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

                                  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, 1999      COMMISSION FILE NUMBER 1-3924

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

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

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

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

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


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

<TABLE>
<CAPTION>
                                                                                       Name of each exchange
                             TITLE OF EACH CLASS                                        ON WHICH REGISTERED
                         ---------------------------                              -------------------------------
<S>                                                                               <C>
Common Stock, $.50 par value.................................................     American, Pacific, Philadelphia

</TABLE>

    Number of shares of common stock outstanding at March 8, 2000: 7,257,751
        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 | |

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

      Based upon the March 8, 2000 American Stock Exchange closing price of
$28.75 per share, the aggregate market value of the Registrant's outstanding
voting stock held by non-affiliates is approximately $125.9 million.

                      DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of Registrant's definitive proxy statement, to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of the Registrant's fiscal year, are incorporated by
reference under Part III.


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



                                TABLE OF CONTENTS


                                     PART I

List of Defined Terms
Item 1.        Business
               General
               Aluminum Operations
               Forest Products Operations
               Real Estate Operations
               Racing 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 Cash Flows
                       Consolidated Statement of Stockholders' Equity (Deficit)
                       Notes to Consolidated Financial Statements

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

                          PART III

Items 10-13.   To be filed with the Registrant's definitive proxy statement

                           PART IV

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


                              LIST OF DEFINED TERMS

        Set forth below is a list of all terms used and defined in this Report
and the page on which they first appear.


$100 Preference Stock
1984 Plan
1994 Director Plan
1994 Omnibus Plan
1999 TOL
2000 TOL
Acquiring Person
Additional Services Agreement
AKW
Alpart
AMT Price
Anglesey
ATI
Board of Managers
BOF
BPA
Britt
Britt Agreement
CARIFA
CDF
CEQA
CERCLA
CESA
Class A Preferred Stock
CMRT
common
Common Stock
Company
Custodial Trust Agreement
CWCB
Drexel
Elk River Timberlands
Environmental Indemnification Agreement
Environmental Laws
Environmental Plans
EPA
EPIC-SYP/Permits lawsuit
ESA
Escrow Agent
Escrow Agreement
Escrowed Funds
FDIC
FDIC action
Federated
FHLBB
Forest Practice Act
GIS
GPS
Grizzly Creek Agreement
Grizzly Creek Grove
Harvest Value Schedule
HCP
Headwaters Agreement
Headwaters Timberlands
Health Laws
Hydro
Intercompany Note
Junior Preferred Stock
KACC
KACC 10 7/8% Senior Notes
KACC 9 7/8% Senior Notes
KACC Credit Agreement
KACC Indentures
KACC Notes
KACC Senior Subordinated Notes
Kaiser
Kaiser Common Stock
KJBC
KLHP
LIFO
LME
LTSY
Master Purchase Agreement
MAXXAM
MGHI
MGHI Notes
MGI
MSHA
NCRWQCB
NL
NLRB
Notice
Old growth
Old PALCO
Old Timber Notes
OTS
OTS action
Owl Creek Agreement
Owl Creek Grove
Pacific Lumber
Pacific Lumber Credit Agreement
Palco Companies
Palmas
PDMPI
Permits
PET
Pre-Permit Agreement
Prefunding Account
PRIDES
PRP
QAL
Race Park
Racing Act
Racing Commission
Reciprocal Rights Agreement
Redeemable Preference Stock
Required Liquidity Amount
Respondents
RICO
Rollins lawsuit
RTC Portfolio
Salmon Creek
Sam Houston Race Park
SAR Account
SBE Price
Scotia LLC
Scotia LLC Line of Credit
Scotia LLC Timber
Scotia LLC Timber Rights
Scotia LLC Timberlands
Series A Right
Series B Right
Services Agreement
Services Fee
SHRP Notes
SHRP, Ltd
SHRP, Ltd.
SunCor
SYP
take
Timber Notes
Timber Notes Indenture
TMDLs
UFG
ULPs
upper
USAT
USWA
USWA lawsuit
Valco
Valley Race Park
VRA
Westbrook
Wrigley lawsuit
young growth


ITEM 1.         BUSINESS

GENERAL

      MAXXAM Inc. and its majority and wholly owned subsidiaries are
collectively referred to herein as the "COMPANY" or "MAXXAM" unless otherwise
indicated or the context indicates otherwise. The Company, through Kaiser
Aluminum Corporation ("KAISER") and Kaiser's principal operating subsidiary,
Kaiser Aluminum & Chemical Corporation ("KACC"), is an integrated aluminum
company. See "--Aluminum Operations." The Company's voting interest in Kaiser is
approximately 63%. In addition, the Company is engaged in forest products
operations through MAXXAM Group Inc. ("MGI") and MGI's wholly owned
subsidiaries, The Pacific Lumber Company and its wholly owned subsidiaries
(collectively referred to herein as "PACIFIC LUMBER," unless the context
indicates otherwise), and Britt Lumber Co., Inc. ("BRITT"). See "--Forest
Products Operations." MGI is a wholly owned subsidiary of MAXXAM Group Holdings
Inc. ("MGHI"), which is in turn a wholly owned subsidiary of the Company. The
Company is also engaged in real estate investment and development, managed
through MAXXAM Property Company, and racing operations, including a Class 1
thoroughbred and quarter horse racing facility located in the greater Houston
metropolitan area. See "--Real Estate Operations" and "--Racing Operations." See
Note 15 to the Consolidated Financial Statements (contained in Item 8 to this
Report) for certain financial information by industry segment and geographic
area.

      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 in this section (see Item 1. "Business--Aluminum Operations--Incident at
Gramercy Facility," "--Strategic Initiatives," "--Business Operations--Primary
Aluminum Business Unit," and "--Competition"; "--Forest Products Operations--
Pacific Lumber Operations--Harvesting Practices," "--Production Facilities" and
"--Regulatory and Environmental Factors"; several sections under Item 3. "Legal
Proceedings"; Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 7A. "Quantitative and Qualitative
Disclosures About Market Risk"). 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.

ALUMINUM OPERATIONS

   GENERAL

      Kaiser 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. 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. In 1999, Kaiser produced
approximately 2,524,000 tons of alumina, of which approximately 83% was sold to
third parties, and produced approximately 426,400 tons of primary aluminum, of
which approximately 62% was sold to third parties. In 1999, Kaiser shipped
approximately 389,000 tons of fabricated aluminum products to third parties,
which accounted for approximately 5% of total United States domestic shipments.
References in this Report to tons refer to metric tons of 2,204.6 pounds.

      Kaiser's operations are conducted through KACC's business units. The
following table sets forth total shipments and intersegment transfers of
Kaiser's alumina, primary aluminum and fabricated aluminum operations:

<TABLE>
<CAPTION>

                                                                                      YEARS ENDED DECEMBER 31,
                                                                             -------------------------------------------
                                                                                 1999           1998           1997
                                                                             -------------  -------------   ------------
                                                                                       (IN THOUSANDS OF TONS)
<S>                                                                          <C>            <C>             <C>
Alumina:(1)
      Shipments to Third Parties...........................................        2,093.9        2,250.0        1,929.8
      Intersegment Transfers...............................................          757.3          750.7          968.0
                                                                             -------------  -------------   ------------
                                                                                   2,851.2        3,000.7        2,897.8
                                                                             -------------  -------------   ------------
Primary Aluminum:
      Shipments to Third Parties...........................................          295.6          263.2          327.9
      Intersegment Transfers...............................................          171.2          162.8          164.2
                                                                             -------------  -------------   ------------
                                                                                     466.8          426.0          492.1
                                                                             -------------  -------------   ------------

Flat-Rolled Products.......................................................          217.9          235.6          247.9

Engineered Products........................................................          171.1          169.4          152.1

<FN>
-------------------------------
(1)   As a result of an explosion at the Gramercy alumina refinery in July 1999
      (see below), which completely curtailed production, shipments to third
      parties and intersegment transfers for 1999 include approximately 264,000
      tons of alumina purchased and resold to certain unaffiliated customers and
      131,000 tons of alumina purchased and transferred to Kaiser's primary
      aluminum business unit.

