres of timberlands containing a significant
amount of virgin old growth timber, from Pacific Lumber and its wholly owned
subsidiary, Salmon Creek. 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. See
Note 11 below for a discussion of additional agreements entered into on March 1,
1999.

      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) in 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 agreements with California
for the sale of two timber properties known as the Owl Creek grove and the
Grizzly Creek grove. On December 29, 2000, Scotia LLC sold the Owl Creek grove
to California for $67.0 million, resulting in a pre-tax gain of $60.0 million.
Under a separate agreement, California must purchase from Pacific Lumber all or
a portion of the Grizzly Creek grove for a purchase price to be determined based
on its fair market value, but not to exceed $19.9 million. This transaction has
not been completed. The original October 31, 2000, date for completing the sale
of the Grizzly Creek grove has been extended to December 31, 2001. California
also has a five year option under the Grizzly Creek agreement to purchase
additional property in the Grizzly Creek grove. The sale of the Grizzly Creek
grove will not be reflected in the Company's financial statements until it has
been concluded.

3.    CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS

      Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less. As of December 31, 2000 and 1999,
the carrying amounts approximated fair value.

      Marketable securities consist primarily of investments in debt securities
and long and short positions in corporate common stocks and option contracts.
The Company determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Debt securities are classified as "held-to-maturity" when
the Company has the positive intent and ability to hold the securities to
maturity. Debt securities which the Company does not have the intent or ability
to hold to maturity are classified as "available-for- sale." "Held-to-maturity"
securities are stated at amortized cost. Debt securities classified as
"held-to-maturity" as of December 31, 2000 and 1999, totaled $18.9 million and
$169.1 million, respectively, and had a fair market value of $18.9 million and
$168.5 million, respectively. "Available-for-sale" securities are carried at
fair market value, with the unrealized gains and losses included in other
comprehensive income and reported in stockholder's deficit. The fair value of
substantially all securities is determined by quoted market prices. Marketable
securities which are considered "trading" securities consist of long and short
positions in corporate common stocks and option contracts and are carried at
fair value. The cost of the securities sold is determined using the first-in,
first-out method. Included in investment, interest and other income (expense),
net for each of the three years in the period ended December 31, 2000 were: 2000
- net realized gains of $13.7 million and net unrealized gains of $0.4 million;
1999 - net realized gains of $12.5 million and net unrealized losses of $0.9
million; 1998 - net realized gains of $5.1 million and net unrealized losses of
$2.2 million.

      Other investments included in long-term restricted cash, marketable
securities and other investments includes $10.1 million as of December 31, 2000,
invested in a limited partnership which invests in marketable securities. The
carrying amount for this investment reflects the market value of the underlying
securities.

      Cash, marketable securities and other investments include the following
amounts which are restricted (in millions):


                                                                                                December 31,
                                                                                       ----------------------------
                                                                                           2000           1999
                                                                                       -------------  -------------
Current assets:
   Cash and cash equivalents:
      Amounts held as security for short positions in marketable securities..........  $        9.2   $       27.1
      Other restricted cash and cash equivalents.....................................          29.2              -
                                                                                       -------------  -------------
                                                                                               38.4           27.1
                                                                                       -------------  -------------
   Marketable securities, restricted:
      Amounts held in SAR Account....................................................          16.3           15.9
                                                                                       -------------  -------------

Long-term restricted cash, marketable securities and other investments:
   Amounts held in SAR Account.......................................................         144.4          153.2
   Amounts held in Prefunding Account................................................           2.5            3.3
   Other amounts restricted under the Timber Notes Indenture.........................           0.4            0.4
   Other long-term restricted cash...................................................           2.0            2.0
   Less:  Amounts attributable to Timber Notes held in SAR Account...................         (52.7)             -
                                                                                       -------------  -------------
                                                                                               96.6          158.9
                                                                                       -------------  -------------

Total restricted cash, marketable securities and other investments...................  $      151.3   $      201.9
                                                                                       =============  =============

      Amounts in the Scheduled Amortization Reserve Account (the "SAR ACCOUNT")
are being held by the trustee under the indenture (the "TIMBER NOTES INDENTURE")
to support principal payments on Scotia LLC's Class A-1, Class A-2 and Class A-3
Timber Collateralized Notes due 2028 (the "TIMBER NOTES"). See Note 7 for
further discussion on the SAR Account. Amounts held in the "PREFUNDING ACCOUNT"
by the trustee are to be used by Scotia LLC to acquire additional timberlands.
The current portion of the SAR Account is determined based on the liquidity
needs of Scotia LLC which corresponds directly with the current portion of
Scheduled Amortization.

4.    INVENTORIES

      Inventories are stated at the lower of cost or market. Cost is primarily
determined using the last-in, first-out ("LIFO") method not in excess of market
value. Replacement cost is not in excess of LIFO cost. Inventory costs consist
of material, labor and manufacturing overhead, including depreciation and
depletion. Inventories consist of the following (in millions):


                                                                                                   DECEMBER 31,
                                                                                               --------------------
                                                                                                 2000       1999
                                                                                               ---------  ---------
Lumber........................................................................................ $   34.0   $   23.2
Logs..........................................................................................     21.1       21.4
                                                                                               ---------  ---------
                                                                                               $   55.1   $   44.6
                                                                                               =========  =========

5.    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment, including capitalized interest, is stated
at cost, net of accumulated depreciation. Depreciation is computed principally
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets. The carrying value of property, plant
and equipment is assessed when events and circumstances indicate that an
impairment is present. The existence of an impairment is determined by comparing
the net carrying value of the asset to its estimated undiscounted future cash
flows. If an impairment is present, the asset is reported at the lower of
carrying value or fair value. The major classes of property, plant and equipment
are as follows (dollar amounts in millions):


                                                                               ESTIMATED         DECEMBER 31,
                                                                                            -----------------------
                                                                             USEFUL LIVES      2000        1999
                                                                             -------------  ----------  -----------
Logging roads, land and improvements.......................................       15 years  $    41.6   $     35.2
Buildings..................................................................       33 years       50.2         49.4
Machinery and equipment....................................................   3 - 15 years      108.3        108.8
Construction in progress...................................................                       2.8          0.7
                                                                                            ----------  -----------
                                                                                                202.9        194.1
Less:  accumulated depreciation............................................                    (102.9)       (93.7)
                                                                                            ----------  -----------
                                                                                            $   100.0   $    100.4
                                                                                            ==========  ===========

      Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was $10.4 million, $10.1 million and $9.8 million, respectively.

6.    INVESTMENT IN KAISER

      As of March 15, 2001, the Company has 27,938,250 shares of the common
stock of Kaiser, of which 25,055,775 shares are pledged as collateral for the
12% MGHI Senior Secured Notes due 2003 (the "MGHI NOTES"). Kaiser operates in
several principal aspects of the aluminum industry--the mining of bauxite into
alumina, (the major aluminum-bearing ore), the refining of bauxite into alumina
(the intermediate material), the production of primary aluminum and the
manufacture of fabricated and semi-fabricated aluminum products. Kaiser's common
stock is publicly traded on the New York Stock Exchange under the trading symbol
"KLU."

      The Company follows the equity method of accounting for its investment in
Kaiser. Net sales and cost and expenses of Kaiser for 1999 and 1998 have been
restated to conform to a new accounting principle that requires freight charges
to be included in cost of products sold. The amount of such restatement was
$39.3 million and $46.0 million for 1999 and 1998, respectively.