</FN>
</TABLE>

      The alumina business unit mines bauxite and obtains additional bauxite
tonnage under long-term contracts. The primary aluminum business unit operates
two wholly owned domestic smelters and two foreign smelters in which Kaiser
holds significant ownership interests. Fabricated aluminum products are
manufactured by two business units--flat-rolled products and engineered
products.

   INCIDENT AT GRAMERCY FACILITY

      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.

      On July 5, 1999, Kaiser's Gramercy, Louisiana alumina refinery was
extensively damaged by an explosion in the digestion area of the plant.
Twenty-four employees were injured in the incident, several of them severely. As
a result of the incident, alumina production at the facility was completely
curtailed. Production at the plant is expected to remain completely curtailed
until the third quarter of 2000 when Kaiser expects to begin partial production.
Full production is expected to be achieved during the first quarter of 2001 or
shortly thereafter. Kaiser has received the regulatory permit required to
operate the plant once the facility is ready to resume production. In the
interim, Kaiser is purchasing alumina from third parties, in excess of the
amounts of alumina available from other Kaiser-owned facilities, to supply major
customers' needs as well as to meet intersegment requirements.

     The cause of the incident is under investigation by Kaiser and governmental
agencies. In January 2000, the U.S. Mine Safety and Health Administration
("MSHA") issued 21 citations in connection with its investigation of the
incident. The citations allege, among other things, that certain aspects of the
plant's operations were unsafe and that such mode of operation contributed to
the explosion. To date, no monetary penalty has been proposed by MSHA. Although
Kaiser expects that a fine will be levied, Kaiser cannot predict the amount of
any such fine. It is possible that other civil or criminal fines or penalties
could be levied against Kaiser. Kaiser has previously announced that it
disagrees with the substance of the citations and has challenged them. However,
as more fully explained below, based on what is known to date and discussions
with Kaiser's advisors, Kaiser believes that the financial impact of this
incident (in excess of insurance deductibles and self-retention provisions) will
be largely offset by insurance coverage. Deductibles and self-retention
provisions under the insurance coverage for the incident total $5.0 million,
which amounts have been charged to cost of sales and operations in 1999.

     As of December 31, 1999, Kaiser had recorded estimated recoveries for
clean-up, site preparation and business interruption costs incurred of
approximately $55.0 million. As of December 31, 1999, approximately $50.0
million of insurance recoveries had been received. Additionally through February
29, 2000, Kaiser had received approximately $25.0 million of additional
insurance recoveries. Also, based on discussions with the insurance carriers and
their representatives and third party engineering reports, Kaiser recorded a
pre-tax gain of $85.0 million, representing the difference between the minimum
expected property damage reimbursement amount and the carrying value of the
damaged property of $15.0 million. Kaiser continues to work with its insurance
carriers to maximize the amount of recoveries and to minimize, to the extent
possible, the period of time between when Kaiser expends funds and when it is
reimbursed. However, Kaiser will likely have to fund an average of 30-60 days of
property damage and business interruption activity, unless some other
arrangement is agreed to with the insurance carriers, and such amounts will be
significant. Kaiser believes it has sufficient financial resources to fund the
construction and business interruption costs on an interim basis. However, no
assurances can be given in this regard. If insurance recoveries were to be
delayed or if there were to be other significant uses of the existing capacity
under KACC's credit agreement (the "KACC CREDIT AGREEMENT"), delays in the
rebuilding of the Gramercy refinery could occur and could have a material
adverse impact on Kaiser's liquidity and operating results.

      See Item 3. "Legal Proceedings--Kaiser Litigation--Gramercy Litigation,"
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations--Aluminum Operations--Recent Events and
Developments--Incident at Gramercy Facility" and Note 2 to the Consolidated
Financial Statements for further information regarding the Gramercy incident.

   LABOR MATTERS

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

      While Kaiser initially experienced an adverse strike-related impact on its
profitability, Kaiser believes that its operations at the affected facilities,
excluding the Gramercy facility (see "--Incident at Gramercy Facility" above),
have been substantially stabilized and will be able to run at, or near, full
capacity, and that the incremental costs associated with operating the affected
plants during the dispute were virtually eliminated in early 1999 (excluding the
impact of the restart costs and the effect of market factors such as the
continued partial curtailment at the Tacoma smelter; see "--Business
Operations--Primary Alumina Business Unit" below). However, no assurances can be
given that Kaiser's efforts to run the plants in this manner on a sustained
basis, without a significant business interruption or material adverse impact on
Kaiser's operating results, will be successful. Kaiser believes that charges of
unfair labor practices made against it by the USWA in connection with the
dispute are without merit. See Note 13 to the Consolidated Financial Statements.
Kaiser and the USWA continue to communicate. The objective of Kaiser has been,
and continues to be, to negotiate a fair labor contract that is consistent with
its business strategy and the commercial realities of the marketplace.

      Kaiser is also uncertain as to what the ultimate cost would be of a
settlement with the USWA. Since the beginning of the dispute, Kaiser has held
periodic but unsuccessful talks with the USWA to seek a new labor agreement.
Kaiser's proposal to the union has encompassed wage and benefit increases in
exchange for productivity improvements. Kaiser believes such a proposal would
result in a significant net reduction in operating costs for the affected plants
compared to pre-strike levels. However, upon settlement, the Company's earnings
may reflect a one-time charge for certain costs associated with the new labor
agreement. There can be no assurance that this proposal will be accepted.

      See "--Labor Related Costs" under Note 1 to the Consolidated Financial
Statements, "--Labor Matters" under Note 13 to the Consolidated Financial
Statements, and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Aluminum Operations--Recent Events and
Developments--Labor Matters" for further information with respect to the USWA
dispute.

   STRATEGIC INITIATIVES

      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.

      Kaiser's strategy is to improve its financial results by: increasing the
competitiveness of its existing plants; continuing its cost reduction
initiatives; adding assets to businesses it expects to grow; pursuing
divestitures of non-core businesses; and strengthening its financial position.

      In 1999, Kaiser completed the acquisition of the remaining 45% interest in
Kaiser LaRoche Hydrate Partners ("KLHP"), an alumina marketing venture, for a
purchase price of approximately $10.0 million and the sale of its 50% interest
in AKW L.P. ("AKW") to its partner for $70.4 million. The strategic analysis
process also resulted in Kaiser's agreement in January 2000 to sell the
Micromill(TM) assets and technology.