      The market value for the Kaiser Shares based on the price per share quoted
at the close of business on March 15, 2001 was $111.8 million. There can be no
assurance that such value would be realized should the Company dispose of its
investment in the Kaiser shares. The following tables contain summarized
financial information of Kaiser (in millions).


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2000         1999
                                                                                            ----------   ----------
Current assets............................................................................  $ 1,012.1    $    973.9
Property, plant and equipment, net........................................................    1,176.1       1,053.7
Other assets..............................................................................    1,154.9       1,171.2
                                                                                            ----------   ----------
           Total assets...................................................................  $ 3,343.1    $  3,198.8
                                                                                            ==========   ==========

Current liabilities.......................................................................  $   841.4    $    637.9
Long-term debt, less current maturities...................................................      957.8         972.5
Other liabilities.........................................................................    1,360.6       1,405.4
Minority interests........................................................................      101.1         117.7
Stockholders' equity:
   Common.................................................................................       82.2          65.3
                                                                                            ----------   ----------
                                                                                                 82.2          65.3
                                                                                            ----------   ----------
            Total liabilities and stockholders' equity....................................  $ 3,343.1    $  3,198.8
                                                                                            ==========   ==========


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2000        1999         1998
                                                                                ----------  ----------  -----------
Net sales.....................................................................  $ 2,169.8   $ 2,083.6   $  2,302.4
Costs and expenses............................................................   (2,030.5)   (2,112.5)    (2,211.8)
Other expenses-net............................................................     (113.9)      (61.0)      (106.5)
                                                                                ----------  ----------  -----------
Income (loss) before income taxes and minority interests......................       25.4       (89.9)       (15.9)
Credit (provision) for income taxes...........................................      (11.6)       32.7         16.4
Minority interests............................................................        3.0         3.1          0.1
                                                                                ----------  ----------  -----------
Net income (loss).............................................................       16.8       (54.1)         0.6
Dividends on preferred stock..................................................          -           -            -
                                                                                ----------  ----------  -----------
Net income (loss) available to common stockholders............................  $    16.8   $   (54.1)  $      0.6
                                                                                ==========  ==========  ===========
Equity in earnings (loss) of Kaiser...........................................  $     5.9   $   (19.2)  $      0.1
                                                                                ==========  ==========  ===========


7.    LONG-TERM AND SHORT-TERM DEBT

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------
Pacific Lumber Credit Agreement...........................................................  $    37.0   $        -
6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028..................      136.7        152.6
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
12% MGHI Senior Secured Notes due August 1, 2003..........................................      118.8        125.2
Other.....................................................................................        1.0          1.1
                                                                                            ----------  -----------
                                                                                              1,000.0        985.4
Less: current maturities..................................................................      (53.5)       (16.0)
   Timber Notes held in SAR Account.......................................................      (59.9)           -
                                                                                            ----------  -----------
                                                                                            $   886.6   $    969.4
                                                                                            ==========  ===========


      Scotia LLC Timber Notes
      Scotia LLC issued $867.2 million aggregate principal amount of Timber
Notes on July 20, 1998. Net proceeds from the offering of the Timber Notes were
used primarily to prepay certain debt, and accordingly, in 1998 the Company
recognized an extraordinary loss of $41.8 million, net of the related income tax
benefit of $23.6 million, for the early extinguishment.

      The Timber Notes and the Scotia LLC Line of Credit (defined below) are
secured by a lien on (i) Scotia LLC's timber, timberlands and timber rights and
(ii) substantially all of Scotia LLC's other property. The Timber Notes
Indenture permits Scotia LLC to have outstanding up to $75.0 million of
non-recourse indebtedness to acquire additional timberlands and to issue
additional timber notes provided certain conditions are met (including repayment
or redemption of the remaining $136.7 million of Class A-1 Timber Notes).

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

      Pursuant to certain liquidity requirements under the Timber Notes
Indenture, Scotia LLC has entered into an agreement (the "SCOTIA LLC LINE OF
CREDIT") with a group of banks pursuant to which Scotia LLC may borrow to pay
interest on the Timber Notes. The maximum amount Scotia LLC may borrow is equal
to one year's interest on the aggregate outstanding principal balance of the
Timber Notes (the "REQUIRED LIQUIDITY AMOUNT"). At December 31, 2000, the
Required Liquidity Amount was $62.0 million. The Scotia LLC Line of Credit
expires on July 15, 2001. Annually, Scotia LLC will request that the banks
extend the Scotia LLC Line of Credit for a period of not less than 364 days. If
not extended, Scotia LLC may draw upon the full amount available. Borrowings
under the Scotia LLC Line of Credit generally bear interest at the Base Rate (as
defined in the agreement) plus 0.25% or at a one month or six month LIBOR rate
plus 1% at any time the borrowings have not been continually outstanding for
more than six months. As of December 31, 2000, Scotia LLC had no borrowings
outstanding under the Scotia LLC Line of Credit.

      In connection with the sale of the Headwaters Timberlands, Salmon Creek
received proceeds of $299.9 million in cash. See Note 2. On November 18, 1999,
$169.0 million of funds from the sale of the Headwaters Timberlands were
contributed to Scotia LLC and set aside in the SAR Account. Amounts in the SAR
Account are part of the collateral securing the Timber Notes and will be used to
make principal payments to the extent that other available amounts are
insufficient to pay Scheduled Amortization on the Class A-1 and Class A-2 Timber
Notes. In addition, during the six years beginning January 20, 2014, amounts in
the SAR Account will be used to amortize the Class A-3 Timber Notes as set forth
in the Timber Notes Indenture, as amended. Funds may from time to time be
released to Scotia LLC from the SAR Account if the amount in the account exceeds
the then Required Scheduled Amortization Reserve Balance (as defined in the
Timber Notes Indenture). If the balance in the SAR Account falls below the
Required Scheduled Amortization Reserve Balance, up to 50% of any Remaining
Funds (funds that could otherwise be released to Scotia LLC free of the lien
securing the Timber Notes) is required to be used on each monthly deposit date
to replenish the SAR Account. The amount attributable to Timber Notes held in
the SAR Account of $52.7 million reflected in Note 3 represents $59.9 million
principal amount of reacquired Timber Notes. Repurchases made during the year
ended December 31, 2000, resulted in an extraordinary gain of $3.8 million, net
of tax.

      Principal and interest on the Timber Notes are payable semi-annually on
January 20 and July 20. On the January 22, 2001, note payment date for the
Timber Notes, Scotia LLC had $40.8 million set aside in the note payment account
to pay the $31.0 million of interest due and $9.8 million of principal. Scotia
LLC repaid an additional $3.3 million of principal using funds held in the SAR
Account resulting in a total principal payment of $13.1 million (an amount equal
to Scheduled Amortization). In addition $10.8 million in funds representing the
excess in the SAR Account above the Required Scheduled Amortization Reserve
Balance were released from the SAR Account on January 22, 2001.

      Pacific Lumber Credit Agreement
      The Pacific Lumber Credit Agreement, a senior secured credit facility
which expires on October 31, 2001, allows 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. Borrowings are secured by all of Pacific Lumber's
domestic accounts receivable and inventory. Borrowings for timberland
acquisitions are also secured by the acquired timberlands and, commencing in
April 2001, are to be repaid annually from 50% of Pacific Lumber's excess cash
flow (as defined). The remaining excess cash flow is available for dividends.
Upon maturity of the facility, all outstanding borrowings used for timberland
acquisitions will convert to a term loan repayable over four years. As of
December 31, 2000, borrowings of $37.0 million and letters of credit of $12.5
million were outstanding, and no borrowings were available under the agreement.

      12% MGHI Senior Secured Notes due 2003 (the "MGHI NOTES")
      The MGHI Notes due August 1, 2003 are guaranteed on a senior, unsecured
basis by MAXXAM. As of March 15, 2001, the MGHI Notes are also secured by a
pledge of 25,055,775 shares of the Kaiser common stock owned by MGHI, the common
stock of MGI and the MAXXAM Note (defined below). Interest on the MGHI Notes is
payable semi-annually.

      The net proceeds from the offering of the MGHI Notes after expenses were
approximately $125.0 million, all of which was loaned to MAXXAM pursuant to an
intercompany note (the "MAXXAM NOTE"). The MAXXAM Note bears interest at the
rate of 11% per annum (payable semi-annually on the interest payment dates
applicable to the MGHI Notes) and matures on August 1, 2003. MAXXAM is entitled
to defer the payment of interest on the MAXXAM Note on any interest payment date
to the extent that the Company has sufficient available funds to satisfy its
obligations on the MGHI Notes on such date. Any such deferred interest will be
added to the principal amount of the MAXXAM Note and will be payable at
maturity. As of December 31, 2000, $47.0 million of interest had been deferred
and added to principal. An additional $9.0 million of interest was deferred and
added to principal on February 1, 2001.

      Maturities
      Scheduled maturities of long-term and short-term debt outstanding at
December 31, 2000 are as follows: $53.5 million in 2001, $17.3 million in 2002,
$138.3 million in 2003, $22.4 million in 2004, $25.2 million in 2005 and $683.4
million thereafter.

      Restricted Net Assets of Subsidiaries
      As of December 31, 2000, all of the assets of MGI and its subsidiaries are
subject to certain debt instruments which restrict the ability to transfer
assets, make loans and advances and pay dividends to the Company.

8.    CREDIT (PROVISION) IN LIEU OF INCOME TAXES

      Income taxes are determined using an asset and liability approach which
requires the recognition of deferred income tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Under this method, deferred
income tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.

      The Company and its corporate subsidiaries are members of MAXXAM's
consolidated return group for federal income tax purposes.

      Pursuant to a tax allocation agreement between MAXXAM, Pacific Lumber, and
Salmon Creek (the "PL TAX ALLOCATION AGREEMENT"), Pacific Lumber is liable to
MAXXAM for the federal consolidated income tax liability of Pacific Lumber,
Scotia LLC and certain other subsidiaries of Pacific Lumber (but excluding
Salmon Creek) (collectively, the "PL SUBGROUP") computed as if the PL Subgroup
was a separate affiliated group of corporations which was never connected with
MAXXAM. The PL Tax Allocation Agreement further provides that Salmon Creek is
liable to MAXXAM for its federal income tax liability computed on a separate
company basis as if it was never connected with MAXXAM. For taxable periods
beginning after December 7, 1999 (the day on which Salmon Creek was converted
from a corporation to a limited liability company), the PL Subgroup includes
Salmon Creek and there is no separate calculation for Salmon Creek. The
remaining subsidiaries of MGI are each liable to MAXXAM for their respective
income tax liabilities computed on a separate company basis as if they were
never connected with MAXXAM, pursuant to their respective tax allocation
agreements.

      MGI's tax allocation agreement with MAXXAM (the "MGI TAX ALLOCATION
AGREEMENT") provides that MGI's federal income tax liability is computed as if
MGI files a consolidated tax return with all of its subsidiaries except Salmon
Creek, and that such corporations were never connected with MAXXAM (the "MGI
CONSOLIDATED TAX LIABILITY"). For taxable periods beginning after December 7,
1999, the MGI Consolidated Tax Liability includes Salmon Creek. The federal
income tax liability of MGI is the difference between (i) the MGI Consolidated
Tax Liability and (ii) the sum of the separate tax liabilities for MGI's
subsidiaries (computed as discussed above), but excluding Salmon Creek for
taxable periods through December 7, 1999. To the extent that the MGI
Consolidated Tax Liability is less than the aggregate amounts in (ii), MAXXAM is
obligated to pay the amount of such difference to MGI.

      MGHI's tax allocation agreement with MAXXAM (the "MGHI TAX ALLOCATION
AGREEMENT") provides that the Company's federal consolidated income tax
liability is computed as if MGHI and its subsidiaries, except Salmon Creek, file
a consolidated tax return and that such corporations were never connected with
MAXXAM (the "MGHI CONSOLIDATED TAX LIABILITY"). For taxable periods beginning
after December 7, 1999, the MGHI Consolidated Tax Liability includes Salmon
Creek. The federal income tax liability of MGHI is the difference between the
MGHI Consolidated Tax Liability and the MGI Consolidated Tax Liability. To the
extent that the MGHI Consolidated Tax Liability is less than the MGI
Consolidated Tax Liability, MAXXAM is obligated to pay the amount of such
difference to MGHI.

      The credit (provision) in lieu of income taxes on income (loss) before
income taxes consists of the following (in millions):


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------
Current:
   Federal in lieu of income taxes.................................................  $    0.1  $   (3.0)  $    0.1
   State and local.................................................................         -       0.1       (0.1)
                                                                                     --------- ---------  ---------
                                                                                          0.1      (2.9)         -
                                                                                     --------- ---------  ---------
Deferred:
   Federal in lieu of income taxes.................................................      (9.3)    (53.4)       7.1
   State and local.................................................................      (4.2)    (21.6)       2.2
                                                                                     --------- ---------  ---------
                                                                                        (13.5)    (75.0)       9.3
                                                                                     --------- ---------  ---------
                                                                                     $  (13.4) $  (77.9)  $    9.3
                                                                                     ========= =========  =========

      A reconciliation between the credit (provision) in lieu of income taxes
and the amount computed by applying the federal statutory income tax rate to
income (loss) before income taxes is as follows (in millions):


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------

Income (loss) before income taxes..................................................  $   39.3  $  177.9   $  (27.3)
                                                                                     ========= =========  =========

Amount of federal income tax credit (provision) based upon the statutory rate......  $  (13.8) $  (62.3)  $    9.6
Revision of prior years' tax estimates and other changes in valuation allowances...       1.2       4.5       (1.4)
Equity in earnings (loss) of Kaiser not tax effected...............................       2.1      (6.6)       0.1
State and local taxes, net of federal tax effect...................................      (2.9)    (13.2)       1.3
Expenses for which no federal tax benefit is available.............................         -      (0.3)      (0.3)
                                                                                     --------- ---------  ---------
                                                                                     $  (13.4) $  (77.9)  $    9.3
                                                                                     ========= =========  =========

      The revision of prior years' tax estimates and other changes in valuation
allowances, as shown in the table above, includes amounts for the reversal of
reserves which the Company no longer believes are necessary, other changes in
prior years' tax estimates and changes in valuation allowances with respect to
deferred income tax assets. Generally, the reversal of reserves relates to the
expiration of the relevant statute of limitations with respect to certain income
tax returns or the resolution of specific income tax matters with the relevant
tax authorities.