      Another area of emphasis has been a continuing focus on managing Kaiser's
legacy liabilities. Kaiser believes that it has insurance coverage available to
recover certain incurred and future environmental costs and a substantial
portion of its asbestos-related costs and is actively pursuing claims in this
regard. During 1998, Kaiser received recoveries totaling approximately $35.0
million from certain of its insurers related to current and future environmental
claims. The timing and amount of future recoveries of asbestos-related claims
from insurance carriers remains a major priority of Kaiser, but will depend on
the pace of claims review and processing by such carriers and the resolution of
any disputes that may arise regarding coverage under the insurance policies.
However, during 1999, Kaiser reached preliminary agreements in principle under
which it expects to collect a substantial portion of its anticipated asbestos-
related payments from certain insurance carriers in 2000. See Note 13 to the
Consolidated Financial Statements for additional information regarding the
legacy liabilities and related insurance coverage.

   SENSITIVITY TO PRICES AND HEDGING PROGRAMS

      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 price changes by up to three months. In addition, Kaiser's operations
are exposed to risks from fluctuating energy prices for fuels used in the
production process and from foreign currency movements in respect of material
cash commitments to foreign subsidiaries and affiliates. 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 the above items. While such hedging activities typically are designed
to provide protection against unfavorable price changes, they can, in certain
circumstances, limit Kaiser's ability to realize favorable price changes and can
also impact Kaiser's liquidity. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial Condition
and Investing and Financing Activities--Aluminum Operations--Financing
Activities and Liquidity," Item 7A. "Quantitative and Qualitative Disclosures
About Market Risk," "--Derivative Financial Instruments" under Note 1 to the
Consolidated Financial Statements and Note 14 to the Consolidated Financial
Statements for further information.


   BUSINESS OPERATIONS

      Kaiser conducts its operations through four main business units, each of
which is discussed below.

      Alumina Business Unit
      The following table lists Kaiser's bauxite mining and alumina refining
facilities as of December 31, 1999:

<TABLE>
<CAPTION>

                                                                                                ANNUAL
                                                                                              PRODUCTION          TOTAL
                                                                                               CAPACITY          ANNUAL
                                                                                KAISER       AVAILABLE TO      PRODUCTION
                ACTIVITY                      FACILITY        LOCATION         OWNERSHIP        KAISER          CAPACITY
-----------------------------------------  -------------   ---------------   -------------  ---------------   -------------
                                                                                                (IN THOUSANDS OF TONS)
<S>                                        <C>             <C>               <C>            <C>               <C>
Bauxite Mining                             KJBC            Jamaica                49.0%             4,500.0         4,500.0
                                           Alpart(1)       Jamaica                65.0%             2,275.0         3,500.0
                                                                                            ---------------   -------------
                                                                                                    6,775.0         8,000.0
                                                                                            ===============   =============

Alumina Refining                           Gramercy(2)     Louisiana             100.0%             1,075.0         1,075.0
                                           Alpart          Jamaica                65.0%               942.5         1,450.0
                                           QAL(3)          Australia              28.3%             1,033.0         3,650.0
                                                                                            ---------------   -------------
                                                                                                    3,050.5         6,175.0
                                                                                            ===============   =============

<FN>
------------------
(1)   Alumina Partners of Jamaica ("ALPART") bauxite is refined into alumina
      at the Alpart refinery.
(2)   Production is currently completely curtailed.
(3)   Queensland Alumina Limited.

</FN>
</TABLE>

      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 requirements under multi-year sales contracts with prices
linked to the price of primary aluminum. See "--Sensitivity to Prices and
Hedging Programs" above and "--Competition" below.

      The Government of Jamaica has granted Kaiser a mining lease for the mining
of bauxite which will, at a minimum, satisfy the bauxite requirements of
Kaiser's Gramercy, Louisiana alumina refinery so that it will be able to produce
at its current rated capacity until 2020. Kaiser Jamaica Bauxite Company
("KJBC") mines bauxite from the land which is subject to the mining lease as an
agent for Kaiser. Although Kaiser owns 49% of KJBC, it is entitled to, and
generally takes, all of its bauxite output. A substantial majority of the
bauxite mined by KJBC is refined into alumina at the Gramercy facility, and the
remainder is sold to a third party. KJBC's operations have been impacted by the
Gramercy incident. Subject to the rebuilding of the Gramercy facility with a
double digest bauxite system, the Government of Jamaica has recently agreed to
grant Kaiser an additional bauxite mining lease. The new mining lease will be
effective upon the expiration of the current lease in 2020 and will enable the
Gramercy facility to produce at its rated capacity for an additional ten year
period.

      Alumina produced by the Gramercy plant is primarily sold to third parties,
but a portion is used by Kaiser in its operations. Production at the Gramercy
refinery is completely curtailed as it was extensively damaged by an explosion
in the digestion area of the plant in July 1999. Production at the plant is
expected to remain completely curtailed until the third quarter of 2000 when
partial production is expected to begin. Based on current estimates, full
production is expected to be achieved during the first quarter of 2001 or
shortly thereafter. In the interim, Kaiser is purchasing alumina from third
parties, in excess of the amounts of alumina available from other Kaiser-owned
facilities, to supply major customers' needs as well as to meet intersegment
requirements. Kaiser believes that the cost to rebuild the Gramercy facility and
the adverse impact of the incident on operations will be largely offset by
insurance coverage. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition and Investing
and Financing Activities--Aluminum Operations--Financing Activities and
Liquidity" and Note 2 to the Consolidated Financial Statements for further
information regarding the Gramercy incident. The Gramercy refinery is one of the
five Kaiser plants which is subject to the continuing USWA dispute. See "--Labor
Matters" above for a discussion of the labor dispute.

      In February 1999, Kaiser purchased its partner's 45% interest in KLHP, a
partnership which markets chemical grade alumina manufactured at the Gramercy
facility. Chemical grade alumina is sold at a premium price over smelter
grade alumina, and this acquisition will permit Kaiser to expand its market
position in this business in North America. However, these operations have been
impacted by the Gramercy incident. Kaiser has entered into the necessary
arrangements to allow it to supply a significant portion of its customers'
chemical grade alumina needs. Kaiser believes that any incremental costs
incurred in connection with such arrangements, as well as lost profits, will be
substantially covered by insurance.

      Alpart holds bauxite reserves and owns a 1.45 million ton per year alumina
plant located in Jamaica. Kaiser owns a 65% interest in Alpart, and Hydro
Aluminium a.s ("HYDRO") owns the remaining 35% interest. Kaiser has management
responsibility for the facility on a fee basis. Kaiser and Hydro have agreed to
be responsible for their proportionate shares of Alpart's costs and expenses.
The Government of Jamaica has granted Alpart a mining lease and has entered into
other agreements with Alpart designed to assure that sufficient reserves of
bauxite will be available to Alpart to operate its refinery, as it may be
expanded up to a capacity of 2.0 million tons per year, through the year 2024.

      In 1999, Alpart and JAMALCO, a joint venture between affiliates of Alcoa
Inc. and the Government of Jamaica, agreed to form a bauxite mining operation
joint venture that will consolidate their bauxite mining operations in Jamaica,
with the objective of optimizing mining operating and capital costs. The joint
venture agreement also grants Alpart certain rights to acquire bauxite mined
from JAMALCO's reserves. The joint venture will commence operations in the first
quarter of 2000.

      Kaiser owns a 28.3% interest in Queensland Alumina Limited ("QAL"), which
owns the largest and one of the most competitive alumina refineries in the
world, located in Queensland, Australia. QAL refines bauxite into alumina,
essentially on a cost basis, for the account of its shareholders under long-term
tolling contracts. The shareholders, including Kaiser, purchase bauxite from
another QAL shareholder under long-term supply contracts. Kaiser has contracted
with QAL to take approximately 868,000 tons per year of alumina or pay standby
charges. Kaiser is unconditionally obligated to pay amounts calculated to
service its share ($103.6 million at December 31, 1999) of certain debt of QAL,
as well as other QAL costs and expenses, including bauxite shipping costs.

      In 1999, Kaiser sold alumina to approximately 21 customers, the largest
and top five of which accounted for approximately 23% and 72% of net sales,
respectively. All of Kaiser's third-party sales of bauxite in 1999 were made to
one customer, which sales represent approximately 7% of total bauxite and
alumina third party net sales. Kaiser's principal customers for bauxite and
alumina consist of other aluminum producers that purchase bauxite and smelter
grade alumina, trading intermediaries who resell raw materials to end-users, and
users of chemical grade alumina.

      Primary Aluminum Business Unit
      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.

      The following table lists Kaiser's primary aluminum smelting facilities as
of December 31, 1999:

<TABLE>
<CAPTION>

                                                                      ANNUAL
                                                                       RATED          TOTAL
                                                                     CAPACITY        ANNUAL         1999
                                                        KAISER     AVAILABLE TO       RATED       OPERATING
              LOCATION                  FACILITY       OWNERSHIP      KAISER        CAPACITY        RATE
----------------------------------   --------------   ----------  --------------  ------------  -------------
                                                                      (IN THOUSANDS OF TONS)
<S>                                  <C>              <C>         <C>             <C>           <C>
Domestic
      Washington                     Mead                 100%           200.0          200.0         102%(1)
      Washington                     Tacoma               100%            73.0           73.0          73%(1)
                                                                  --------------  ------------
           Subtotal                                                      273.0          273.0
                                                                  --------------  ------------

International
      Ghana                          Valco                 90%           180.0          200.0          57%(2)
      Wales, United Kingdom          Anglesey              49%            66.2          135.0         102%
                                                                  --------------  ------------
           Subtotal                                                      246.2          335.0
                                                                  --------------  ------------

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

<FN>
------------------
(1)  1999 operating rates were affected by the continuing USWA dispute.
(2)  See Item 7. "Management's Discussion and Analysis of Financial Condition
     and Results of Operations--Results of Operations--Aluminum
     Operations--Recent Events and Developments--Valco Operating Level" for
     additional information regarding recent and future operating levels.
</FN>
</TABLE>

      Kaiser has developed and installed proprietary retrofit and control
technology in all of its smelters, as well as at third party locations. This
technology, which includes the redesign of the cathodes, anodes and bus that
conduct electricity through reduction cells, improved feed systems that add
alumina to the cells, computerized process control and energy management
systems, and furnace technology for baking of anode carbon, has significantly
contributed to increased and more efficient production of primary aluminum and
enhanced Kaiser's ability to compete more effectively with the industry's newer
smelters.

      The Mead facility uses pre-bake technology. Approximately 77% of Mead's
1999 production was used at Kaiser's Trentwood, Washington, rolling mill, and
the balance was sold to third parties. Kaiser has modernized and expanded the
carbon baking furnace at its Mead smelter. The project has improved the
reliability of the carbon baking operations, increased productivity, enhanced
safety, and improved the environmental performance of the facility. The first
stage of this project, the construction of a new 90,000 ton per year furnace,
was completed in 1997. The remaining modernization work was completed in early
1999. The Tacoma facility uses Soderberg technology and produces primary
aluminum and high-grade, continuous-cast, redraw rod, which currently commands a
premium price in excess of the price of primary aluminum. Both smelters have
achieved significant production efficiencies through retrofit technology and a
variety of cost controls, leading to increases in production volume and
enhancing their ability to compete with newer smelters. The business unit
maintains specialized laboratories and a miniature carbon plant in the state of
Washington which concentrate on the development of cost-effective technical
innovations such as equipment and process improvements.

      The process of converting alumina into aluminum requires significant
amounts of electric power. The cost of electric power is an important production
cost at Kaiser's aluminum smelters. Kaiser purchases electric power for the Mead
and Tacoma, Washington, smelters from the Bonneville Power Administration
("BPA"), which supplies approximately half of the electric power for the two
plants, and from other suppliers. The power contracts with BPA expire in
September 2001, and the power contracts with other suppliers expire at various
times through September 2001. BPA is engaged in the process of determining the
allocation and price of electric power to its customers for the period October
2001 to September 2006. Kaiser believes that adequate electric power will be
available during that period, from BPA and from other suppliers, for the
operation of Kaiser's smelters in Washington; however, the price of power
purchased from BPA could be significantly greater than the current price for
such power.

      The Mead and Tacoma, Washington, smelters are two of the five Kaiser
plants which are subject to the continuing USWA dispute. Kaiser temporarily
curtailed three out of a total of 11 potlines at its Mead and Tacoma,
Washington, aluminum smelters at September 30, 1998, as a result of the USWA
strike. The curtailed potlines represented approximately 70,000 tons of annual
production capacity out of a total combined production capacity of 273,000 tons
per year at the facilities. Restarts of the two Mead potlines were completed
during mid-1999. While a portion of the curtailed potline at Tacoma has been
restarted to meet internal requirements, the timing for a complete restart of
the potline (representing approximately 10,000 tons of idle production capacity)
has yet to be determined and will depend upon market conditions and other
factors.

      Kaiser manages, and owns a 90% interest in, the Volta Aluminium Company
Limited ("VALCO") aluminum smelter in Ghana. The Valco smelter uses pre-bake
technology and processes alumina supplied by Kaiser and the other participant
into primary aluminum under tolling contracts which provide for proportionate
payments by the participants. Kaiser's share of the primary aluminum is sold to
third parties. Valco's operating level has been subject to fluctuations
resulting from the amount of power it is allocated by the Volta River Authority
("VRA"). The operating level over the last five years has ranged from one to
four out of a total of five potlines. During 1999, Valco operated an average of
three potlines.  Kaiser expects Valco to operate four potlines during 2000.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Aluminum Operations--Recent Events and
Developments--Valco Operating Level" for information regarding Valco's power
situation.

      Kaiser owns a 49% interest in the Anglesey Aluminium Limited ("ANGLESEY")
aluminum smelter at Holyhead, Wales. The Anglesey smelter uses pre-bake
technology. Kaiser supplies 49% of Anglesey's alumina requirements and purchases
49% of Anglesey's aluminum output. Kaiser sells its share of Anglesey's output
to third parties. Electric power for the Anglesey smelter is supplied under a
contract which expires in 2001. Anglesey expects to enter into a new power
agreement during the first quarter of 2000 which would extend through
September 2005. Kaiser expects that the price of power under the new agreement
will be significantly greater than the price under the present contract.

      Kaiser's principal primary aluminum customers consist of large trading
intermediaries and metal brokers. In 1999, Kaiser sold its primary aluminum
production not utilized for internal purposes to approximately 42 customers, the
largest and top five of which accounted for approximately 29% and 68% of net
sales, respectively. See "--Competition." Marketing and sales efforts are
conducted by personnel located in Houston, Texas, and Tacoma and Spokane,
Washington.

      Flat-Rolled Products Business Unit
      The flat-rolled products business unit operates the Trentwood, Washington,
rolling mill. The business unit sells to the aerospace and general engineering
markets (producing heat treat sheet and plate products), the beverage container
market (producing body, lid, and tab stock), and the specialty coil markets
(producing automotive brazing sheet, wheel, and tread products), both directly
and through distributors. The Trentwood facility is one of the five Kaiser
plants which is subject to the continuing USWA dispute.