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------
Deferred income tax assets:
   Loss and credit carryforwards..........................................................  $   144.1   $    136.5
   Timber and timberlands.................................................................       28.1         32.2
   Other..................................................................................       20.2         17.9
   Valuation allowances...................................................................      (47.6)       (47.6)
                                                                                            ----------  -----------
      Total deferred income tax assets, net...............................................      144.8        139.0
                                                                                            ----------  -----------
Deferred income tax liabilities:
   Deferred gains on sales of timber and timberlands......................................     (130.4)      (104.3)
   Property, plant and equipment..........................................................      (14.9)       (16.9)
   Inventories............................................................................       (8.9)       (10.4)
   Other..................................................................................       (6.2)        (5.9)
                                                                                            ----------  -----------
      Total deferred income tax liabilities...............................................     (160.4)      (137.5)
                                                                                            ----------  -----------
Net deferred income tax assets (liabilities)..............................................  $   (15.6)  $      1.5
                                                                                            ==========  ===========

      Included in net deferred income tax assets as of December 31, 2000 is
$96.5 million attributable to the tax benefit of loss and credit carryforwards,
net of valuation allowances. The Company evaluated all appropriate factors in
determining the realizability of the deferred tax assets attributable to loss
and credit carryforwards, including any limitations on their use, the year the
carryforwards expire and the levels of taxable income necessary for utilization.
Based on this evaluation of the appropriate factors to determine the proper
valuation allowances for these carryforwards, the Company believes that it is
more likely than not that it will realize the benefit for the carryforwards for
which valuation allowances were not provided. The deferred income tax
liabilities related to deferred gains on the sales of timber and timberlands are
a result of the sales of the Headwaters Timberlands (1999) and the Owl Creek
grove (2000).

      Included in the net deferred income tax assets listed above are $2.8
million and $15.6 million at December 31, 2000 and 1999, respectively, which are
recorded pursuant to the tax allocation agreements with MAXXAM.

      The following table presents the estimated tax attributes for federal
income tax purposes for the Company and its subsidiaries as of December 31,
2000, under the terms of the respective tax allocation agreements (in millions).
The utilization of certain of these tax attributes is subject to limitations.


                                                                                                         EXPIRING
                                                                                                          THROUGH
                                                                                                        -----------
Regular Tax Attribute Carryforwards:
   Net operating losses...................................................................  $   392.8         2020
Alternative Minimum Tax Attribute Carryforwards:
   Net operating losses...................................................................  $   344.6         2020

      The income tax credit (provision) related to other comprehensive income
for the years ended December 31, 2000, 1999 and 1998 was $(0.3) million, $0.2
million and $(0.3) million, respectively.

9.    EMPLOYEE BENEFIT PLANS

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

      Pacific Lumber has an unfunded benefit plan for certain postretirement
medical benefits which covers substantially all employees of Pacific Lumber.
Participants of the plan are eligible for certain health care benefits upon
retirement. Participants make contributions for a portion of the cost of their
health care benefits. The expected costs of postretirement medical benefits are
accrued over the period the employees provide services to the date of their full
eligibility for such benefits.

      The following tables present the changes, status and assumptions of
Pacific Lumber's pension and other postretirement benefit plans as of December
31, 2000 and 1999, respectively (in millions):


                                                                            PENSION BENEFITS   MEDICAL/LIFE BENEFITS
                                                                          -------------------- ---------------------
                                                                                    YEARS ENDED DECEMBER 31,
                                                                          -----------------------------------------
                                                                            2000       1999      2000       1999
                                                                          ---------  --------- ---------  ---------
Change in benefit obligation:
   Benefit obligation at beginning of year..............................  $   33.7   $   34.3  $    4.9   $    5.0
   Service cost.........................................................       1.9        2.4       0.2        0.3
   Interest cost........................................................       2.7        2.5       0.3        0.4
   Plan participants' contributions.....................................         -          -       1.1        0.3
   Actuarial (gain) loss................................................       0.8       (4.8)      1.2       (0.7)
   Benefits paid........................................................      (0.9)      (0.7)     (1.7)      (0.4)
                                                                          ---------  --------- ---------  ---------
      Benefit obligation at end of year ................................      38.2       33.7       6.0        4.9
                                                                          ---------  --------- ---------  ---------

Change in plan assets:
   Fair value of plan assets at beginning of year.......................      37.1       29.9         -          -
   Actual return on assets..............................................      (1.5)       5.7         -          -
   Employer contributions...............................................         -        2.2       0.6        0.1
   Plan participants' contributions.....................................         -          -       1.1        0.3
   Benefits paid........................................................      (0.9)      (0.7)     (1.7)      (0.4)
                                                                          ---------  --------- ---------  ---------
   Fair value of plan assets at end of year.............................      34.7       37.1         -          -
                                                                          ---------  --------- ---------  ---------

   Benefit obligation in excess of (less than) plan assets..............       3.5       (3.4)      6.0        4.9
   Unrecognized actuarial gain..........................................       7.5       12.8       0.8        2.1
   Unrecognized prior service costs.....................................      (0.7)      (0.8)        -          -
                                                                          ---------  --------- ---------  ---------
      Accrued benefit liability.........................................  $   10.3   $    8.6  $    6.8   $    7.0
                                                                          =========  ========= =========  =========





                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2000        1999      1998       2000      1999       1998
                                                     ---------  ---------  ---------  --------- ---------  ---------
Components of net periodic benefit costs:
   Service cost....................................  $    1.9   $    2.4   $    2.2   $    0.2  $   0.3    $    0.3
   Interest cost...................................       2.7        2.5        2.2        0.3      0.4         0.3
   Expected return on assets.......................      (2.6)      (2.1)      (1.8)         -        -           -
   Amortization of prior service costs.............       0.1        0.1        0.1          -        -           -
   Recognized net actuarial gain...................      (0.4)         -          -       (0.1)    (0.1)       (0.1)
                                                     ---------  ---------  ---------  --------- ---------  ---------
      Adjusted net periodic benefit costs..........  $    1.7   $    2.9   $    2.7   $    0.4  $   0.6    $    0.5
                                                     =========  =========  =========  ========= =========  =========


                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2000        1999      1998       2000      1999       1998
                                                     ---------  ---------  ---------  --------- ---------  ---------
Weighted-average assumptions:
   Discount rate...................................    7.5%        7.8%      7.0%       7.5%      7.8%        7.0%
   Expected return on plan assets..................    8.0%        8.0%      8.0%         -         -           -
   Rate of compensation increase...................    5.0%        5.0%      5.0%       5.0%      5.0%        5.0%

      Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates as of December 31, 2000 would have the
following effects (in millions):


                                                                       1-PERCENTAGE-POINT              1-PERCENTAGE-POINT
                                                                            INCREASE                        DECREASE
                                                                   ---------------------------     ---------------------------
Effect on total of service and interest cost components.......              $    0.1                        $    (0.1)
Effect on the postretirement benefit obligations..............                   0.8                             (0.7)


      Employee Savings Plan
      Pacific Lumber's employees are eligible to participate in a defined
contribution savings plan sponsored by MAXXAM. This plan is designed to enhance
the existing retirement programs of participating employees. The cost to the
Company of this plan was $1.5 million, $1.4 million and $1.4 million for the
years ended December 31, 2000, 1999 and 1998, respectively.

      Workers' Compensation Benefits
      Pacific Lumber is self-insured for workers' compensation benefits, whereas
Britt is insured for workers' compensation benefits by an outside party.
Included in accrued compensation and related benefits and other noncurrent
liabilities are accruals for workers' compensation claims amounting to $9.2
million and $9.8 million at December 31, 2000 and 1999, respectively. Workers'
compensation expenses amounted to $3.4 million, $3.9 million and $3.5 million
for the years ended December 31, 2000, 1999 and 1998, respectively.