      Kaiser continues to shift the product mix of its Trentwood rolling mill
away from beverage can body stock toward higher value added product lines, such
as heat treat, beverage can lid and tab stock, automotive, and other niche
businesses in an effort to maximize its profitability. Global sales of Kaiser's
heat treat products are made primarily to the aerospace and general engineering
markets. In 1999, the business unit shipped products to approximately 147
customers in the aerospace, transportation, and industrial ("ATI") markets, most
of which were distributors who sell to a variety of industrial end-users. The
top five customers in the ATI markets for flat-rolled products accounted for
approximately 18% of the business unit's net sales.

      Kaiser's flat-rolled products are also sold to beverage container
manufacturers located primarily in western North America and in the Asian
Pacific Rim countries. Quality of products for the beverage container industry,
service, price, and timeliness of delivery are the primary bases on which Kaiser
competes. In 1999, the business unit had approximately 25 domestic and foreign
can stock customers, supplying approximately 35 can plants worldwide. The
largest and top five of such customers accounted for approximately 12% and 36%,
respectively, of the business unit's net sales. See "-- Competition" below. The
marketing staff for the business unit is located at the Trentwood facility.
Sales are made directly to end-use customers and distributors from four sales
offices in the United States, from a sales office in England, and by independent
sales agents in Asia and Latin America.

      Engineered Products Business Unit
      The engineered products business unit operates soft-alloy and hard-alloy
extrusion facilities and engineered component (forgings) facilities in the
United States and Canada. Major markets for extruded products are in the
transportation industry, to which the business unit sells extruded shapes for
automobiles, light-duty vehicles, heavy-duty trucks and trailers, and shipping
containers, and in the distribution, durable goods, defense, building and
construction, ordnance and electrical markets.

      The business unit sells forged parts to customers in the automotive,
heavy-duty truck, general aviation, rail, machinery and equipment, and ordnance
markets. The high strength-to-weight properties of forged aluminum make it
particularly well-suited for automotive applications. The business unit
maintains a sales and engineering office in Southfield, Michigan, which works
with automobile makers and other customers and plant personnel to create new
automotive component designs and to improve existing products.

      Soft-alloy extrusion facilities are located in Los Angeles, California;
Sherman, Texas; Richmond, Virginia; and London, Ontario, Canada. Each of the
soft-alloy extrusion facilities has fabricating capabilities and provides
finishing services. Products manufactured at these facilities include rod, bar,
tube, shapes, and billet. The Richmond, Virginia, facility was acquired in
mid-1997 and increased Kaiser's extruded products capacity and enhanced its
existing extrusion business due to that facility's ability to manufacture
seamless tubing and large circle size extrusions and to serve the distribution
and ground transportation industries. The 1999 acquisition of an extrusion press
in the Los Angeles area also increased capacity in both seamless tube and rod
and bar products. Hard-alloy rod and bar extrusion facilities are located in
Newark, Ohio, and Jackson, Tennessee, and produce screw machine stock, redraw
rod, forging stock, and billet. The Newark facility is one of the five Kaiser
plants which is subject to the continuing USWA dispute. A facility located in
Richland, Washington, produces seamless tubing in both hard and soft alloys. The
business unit also operates an aluminum cathodic protection business located in
Tulsa, Oklahoma. The business unit operates forging facilities at Oxnard,
California, and Greenwood, South Carolina, and a machine shop at Greenwood,
South Carolina. Kaiser sold a small casting operation in Canton, Ohio in May
1999.

      In 1999, the engineered products business unit had approximately 400
customers, the largest and top five of which accounted for approximately 5% and
18%, respectively, of the business unit's net sales. See "--Competition" below.
Sales are made directly from plants, and from marketing locations elsewhere in
the United States.

   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" and below 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. Beverage container materials, including aluminum,
face increased competition from plastics as increased polyethylene terephthalate
("PET") container capacity is brought on line by plastics manufacturers. 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. Also see the description of each
of the business units above.

   RESEARCH AND DEVELOPMENT

      Net expenditures for Kaiser-sponsored research and development activities
were $11.0 million in 1999, $13.7 million in 1998, and $19.7 million in 1997.
Approximately $0.8 million of the 1999 research and development net expenditures
were attributable to development of the Micromill assets and technology, which
were sold in January 2000. See Note 6 to the Consolidated Financial Statements.
Kaiser's research staff totaled 50 at December 31, 1999. Kaiser estimates that
research and development net expenditures will be in the range of $9.0 million
to $11.0 million in 2000.

   EMPLOYEES

      During 1999, Kaiser employed an average of approximately 8,600 persons,
compared with an average of approximately 9,200 persons in 1998 and
approximately 9,600 persons in 1997. At December 31, 1999, Kaiser employed
approximately 8,300 persons. The foregoing employee figures for 1999 and 1998
include the USWA workers who are currently subject to the lockout imposed by
Kaiser as a result of the continuing labor dispute. Since the inception of the
labor dispute, Kaiser has operated the five affected facilities with temporary
workers who are not included in the employee counts for 1999 and 1998. The
average number of temporary workers employed during 1999 at the five plants
affected by the USWA labor dispute was approximately 25% less than the average
number of USWA workers employed prior to the labor dispute. The labor agreements
with employees at the Alpart refinery in Jamaica and the Valco smelter in Ghana
both expire in 2001.

   ENVIRONMENTAL MATTERS

      Kaiser is subject to a wide variety of international, federal, state and
local environmental laws and regulations (the "ENVIRONMENTAL LAWS"). The
Environmental Laws regulate, among other things, air and water emissions and
discharges; the generation, storage, treatment, transportation and disposal of
solid and hazardous waste; the release of hazardous or toxic substances,
pollutants and contaminants into the environment; and, in certain instances, the
environmental condition of industrial property prior to transfer or sale. In
addition, Kaiser is subject to various federal, state and local workplace health
and safety laws and regulations ("HEALTH LAWS").

      Kaiser's current and former operations can subject it to fines or
penalties for alleged breaches of the Environmental and Health Laws and to
claims and litigation brought by federal, state or local agencies and by private
parties seeking remedial or other enforcement action under the Environmental and
Health Laws or damages related to alleged injuries to health or to the
environment, including claims with respect to certain waste disposal sites and
the remediation of sites presently or formerly operated by Kaiser. Kaiser is
subject to certain lawsuits under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986 ("CERCLA"). Kaiser, along with certain other
entities, has been named as a Potentially Responsible Party ("PRP") for remedial
costs at certain third-party sites listed on the National Priorities List under
CERCLA and, in certain instances, may be exposed to joint and several liability
for those costs or damages to natural resources. Kaiser's Mead, Washington,
facility has been listed on the National Priorities List under CERCLA and Kaiser
will be required to implement one of several acceptable remedial options
suggested by the regulatory authorities.

      Based on Kaiser's evaluation of these and other environmental matters,
Kaiser has established environmental accruals, primarily related to potential
solid waste disposal and soil and groundwater remediation matters. Kaiser is a
defendant in a number of lawsuits, some of which involve claims of multiple
persons, in which the plaintiffs allege that certain of their injuries were
caused by, among other things, exposure to asbestos during, and as a result of,
their employment or association with Kaiser or exposure to products containing
asbestos produced or sold by Kaiser. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial Condition
and Investing and Financing Activities--Aluminum Operations--Commitments and
Contingencies" and Note 13 to the Consolidated Financial Statements under the
headings "Environmental Contingencies" and "Asbestos Contingencies."

   PROPERTIES

      The locations and general character of the principal plants, mines, and
other materially important physical properties relating to Kaiser's operations
are described above. Kaiser owns in fee or leases all of the real estate and
facilities used in connection with its business. Plants and equipment and other
facilities, other than the Gramercy facility, are generally in good condition
and suitable for their intended uses, subject to changing environmental
requirements. Although Kaiser's domestic aluminum smelters and alumina facility
were initially designed early in Kaiser's history, they have been modified
frequently over the years to incorporate technological advances in order to
improve efficiency, increase capacity, and achieve energy savings. Kaiser
believes that its plants are cost competitive on an international basis.

      Kaiser's obligations under the KACC Credit Agreement, are secured by,
among other things, mortgages on its major domestic plants (other than the
Gramercy alumina refinery and Nevada Micromill). For a description of the KACC
Credit Agreement, see Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities--Aluminum Operations--Financing Activities and Liquidity"
and Note 8 to the Consolidated Financial Statements.

FOREST PRODUCTS OPERATIONS

   GENERAL

      The Company engages in forest products operations through MGI and its
wholly owned subsidiaries, Pacific Lumber and Britt, and Pacific Lumber's wholly
owned subsidiaries, Scotia Pacific Company LLC ("SCOTIA LLC") and Salmon Creek
LLC (formerly known as Salmon Creek Corporation; "SALMON CREEK"). 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).

   PACIFIC LUMBER OPERATIONS

      Consummation of the Headwaters Agreement
      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. See "--Regulatory
and Environmental Factors" below. Pursuant to the terms of the Headwaters
Agreement, 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) California agreed to purchase Scotia LLC's
Owl Creek grove and a portion of Pacific Lumber's Grizzly Creek grove, and (iii)
the Palco Companies dismissed takings litigation pending against the United
States and California. Salmon Creek deposited $285.0 million of the proceeds
from the sale of the Headwaters Timberlands into escrow pursuant to an Escrow
Agreement (the "ESCROW AGREEMENT"). These proceeds were released from escrow in
November 1999, with $169.0 million being placed 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--Escrow Agreement and SAR Account" below.

      Timber and Timberlands
      Pacific Lumber owns and manages approximately 220,000 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
206,000 acres of Pacific Lumber's timberlands are owned by Scotia LLC (the
"SCOTIA LLC TIMBERLANDS"). In addition, 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
Scotia LLC's 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 Indenture governing
the Timber Notes is referred to herein as 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.

      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
1999, Pacific Lumber planted an estimated 971,000 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
("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. In
connection with the consummation 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 file with
the CDF, and obtain its 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 Pacific Lumber'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 over more than one year. 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 Pacific Lumber's best efforts, during
the second half of 1998, into 1999 and through early 2000, Pacific Lumber has
experienced an absence of a sufficient number of available THPs for harvest to
enable it to conduct its operations at historical levels. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Trends." Pacific Lumber believes that the Environmental Plans should
in the long-term expedite the preparation and facilitate approval of its THPs,
although Pacific Lumber is experiencing 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. Subject 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. These methods, which are designed to achieve optimal
regeneration, are referred to as "silvicultural systems" in the forestry
profession. Silvicultural systems range from very light thinnings aimed at
enhancing the growth rate of retained trees to clear cutting which results in
the harvest of all trees in an area and replacement with a new forest stand. In
between are a number of varying levels of partial harvests which can be
employed.

      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 155, 230 and 309 million board feet of lumber in 1999,
1998 and 1997, respectively. The Fortuna sawmill produces primarily common grade
lumber and during 1999 produced approximately 54 million board feet of lumber.
The Carlotta sawmill produces both common and upper grade redwood lumber and
during 1999 produced approximately 31 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 1999,
Sawmills "A" and "B" produced approximately 57 million and 11 million board feet
of lumber, respectively. During 1999, Pacific Lumber partially curtailed
operations at all of its sawmills due to difficulties in supplying an adequate
number of logs. The only sawmill which is curtailed at the present time is
Sawmill "B". See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Forest Products
Operations--Trends."

      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 12
months and then kiln-dried for seven to 24 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.

      In addition, 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 1999, the sale of surplus power accounted
for approximately 2% of Pacific Lumber's total revenues.

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

<TABLE>
<CAPTION>


                                               YEAR ENDED DECEMBER 31, 1999               YEAR ENDED DECEMBER 31, 1998
                                        ------------------------------------------  -----------------------------------------
                                          % OF TOTAL                                 % OF TOTAL
                                            LUMBER      % OF TOTAL                     LUMBER      % OF TOTAL
                                          PRODUCTION      LUMBER      % OF TOTAL     PRODUCTION      LUMBER      % OF TOTAL
                PRODUCT                     VOLUME       REVENUES      REVENUES        VOLUME       REVENUES      REVENUES
                                        -------------  -------------  ------------  ------------  ------------- -------------
<S>                                     <C>            <C>            <C>           <C>           <C>           <C>
Upper grade redwood lumber.............           12%            29%           23%           14%            35%           29%
Common grade redwood lumber............           35%            39%           32%           58%            49%           41%
                                        -------------  -------------  ------------  ------------  ------------- -------------
   Total redwood lumber................           47%            68%           55%           72%            84%           70%
                                        -------------  -------------  ------------  ------------  ------------- -------------
Upper grade Douglas-fir lumber.........            7%            10%            8%            3%             5%            4%
Common grade Douglas-fir lumber........           41%            20%           16%           22%            10%            8%
                                        -------------  -------------  ------------  ------------  ------------- -------------
   Total Douglas-fir lumber............           48%            30%           24%           25%            15%           12%
                                        -------------  -------------  ------------  ------------  ------------- -------------
Other grades of lumber.................            5%             2%            2%            3%             1%            1%
                                        -------------  -------------  ------------  ------------  ------------- -------------
      Total lumber.....................          100%           100%           81%          100%           100%           83%
                                        =============  =============  ============  ============  ============= =============
Logs...................................
                                                                                5%                                         6%
                                                                      ============                              =============

Hardwood chips.........................                                         4%                                         3%
Softwood chips.........................                                         4%                                         3%
                                                                      ------------                              -------------
   Total wood chips....................                                         8%                                         6%
                                                                      ============                              =============

</TABLE>

      Lumber. In 1999, Pacific Lumber sold approximately 178 million board feet
of lumber, which accounted for approximately 81% 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 Pacific Lumber'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--Results of
Operations--Forest Products Operations--Industry Overview." Common grade redwood
lumber, historically Pacific Lumber's largest volume product, has many of the
same aesthetic and structural qualities of redwood uppers, but has some knots,
sapwood and a coarser grain. Such lumber is commonly used for construction
purposes, including outdoor structures such as decks, hot tubs and fencing.

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

      Logs. Pacific Lumber sells certain logs that, due to their size or
quality, cannot be efficiently processed by its mills into lumber. Substantially
all of these logs are purchased by Britt. See "--Relationships with Scotia LLC
and Britt" below. Except for the agreement with Britt described below, Pacific
Lumber does not have any significant contractual relationships with third
parties relating to the purchase of logs. During 1999, Pacific Lumber purchased
approximately 57 million board feet of logs from third parties.

      Wood Chips. 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.