10.   RELATED PARTY TRANSACTIONS

      MAXXAM provides the Company and certain of the Company's subsidiaries with
accounting, data processing services, office space and various office personnel,
insurance, legal, operating, financial and certain other services. MAXXAM's
expenses incurred on behalf of the Company are reimbursed by the Company through
payments consisting of (i) an allocation of the lease expense for the office
space utilized by or on behalf of the Company and (ii) a reimbursement of actual
out-of-pocket expenses incurred by MAXXAM, including, but not limited to, labor
costs of MAXXAM personnel rendering services to the Company. Charges by MAXXAM
for such services were $2.2 million, $3.1 million and $3.5 million for the years
ended December 31, 2000, 1999 and 1998, respectively. The Company believes that
the services being rendered are on terms not less favorable to the Company than
those which would be obtainable from unaffiliated third parties.

11.   COMMITMENTS AND CONTINGENCIES

      Commitments
      Minimum rental commitments under operating leases at December 31, 2000 are
as follows: years ending December 31, 2001--$4.2 million; 2002--$3.5 million;
2003--$2.8 million; 2004--$1.7 million; 2005--$1.2 million; thereafter--$2.5
million. Rental expense for operating leases was $4.7 million, $4.2 million and
$3.0 million for the years ended December 31, 2000, 1999 and 1998, respectively.

      Contingencies
      Regulatory and environmental matters play a significant role in the
Company's forest products business, which is subject to a variety of California
and federal laws and regulations, as well as the HCP and SYP and Pacific
Lumber's timber operator's license, dealing with timber harvesting practices,
threatened and endangered species and habitat for such species, and air and
water quality. As further described in Note 2, on March 1, 1999, Pacific Lumber
and MAXXAM consummated the Headwaters Agreement with the United States and
California. In addition to the transfer of the Headwaters Timberlands described
in Note 2, the SYP and the HCP were approved and incidental take permits related
to the HCP (the "PERMITS") were issued.

      The SYP complies with certain California Board of Forestry and Fire
Protection regulations requiring timber companies to project timber growth and
harvest on their timberlands over a 100-year planning period and to demonstrate
that their projected average annual harvest for any decade within a 100-year
planning period will not exceed the average annual harvest level during the last
decade of the 100-year planning period. The SYP is effective for 10 years
(subject to review after five years) and may be amended by Pacific Lumber,
subject to approval by the California Department of Forestry and Fire Protection
(the "CDF"). Revised SYPs will be prepared every decade that address the harvest
level based upon reassessment of changes in the resource base and other factors.
The HCP and the Permits allow incidental "take" of certain species located on
the Company's timberlands which have been listed as endangered or threatened
under the federal Endangered Species Act (the "ESA") and/or the California
Endangered Species Act ("CESA") so long as there is no "jeopardy" to the
continued existence of such species. The HCP identifies the measures to be
instituted in order to minimize and mitigate the anticipated level of take to
the greatest extent practicable. The SYP is also subject to certain of these
provisions. The HCP and related Permits have a term of 50 years. The Company
believes that the SYP and the 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 Environmental Protection Agency
("EPA") is required to establish total maximum daily load limits ("TMDLS") in
water courses that have been declared to be "water quality impaired." The EPA
and the North Coast Regional Water Quality Control Board are in the process of
establishing TMDLs for 17 northern California rivers and certain of their
tributaries, including nine water courses that flow within the Company's
timberlands. The Company expects this process to continue into 2010. In the
December 1999 EPA report dealing with TMDLs on two of the nine water courses,
the agency indicated that the requirements under the HCP would significantly
address the sediment issues that resulted in TMDL requirements for these water
courses. However, the September 2000 report by the staff of the North Coast
Regional Water Quality Control Board proposed various actions, including
restrictions on harvesting beyond those required under the HCP. Dates for
hearings concerning these matters have not been scheduled. Establishment of the
final TMDL requirements applicable to the Company's timberlands will be a
lengthy process, and the final TMDL requirements applicable to the Company's
timberlands may require aquatic protection measures that are different from or
in addition to the prescriptions to be developed pursuant to the watershed
analysis process provided for in the HCP.

      Lawsuits are pending and threatened which seek to prevent the Company from
implementing the HCP and/or the SYP, implementing certain of the Company's
approved THPs or carrying out certain other operations. On December 2, 1997, a
lawsuit 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, et al. (the "ROLLINS
LAWSUIT") was filed. On March 5, 2001, the parties in the Rollins lawsuit
reached an agreement to settle this matter. Substantially all of the amounts to
be paid to the plaintiffs will be paid by the Company's insurers. Still pending
is a similar lawsuit, also filed on December 2, 1997, 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, et al. (the "WRIGLEY LAWSUIT"). This action alleges, among
other things, that the defendants' logging practices have contributed to an
increase in flooding and damage to domestic water systems in a portion of the
Elk River watershed.

      On January 28, 1997, an action was filed against Pacific Lumber entitled
Ecological Rights Foundation, Mateel Environmental v. Pacific Lumber (the "ERF
LAWSUIT") in the U.S. District Court in the Northern District of California.
This action alleges that Pacific Lumber has discharged pollutants into federal
waterways, and the plaintiffs are seeking to enjoin Pacific Lumber from
continuing such actions, civil penalties of up to $25,000 per day for each
violation, remediation and other damages. This case was dismissed by the
District Court on August 19, 1999, but the dismissal was reversed by the U.S.
Ninth Circuit Court of Appeals on October 30, 2000, and the case was remanded to
the District Court, but no further proceedings have occurred. The Company
believes that it has strong factual and legal defenses with respect to the
Wrigley lawsuit and ERF lawsuit; however, there can be no assurance that they
will not have a material adverse effect on the Company's financial position,
results of operations or liquidity.

      On March 31, 1999, an action entitled Environmental Protection Information
Center, Sierra Club v. California Department of Forestry and Fire Protection,
California Department of Fish and Game, The Pacific Lumber Company, Scotia
Pacific Company LLC, Salmon Creek Corporation, et al. (the "EPIC-SYP/PERMITS
LAWSUIT") was filed alleging various violations of the CESA and the California
Environmental Quality Act , and challenging, among other things, the validity
and legality of the Permits issued by California and the SYP. On March 31, 1999,
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 (the
"USWA LAWSUIT") was filed also challenging the validity and legality of the SYP.
The Company believes that appropriate procedures were followed throughout the
public review and approval process concerning the HCP and the SYP, and the
Company is working with the relevant government agencies to defend these
challenges. Although uncertainties are inherent in the final outcome of the
EPIC-SYP/Permits lawsuit and the USWA lawsuit, the Company believes that the
resolution of these matters should not result in a material adverse effect on
its financial condition, results of operations or the ability to harvest timber.

      On or about February 23, 2001, Pacific Lumber received a letter from the
Environmental Protection Information Association of its 60-day notice of intent
to sue Pacific Lumber under the federal Clean Water Act ("CWA"). The letter
alleges a number of violations of the CWA by Pacific Lumber in certain
watersheds since 1990. If filed, the lawsuit will purportedly seek declarative
and injunction relief for past violations and to prevent future violations, as
well as civil penalties. Such civil penalties could be up to $25,000 per day for
each continuing violation. The Company does not know when or if a lawsuit will
be filed regarding this matter, or if a lawsuit is filed, the ultimate impact of
such lawsuit on its consolidated financial condition or results of operations.