      Backlog and Seasonality
      Pacific Lumber's backlog of sales orders at December 31, 1999 and 1998 was
approximately $15.4 million and approximately $16.8 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 1998 to 1999 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--Results of
Operations--Forest Products Operations--Net Sales" and "--Trends." Pacific
Lumber has historically experienced lower first quarter sales due largely to the
general decline in construction-related activity during the winter months. As a
result, Pacific Lumber'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--Results of Operations--Forest
Products Operations--Background."

      Other
      The Company also derives revenues from a soil amendment operation and a
concrete block manufacturing operation.

      Marketing
      The housing, construction and remodeling markets are the primary markets
for Pacific Lumber's lumber products. Pacific Lumber's policy is to maintain a
wide distribution of its products both geographically and in terms of the number
of customers. Pacific Lumber 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 51%
of these sales in 1999. Common grades of Douglas-fir lumber are sold primarily
in California. In 1999, Pacific Lumber had three customers which accounted for
approximately 7%, 7% and 4%, respectively, of Pacific Lumber's total net lumber
sales. Exports of lumber accounted for approximately 5% of Pacific Lumber's
total revenues in 1999. Pacific Lumber markets its products through its own
sales staff which focuses primarily on domestic sales.

      Pacific Lumber 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, Pacific Lumber believes it has a strong degree of customer
loyalty.

      Competition
      Pacific Lumber's lumber is sold in highly competitive markets. Competition
is generally based upon a combination of price, service, product availability
and product quality. Pacific Lumber'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 Pacific Lumber'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 Pacific Lumber's lumber
products. Competition in the common grade redwood and Douglas-fir lumber market
is intense, with Pacific Lumber competing with numerous large and small lumber
producers.

      Employees
      As of March 1, 2000, Pacific Lumber had approximately 1,150 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 Pacific and Pacific Lumber are parties to several agreements
between themselves, including a master purchase agreement, a services agreement,
an additional services agreement, an environmental indemnification agreement and
a reciprocal rights agreement. The master purchase agreement (the "MASTER
PURCHASE AGREEMENT") governs the sale to Pacific Lumber of logs harvested from
the Scotia LLC Timberlands. As Pacific Lumber purchases logs from Scotia LLC
pursuant to the Master Purchase Agreement, Pacific Lumber is responsible, at its
own expense, for harvesting and removing the standing Scotia LLC Timber covered
by approved THPs, and the purchase price is therefore based upon "stumpage
prices." Title to, and the obligation to pay for, harvested logs does not pass
to Pacific Lumber until the logs are transported to Pacific Lumber's log decks
and measured. The Master Purchase Agreement generally contemplates that all
sales of logs by Scotia LLC to Pacific Lumber will be at a price which equals or
exceeds the applicable SBE Price. The Master Purchase Agreement defines the "SBE
PRICE" for any species and category of timber as the stumpage price for such
species and category, as set forth in the most recent "HARVEST VALUE SCHEDULE"
(or any successor publication) published by the California State Board of
Equalization (or any successor agency) applicable to the timber sold during the
period covered by such Harvest Value Schedule. Harvest Value Schedules are
published twice a year for purposes of computing a yield tax imposed on timber
harvested between January 1 through June 30 and July 1 through December 31. SBE
Prices are not necessarily representative of actual prices that would be
realized from unrelated parties at subsequent dates.

      After obtaining an approved THP, Scotia LLC offers for sale the logs to be
harvested pursuant to such THP. While Scotia LLC may sell logs to third parties,
it derives substantially all of its revenue from the sale of logs to Pacific
Lumber pursuant to the Master Purchase Agreement. Each sale of logs by Scotia
LLC to Pacific Lumber is made pursuant to a separate log purchase agreement that
relates to the Scotia LLC Timber covered by an approved THP and incorporates the
provisions of the Master Purchase Agreement. Each such log purchase agreement
provides for the sale to Pacific Lumber of the logs harvested from the Scotia
LLC Timber covered by such THP and generally constitutes an exclusive agreement
with respect to the timber covered thereby, subject to certain limited
exceptions. However, the timing and amount of log purchases by Pacific Lumber is
affected by factors outside the control of Scotia LLC, including regulatory and
environmental factors, the financial condition of Pacific Lumber, Pacific
Lumber's own supply of timber and its ability to harvest such timber, and the
supply and demand for lumber products (which, in turn, will be influenced by
demand in the housing, construction and remodeling industries).

      Scotia LLC continues to rely on Pacific Lumber to provide operational,
management and related services not performed by its own employees with respect
to the Scotia LLC Timberlands pursuant to a services agreement (the "SERVICES
AGREEMENT"). The services under the Services Agreement include the furnishing of
all equipment, personnel and expertise not within Scotia LLC's possession and
reasonably necessary for the operation and maintenance of the Scotia LLC
Timberlands and the Scotia LLC Timber as well as timber management techniques
designed to supplement the natural regeneration of, and increase the amount of,
Scotia LLC Timber. Pacific Lumber is required to provide all services under the
Services Agreement in a manner consistent in all material respects with prudent
business practices which, in the reasonable judgment of Pacific Lumber (a) are
consistent with then current applicable industry standards and (b) are in
compliance in all material respects with all applicable timber laws. As
compensation for the services provided by Pacific Lumber pursuant to the
Services Agreement, Scotia LLC pays Pacific Lumber a services fee ("SERVICES
FEE") which is adjusted each year based on a specified government index relating
to wood products and reimburses Pacific Lumber for the cost of constructing,
rehabilitating and maintaining roads, and performing reforestation services, on
the Scotia LLC Timberlands, as determined in accordance with generally accepted
accounting principles. Certain of such reimbursable expenses are expected to
vary in relation to the amount of timber to be harvested in any given period.

      Scotia LLC and Pacific Lumber are also parties to an additional services
agreement (the "ADDITIONAL SERVICES AGREEMENT") pursuant to which Scotia LLC
provides certain services to Pacific Lumber. Services include (a) assisting
Pacific Lumber to operate, maintain and harvest its own timber properties, (b)
updating and providing access to the GIS with respect to information concerning
Pacific Lumber's own timber properties and (c) assisting Pacific Lumber with its
statutory and regulatory compliance. Pacific Lumber pays Scotia LLC a fee for
such services equal to the actual cost of providing such services, as determined
in accordance with generally accepted accounting principles.

      Scotia LLC, Pacific Lumber and Salmon Creek are also parties to a
reciprocal rights agreement (the "RECIPROCAL RIGHTS AGREEMENT") whereby, among
other things, the parties granted to each other certain reciprocal rights of
egress and ingress through their respective properties in connection with the
operation and maintenance of such properties and their respective businesses. In
addition, Pacific Lumber and Scotia LLC are parties to an environmental
indemnification agreement (the "ENVIRONMENTAL INDEMNIFICATION AGREEMENT"),
pursuant to which Pacific Lumber agreed to indemnify Scotia LLC from and against
certain present and future liabilities arising with respect to hazardous
materials, hazardous materials contamination or disposal sites, or under
environmental laws with respect to the Scotia LLC Timberlands. In particular,
Pacific Lumber is liable with respect to any contamination which occurred on the
Scotia LLC Timberlands prior to the date of their transfer to Scotia LLC.