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

12.   SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------
                                                                                              (IN MILLIONS)
Supplemental information on non-cash investing and financing activities:
   Acquisition of assets subject to other liabilities..............................  $      -  $      -    $   0.8
   Deferral of interest on MAXXAM note receivable..................................      16.7      15.0        7.8
   Repurchases of debt using restricted cash.......................................      52.5         -          -
   Purchases of marketable securities and other investments using restricted cash..       0.4      15.9          -

Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized interest......................................  $   79.3  $   80.8   $   78.2
   Income taxes paid...............................................................         -         -        0.2
   Tax allocation payments to (from) MAXXAM........................................      (0.5)      1.8        0.2


13.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

      Summary quarterly financial information for the years ended December 31,
2000 and 1999 is as follows (in millions):


                                                                            THREE MONTHS ENDED
                                                        -----------------------------------------------------------
                                                          MARCH 31        JUNE 30     SEPTEMBER 30     DECEMBER 31
                                                        -------------  -------------  -------------- --------------
2000:
   Net sales..........................................  $       47.4   $       55.9   $        49.4  $        47.4
   Operating income (loss)............................           5.7            8.5             0.1           (7.0)
   Income (loss) before extraordinary items...........           2.0            4.9           (12.8)          31.8
   Extraordinary items, net...........................           1.4              -             0.6            2.2
   Net income (loss)..................................           3.4            4.9           (12.2)          34.0

1999:
   Net sales..........................................  $       46.7   $       41.4   $        49.0  $        50.7
   Operating income (loss)............................          (1.5)          (3.4)           (3.9)           4.4
   Net income (loss)..................................         120.3          (10.8)          (19.3)           9.8



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

      None.

                                    PART III

      Not applicable.

                                     PART IV

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

(A)   INDEX TO FINANCIAL STATEMENTS

      1.   FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):

           Report of Independent Public Accountants
           Consolidated Balance Sheet at December 31, 2000 and 1999
           Consolidated Statement of Operations for the Years Ended December 31, 2000,
              1999 and 1998
           Consolidated Statement of Stockholder's Deficit for the Years Ended
              December 31, 2000, 1999 and 1998
           Consolidated Statement of Cash Flows for the Years Ended December 31, 2000,
              1999 and 1998
           Notes to Consolidated Financial Statements

      2.   FINANCIAL STATEMENT SCHEDULES:

           Schedule I  -  Condensed Financial Information of Registrant at December 31, 2000
              and 1999 and for the Years Ended December 31, 2000, 1999 and 1998

           The Consolidated Financial Statements and Notes thereto of MAXXAM Inc., MAXXAM Group
           Inc.  and Kaiser Aluminum Corporation are incorporated herein by reference and included as
           Exhibits 99.1, 99.2 and 99.3 hereto, respectively.

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

(B)   REPORTS ON FORM 8-K

      On January 2, 2001, the Company filed a current report on Form 8-K (under
Item 5) dated December 29, 2000, related to the sale of approximately 1,200
acres of timberlands known as the Owl Creek grove.

(C)   EXHIBITS

      Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 47), which index is incorporated herein by
reference.


           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                           MAXXAM GROUP HOLDINGS INC.

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



                                                                                                   DECEMBER 31,
                                                                                               --------------------
                                                                                                 2000       1999
                                                                                               ---------  ---------
                                            ASSETS

Current assets:
   Cash and cash equivalents.................................................................. $   46.9   $    9.0
   Marketable securities......................................................................      7.4          -
   Receivable from MAXXAM Inc.................................................................      7.6        6.8
                                                                                               ---------  ---------
      Total current assets....................................................................     61.9       15.8
Note receivable from MAXXAM Inc...............................................................    164.5      147.8
Deferred income taxes.........................................................................      6.4        9.9
Deferred financing costs......................................................................      2.0        2.7
                                                                                               ---------  ---------
                                                                                               $  234.8   $  176.2
                                                                                               =========  =========

                             LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
   Accounts payable and other accrued liabilities............................................. $    1.3   $    1.2
   Accrued interest...........................................................................      5.9        6.3
                                                                                               ---------  ---------
      Total current liabilities...............................................................      7.2        7.5
Note payable to MGI...........................................................................        -        4.6
Losses recognized in excess of investments in subsidiaries....................................    158.2       73.8
Long-term debt................................................................................    118.8      125.2
                                                                                               ---------  ---------
      Total liabilities.......................................................................    284.2      211.1
                                                                                               ---------  ---------

Stockholder's deficit:
   Common stock, $1.00 par value, 3,000 shares authorized, 1,000 shares issued................        -          -
   Additional capital.........................................................................    123.2      123.2
   Accumulated deficit........................................................................   (172.6)    (157.7)
   Accumulated other comprehensive loss.......................................................        -       (0.4)
                                                                                               ---------  ---------
      Total stockholder's deficit.............................................................    (49.4)     (34.9)
                                                                                               ---------  ---------
                                                                                               $  234.8   $  176.2
                                                                                               =========  =========


     See notes to consolidated financial statements and accompanying notes.

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                           MAXXAM GROUP HOLDINGS INC.

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



                                                                                      YEARS ENDED DECEMBER 31,
                                                                               -------------------------------------
                                                                                  2000         1999         1998
                                                                               -----------  -----------  -----------

Investment, interest and other income (expense), net.......................... $    24.9    $     17.7   $     14.4
Interest expense..............................................................     (15.2)        (16.4)       (16.4)
General and administrative expenses...........................................      (0.3)         (0.3)        (0.3)
Equity in earnings (loss) of subsidiaries.....................................      23.6          99.3        (56.1)
                                                                               -----------  -----------  -----------
Income (loss) before income taxes.............................................      33.0         100.3        (58.4)
Credit (provision) in lieu of income taxes....................................      (3.3)         (0.3)         0.2
                                                                               -----------  -----------  -----------
Income (loss) before extraordinary items......................................      29.7         100.0        (58.2)
Extraordinary items:
   Gain on repurchase of debt, net of provision in lieu of income taxes.......       0.4             -            -
   Loss on early extinguishment of debt, net of credit in lieu
      of income taxes.........................................................         -             -         (1.6)
                                                                               -----------  -----------  -----------
Net income (loss)............................................................. $     30.1   $    100.0   $    (59.8)
                                                                               ===========  ===========  ===========


     See notes to consolidated financial statements and accompanying notes.

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                           MAXXAM GROUP HOLDINGS INC.

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


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                    -------------------------------
                                                                                       2000      1999       1998
                                                                                    ---------- ---------  ---------
Cash flows from operating activities:
   Net income (loss)..............................................................  $    30.1  $  100.0   $  (59.8)
   Adjustments to reconcile net income (loss) to net cash
      provided by (used for) operating activities:
      Extraordinary loss (gain) on early extinguishment of debt, net..............       (0.4)        -        1.6
      Net gains on marketable securities..........................................       (6.9)        -          -
      Amortization of deferred financing costs and
        discounts on long-term debt...............................................        0.8       0.8        0.8
      Equity in loss (earnings) of subsidiaries...................................      (23.6)    (99.3)      56.1
      Dividends from subsidiaries.................................................      108.4      18.7       18.7
      Increase (decrease) in cash resulting from changes in:
        Receivable from MAXXAM Inc................................................      (22.1)    (11.0)      (8.4)
        Accrued and deferred income taxes.........................................        2.8       0.3       (0.1)
        Accrued interest, other liabilities and other.............................        0.1      (6.1)      (0.1)
                                                                                    ---------- ---------  ---------
        Net cash provided by operating activities.................................       89.2       3.4        8.8
                                                                                    ---------- ---------  ---------

Cash flows from investing activities:
   Net purchases of marketable securities.........................................       (0.5)        -          -
                                                                                    ---------- ---------  ---------
      Net cash used for investing activities......................................       (0.5)        -          -
                                                                                    ---------- ---------  ---------

Cash flows from financing activities:
   Repurchases of long-term debt..................................................       (5.8)        -          -
   Consent fees for early retirement of subsidiaries' debt........................          -         -       (2.6)
   Dividends paid.................................................................      (45.0)        -       (2.5)
                                                                                    ---------- ---------  ---------
      Net cash used for financing activities......................................      (50.8)        -       (5.1)
                                                                                    ---------- ---------  ---------

Net increase in cash and cash equivalents.........................................       37.9       3.4        3.7
Cash and cash equivalents at beginning of year....................................        9.0       5.6        1.9
                                                                                    ---------- ---------  ---------
Cash and cash equivalents at end of year..........................................  $    46.9  $    9.0   $    5.6
                                                                                    ========== =========  =========



     See notes to consolidated financial statements and accompanying notes.

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                          NOTES TO FINANCIAL STATEMENTS


1. DEFERRED INCOME TAXES

      The deferred income tax assets and liabilities reported in the
accompanying unconsolidated balance sheet are determined by computing such
amounts on a consolidated basis, as if MGHI files a consolidated tax return with
all of its subsidiaries except Salmon Creek, and as if such corporations were
never connected with MAXXAM, and then reducing such consolidated amounts by the
amounts recorded by MGHI's subsidiaries, but excluding Salmon Creek, pursuant to
their respective tax allocation agreements with MAXXAM. For taxable periods
beginning after December 7, 1999, the computation includes Salmon Creek. A
significant portion of MGHI's net deferred income tax assets relates to loss and
credit carryforwards, net of valuation allowances. MGHI evaluated all
appropriate factors to determine the proper valuation allowances for these
carryforwards, including any limitations concerning their use, the year the
carryforwards expire and the levels of taxable income necessary for utilization.
Based on this evaluation, MGHI has concluded that it is more likely than not
that it will realize the benefit of these carryforwards for which valuation
allowances were not provided.

2.    SUPPLEMENTAL CASH FLOW INFORMATION

                                                                                       YEARS ENDED DECEMBER 31,
                                                                        ---------------------------------------------------
                                                                             2000              1999               1998
                                                                        --------------    --------------     --------------
                                                                                           (IN MILLIONS)

Supplemental information on non-cash investing and financing activities:
   Deferral of interest on MAXXAM note receivable......................     $     16.7       $     15.0      $         7.8

Supplemental disclosure of cash flow information:
   Interest paid.......................................................     $     14.9       $     15.6      $        15.6




                                   SIGNATURES

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



                                                                       MAXXAM GROUP HOLDINGS INC.


Date:   March 28, 2001                           By:                    /S/ CHARLES E. HURWITZ
                                                     --------------------------------------------------------------
                                                                           Charles E. Hurwitz
                                                                         Chairman of the Board

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



Date:   March 28, 2001                           By:                    /S/ CHARLES E. HURWITZ
                                                     --------------------------------------------------------------
                                                                           Charles E. Hurwitz
                                                                   Chairman of the Board, President,
                                                                      and Chief Executive Officer


Date:   March 28, 2001                           By:                     /S/ J. KENT FRIEDMAN
                                                     --------------------------------------------------------------
                                                                            J. Kent Friedman
                                                                                Director


Date:   March 28, 2001                           By:                      /S/ JOHN T. LA DUC
                                                     --------------------------------------------------------------
                                                                             John T. La Duc
                                                                                Director


Date:   March 28, 2001                           By:                     /S/ PAUL N. SCHWARTZ
                                                     --------------------------------------------------------------
                                                                            Paul N. Schwartz
                                                                Vice President, Chief Financial Officer
                                                                              and Director
                                                                     (Principal Financial Officer)


Date:   March 28, 2001                           By:                   /S/ ELIZABETH D. BRUMLEY
                                                     --------------------------------------------------------------
                                                                          Elizabeth D. Brumley
                                                                               Controller
                                                                     (Principal Accounting Officer)



                                INDEX OF EXHIBITS


EXHIBIT
NUMBER                                  DESCRIPTION
-------       ------------------------------------------------------------------
 3.1          Certificate of Incorporation of MAXXAM Group Holdings Inc. (the
              "Company" or "MGHI") (incorporated herein by reference to Exhibit
              3.1 to the Company's Registration Statement on Form S-4 dated
              November 4, 1996; Registration No. 333-18723; the "Company's Form
              S-4")
 3.2          Amended and Restated By-laws of the Company, adopted July 7, 1998
              (incorporated herein by reference to Exhibit 3.2 to the Company's
              Form S-4)
 4.1          Indenture, dated as of December 23, 1996 among the Company, as
              Issuer, MAXXAM Inc. ("MAXXAM"), as Guarantor, and First Bank
              National Association, as Trustee ("MGHI Indenture"), regarding the
              Company's 12% Senior Secured Notes due 2003 (incorporated herein
              by reference to Exhibit 4.1 to the Company's Form S-4)
 4.2          First Supplemental Indenture, dated as of July 8, 1998, to
              the MGHI Indenture (incorporated herein by reference to
              Exhibit 4.4 to the Quarterly Report on Form 10-Q/A of the
              Company for the quarter ended June 30, 1998; the "Company
              June 1998 Form 10-Q/A")
 4.3          Second Supplemental Indenture, dated as of July 29, 1998, to the
              MGHI Indenture (incorporated herein by reference to Exhibit 4.5 to
              the Company June 1998 Form 10-Q/A)
 4.4          Indenture, dated as of July 20, 1998, between Scotia Pacific
              Company LLC ("Scotia LLC") and State Street Bank and Trust
              Company ("State Street") regarding Scotia LLC's Class A-1,
              Class A-2 and Class A-3 Timber Collateralized Notes (the
              "Timber Note Indenture") (incorporated herein by reference
              to Exhibit 4.2 to the Quarterly Report on Form 10-Q/A of
              MAXXAM for the quarter ended June 30, 1998; File No. 1-3924
 4.5          First Supplemental Indenture, dated as of July 16, 1999, to the
              Timber Note Indenture (incorporated herein by reference to Exhibit
              4.1 to Scotia LLC's Quarterly Report on Form 10-Q for the quarter
              ended June 30, 1999; File No. 333-63825;  the "Scotia LLC June
              1999 Form 10-Q")
 4.6          Second Supplemental Indenture, dated as of November 18, 1999, to
              the Timber Note Indenture (incorporated herein by reference to
              Exhibit 99.3 to Scotia LLC's Report on Form 8-K dated November 19,
              1999; File No. 333-63825)
 4.7          Deed of Trust, Security Agreement, Financing Statement
              Fixture Filing and Assignment of Proceeds, dated as of July
              20, 1998, among Scotia LLC, Fidelity National Title
              Insurance Company, as trustee, and State Street, as
              collateral agent (incorporated herein by reference to
              Exhibit 4.6 to Scotia LLC's Registration Statement on Form
              S-4; Registration No. 333-63825; the "Scotia LLC
              Registration Statement")
 4.8          Credit Agreement, dated as of July 20, 1998, among Scotia
              LLC, the financial institutions party thereto and Bank of
              America National Trust and Savings Association, as agent
              (incorporated herein by reference to Exhibit 4.3 to the
              Quarterly Report on Form 10-Q/A of MAXXAM for the quarter
              ended June 30, 1998; File No. 1-3924; the "MAXXAM June 1998
              Form 10-Q")
 4.9          First Amendment, dated as of July 16, 1999, to the Line of Credit
              Agreement among Scotia LLC, the financial institutions party
              thereto and Bank of America National Trust and Savings Association,
              as agent (incorporated herein by reference to Exhibit 4.2 to the
              Scotia LLC June 1999 Form 10-Q)
 4.10         Amended and Restated Credit Agreement ("Pacific Lumber Credit
              Agreement") dated as of December 18, 1998 between The Pacific
              Lumber Company ("Pacific Lumber") and Bank of America National
              Trust and Savings Association (incorporated herein by reference to
              Exhibit 4.7 to the Company's Annual Report on Form 10-K dated
              December 31, 1998)
 4.11         Amendment, dated as of January 31, 2000, to the Pacific Lumber
              Credit Agreement

              Note: Pursuant to Regulation ss. 229.601, Item 601
              (b)(4)(iii) of Regulation S-K, upon request of the
              Securities and Exchange Commission, the Company hereby
              agrees to furnish a copy of any unfiled instrument which
              defines the rights of holders of long-term debt of the
              Company and its consolidated subsidiaries (and for any of
              its unconsolidated subsidiaries for which financial
              statements are required to be filed) wherein the total
              amount of securities authorized thereunder does not exceed
              10 percent of the total consolidated assets of the Company
10.1          Tax Allocation Agreement dated as of December 23, 1996
              between MGHI and MAXXAM (incorporated herein by reference to
              Exhibit 10.1 to the Company's Form S-4)
10.2          Tax Allocation Agreement between MAXXAM Group Inc. ("MGI") and
              MAXXAM dated as of August 4, 1993 (incorporated herein by
              reference to Exhibit 10.6 to Amendment No. 3 to the Registration
              Statement on Form S-2 of MGI; Registration No. 33-64042; the "MGI
              Registration Statement")
10.3          Tax Allocation Agreement dated as of May 21, 1988 among MAXXAM,
              MGI, Pacific Lumber and the corporations signatory thereto
              (incorporated herein by reference to Exhibit 10.8 to Pacific
              Lumber's Annual Report on Form 10-K for the fiscal year ended
              December 31, 1988; File No. 1-9204)
10.4          Tax Allocation Agreement among Pacific Lumber, Scotia LLC, Salmon
              Creek Corporation ("Salmon Creek") and MAXXAM dated as of March
              23, 1993 (incorporated herein by reference to Exhibit 10.1 to
              Amendment No. 3 to the Form S-1 Registration Statement of Scotia
              Pacific Holding Company, Registration No. 33-55538)
10.5          Tax Allocation Agreement between MAXXAM and Britt Lumber Co., Inc.
              ("Britt"), dated as of July 3, 1990 (incorporated herein by
              reference to Exhibit 10.4 to Pacific Lumber's Annual Report
              on Form 10-K for the fiscal year ended December 31, 1993)
10.6          Non-Negotiable Intercompany Note dated as of December 23, 1996
              executed by MAXXAM in favor of the Company (incorporated herein by
              reference to Exhibit 10.8 to the Company's Form S-4)
10.7          Power Purchase Agreement dated as of January 17, 1986
              between Pacific Lumber and Pacific Gas and Electric Company
              (incorporated herein by reference to Exhibit 10(n) to
              Pacific Lumber's Registration Statement on Form S-1,
              Registration No. 33-5549)
10.8          New Master Purchase Agreement, dated as of July 20, 1998, between
              Scotia LLC and Pacific Lumber (incorporated herein by reference to
              Exhibit 10.1 to the Quarterly Report on Form 10-Q of the Company
              for the quarter ended June 30, 1998; the "Company June 1998
              Form 10-Q")
10.9          New Services Agreement, dated as of July 20, 1998, between
              Pacific Lumber and Scotia LLC (incorporated herein by
              reference to Exhibit 10.2 to the Company June 1998 Form
              10-Q)
10.10         New Additional Services Agreement, dated as of July 20,
              1998, between Scotia LLC and Pacific Lumber (incorporated
              herein by reference to Exhibit 10.3 to the Company June 1998
              Form 10-Q)
10.11         New Reciprocal Rights Agreement, dated as of July 20, 1998, among
              Pacific Lumber, Scotia LLC and Salmon Creek Corporation
              (incorporated herein by reference to Exhibit 10.4 to the Company
              June 1998 Form 10-Q)
10.12         New Environmental Indemnification Agreement, dated as of July 20,
              1998, between Pacific Lumber and Scotia LLC (incorporated herein
              by reference to Exhibit 10.5 to the Company June 1998 Form 10-Q)
10.13         Purchase and Services Agreement between Pacific Lumber and Britt
              dated as of March 23, 1993 (incorporated herein by reference to
              Exhibit 10.17 to Amendment No. 2 to the Form S-2 Registration
              Statement of Pacific Lumber; Registration Statement No. 33-56332)
10.14         Implementation Agreement with Regard to Habitat Conservation
              Plan for the Properties of Pacific Lumber, Scotia LLC and
              Salmon Creek dated as of February 1999 by and among The
              United States Fish and Wildlife Service, the National Marine
              Fisheries Service, the California Department of Fish and
              Game ("CDF&G"), the California Department of Forestry and
              Fire Protection (the "CDF") and Pacific Lumber, Salmon Creek
              and Scotia LLC (incorporated herein by reference to Exhibit
              99.3 to Scotia LLC's Form 8-K dated March 19, 1999; File No.
              333-63825; the "Scotia LLC March 19, 1999 Form 8-K")
10.15         Agreement Relating to Enforcement of AB 1986 dated as of February
              25, 1999 by and among The California Resources Agency, CDF&G, CDF,
              The California Wildlife Conservation Board, Pacific Lumber, Salmon
              Creek and Scotia LLC (incorporated herein by reference to
              Exhibit 99.4 to the Scotia LLC March 19, 1999 Form 8-K)
10.16         Habitat Conservation Plan dated as of February 1999 for the
              Properties of Pacific Lumber, Scotia Pacific Holding Company
              and Salmon Creek (incorporated herein by reference to
              Exhibit 99.5 to the Scotia LLC March 19, 1999 Form 8-K)
10.17         Agreement for Transfer of Grizzly Creek and Escrow
              Instructions and Option Agreement dated as of February 26,
              1999 by and between Pacific Lumber and the State of
              California (incorporated herein by reference to Exhibit 99.6
              to Scotia LLC's March 19, 1999 Form 8-K)
10.18         Letter dated February 25, 1999 from the CDF to Pacific Lumber
              (incorporated herein by reference to Exhibit 99.8 to Scotia LLC's
              March 19, 1999 Form 8-K)
10.19         Letter dated March 1, 1999 from the CDF to Pacific Lumber
              (incorporated herein by reference to Exhibit 99.9 to Scotia LLC's
              March 19, 1999 Form 8-K)
10.20         Letter dated March 1, 1999 from the U.S. Department of the
              Interior Fish and Wildlife Service and the U.S. Department
              of Commerce National Oceanic and Atmospheric Administration
              to Pacific Lumber, Salmon Creek and the Company
              (incorporated herein by reference to Exhibit 99.10 to Scotia
              LLC's March 19, 1999 Form 8-K)
*99.1         The consolidated financial statements and notes thereto of MAXXAM
              Inc. for the fiscal year ended December 31, 2000
*99.2         The financial statements and notes thereto of MAXXAM Group Inc.
              for the fiscal year ended December 31, 2000
*99.3         The consolidated financial statements and notes thereto of Kaiser
              Aluminum Corporation for the fiscal year ended December 31, 2000
*99.4         Item 7A. of Kaiser Aluminum Corporation's Annual Report on Form
              10-K for the fiscal year ended December 31, 2000

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* Included with this filing.`