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

   BRITT LUMBER OPERATIONS

      Business
      Britt is located in Arcata, California, approximately 45 miles north of
Pacific Lumber's headquarters. Britt's primary business is the processing of
small diameter redwood logs into wood fencing products for sale to retail and
wholesale customers. Britt was incorporated in 1965 and operated as an
independent manufacturer of fence products until July 1990, when it was
purchased by a subsidiary of the Company. Britt purchases small diameter (6 to
11 inch) redwood logs of varying lengths. Britt's purchases are primarily from
Pacific Lumber, although it does purchase a variety of different diameter and
different length logs from various other timberland owners. Britt processes logs
at its mill into a variety of different fencing products, including "dog-eared"
1" x 6" fence stock in six foot lengths, 4" x 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.

      Marketing
      In 1999, Britt sold approximately 65 million board feet of lumber products
to approximately 59 different customers. Over one-half of its 1999 lumber sales
were in California. The remainder of its 1999 sales were in ten other western
states. In 1999, Britt had four customers which accounted for approximately 39%,
15%, 13% and 9%, respectively, of Britt's total sales. Britt markets its
products through its own salesmen to a variety of customers, including
distribution centers, industrial remanufacturers, wholesalers and retailers.

      Britt's backlog of sales orders at December 31, 1999 and 1998 was
approximately $3.5 million and $3.2 million, respectively, the substantial
portion of which was delivered in the first quarter of the next fiscal year.

      Facilities and Employees
      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. Production is conducted in a 46,000 square foot mill. An 18-acre
log sorting and storage yard is located one quarter of a mile away. The mill was
constructed in 1980, and capital expenditures to enhance its output and
efficiency are made periodically. 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. As of March 1, 2000, Britt employed approximately 130 people,
none of whom are covered by a collective bargaining agreement.

      Competition
      Britt competes primarily with the northern California mills of Georgia
Pacific, Eel River and Redwood Empire.

   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 (the "BOF") set forth detailed requirements for the
conduct of timber harvesting operations in California. These requirements
include the obligation of timber companies to prepare, and obtain regulatory
approval of, detailed THPs containing information with respect to areas proposed
to be harvested (see "--Pacific Lumber Operations--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 "--Pacific Lumber
Operations--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 Pacific
Lumber's timber operations, increased operational costs and engendered
litigation and other challenges to its operations.

      The Headwaters Agreement
      In order to, among other things, mitigate these difficulties, on March 1,
1999, Scotia LLC, Pacific Lumber and Salmon Creek consummated the Headwaters
Agreement with the United States and California. See "--Pacific Lumber
Operations--Consummation of the Headwaters Agreement" above. The Board of
Managers of Scotia LLC (the "BOARD OF MANAGERS"), pursuant to a recommendation
by a special committee of the Board of Managers which had been appointed to
review the Headwaters Agreement, voted to consummate the transactions
contemplated by the Headwaters Agreement. A condition of the approval of the
transactions by the Board of Managers was that the net proceeds from the sale of
the Headwaters Timberlands, subject to release upon the satisfaction of certain
conditions, be deposited in a restricted account or trust arrangement to support
the Timber Notes. See "--Escrow Agreement and SAR Account" below and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition and Investing and Financing Activities--Forest
Products Operations--Financing Activities and Liquidity" below.

      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 of these
agreements or the Environmental Plans by Scotia LLC.

      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. 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 a
watershed analysis process, which the HCP requires be completed within five
years of its effective date. Further, harvesting in 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.

      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. The state may pay the
consideration for the Owl Creek grove to Scotia LLC in cash or, at the state's
option, 25% in cash and the balance in three equal annual installments without
interest. California must purchase the Owl Creek grove by June 30, 2001.
Consummation of the purchase is also subject to typical real estate title and
other closing conditions. Scotia LLC is continuing to work with California to
consummate the sale of the Owl Creek grove. See Note 3 to the Consolidated
Financial Statements.

      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 $20.0
million. The Grizzly Creek Agreement provides that California must purchase a
portion of the Grizzly Creek grove by October 31, 2000.  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 ("NCRWQCB") are in the
process of establishing TMDL limits for 17 northern California rivers and
certain of their tributaries, including certain water courses that flow within
the Scotia LLC Timberlands. As part of this process, the EPA and the NCRWQCB are
expected to submit the TMDL requirements on the Scotia LLC Timberlands for
public review and comment. Following the comment period, the NCRWQCB would
finalize the TMDL requirements applicable to the Scotia LLC Timberlands, which
may require aquatic measures that are different from or in addition to the
prescriptions to be developed pursuant to the watershed analysis process
contained 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. On
February 26, 1999, the CDF issued Pacific Lumber a conditional Timber Operator's
License ("1999 TOL") for calendar year 1999 which contained, among other things,
operational restrictions similar to certain operational restrictions contained
in the HCP. During the first week of January 2000, Pacific Lumber was granted a
Timber Operator's License for the years 2000 and 2001 ("2000 TOL") containing
less restrictions than the 1999 TOL.

      Escrow Agreement and SAR Account
      As a result of the sale of the Headwaters Timberlands, Salmon Creek
received proceeds of $299.9 million in cash, prior to payment of closing costs
and expenses. Pursuant to the Escrow Agreement entered into among Salmon Creek,
Pacific Lumber and Citibank, N.A. (the "ESCROW AGENT"), Salmon Creek deposited
$285.0 million of such proceeds into a restricted account (the "ESCROWED
FUNDS"), with such Escrowed Funds being made available, while so held in escrow,
as necessary to support the Timber Notes, with the balance of $15.0 million
being used to defray expenses in connection with negotiation and consummation of
the Headwaters Agreement. In November 1999, upon satisfaction of certain
requirements set forth in the Escrow Agreement, the Board of Managers approved
the release of the Escrowed Funds, with $169.0 million of the Escrowed Funds
being placed in the SAR Account in order to support principal payments on the
Timber Notes. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities."

REAL ESTATE OPERATIONS

      General
      The Company, principally through its wholly owned subsidiaries, invests in
and develops residential and commercial real estate primarily in Puerto Rico,
Arizona and California. At December 31, 1999, the Company had approximately
$37.9 million of gross outstanding receivables derived from the financing of
real estate sales in its land developments and may continue to finance real
estate sales in the future.

      Principal Properties
      Palmas del Mar. Palmas del Mar, a master-planned community located on the
southeastern coast of Puerto Rico near Humacao ("PALMAS"), was acquired by a
subsidiary of the Company in 1984. As of December 31, 1999, Palmas included
approximately 27 developed lots, parcels held for sale consisting of 166 acres,
and approximately 1,161 acres of undeveloped land. Palmas del Mar Properties,
Inc. ("PDMPI"), the subsidiary through which the Company primarily conducts
operations at Palmas, is planning the development and sale of certain of this
remaining acreage. PDMPI or its affiliates also own a casino, a Gary
Player-designed 18-hole golf course, a Rees Jones-designed 18-hole golf course,
20 tennis courts, and other facilities within Palmas. Additionally, 104
condominiums are utilized by PDMPI in its timesharing program (comprising 5,300
time-share intervals, of which approximately 568 remain to be sold). A 23-room
luxury hotel known as the Palmas Inn (which was sold to a third party in 1999
and is currently closed for planned remodeling and renovation), a 102-room
hotel and adjacent executive convention center, known as the Doral Resort at
Palmas del Mar, a marina, and certain restaurant facilities within Palmas, are
owned and operated by third parties.  Approximately 1,600 private residences are
also presently located within Palmas.

      In 1999, PDMPI sold approximately 57 acres, 11 residential lots, 206
time-share intervals, 64 time-share conversions, and 14 condominiums for an
aggregate of $20.6 million, $10.1 million of which has been deferred to future
periods. PDMPI is entitled to royalty payments from the purchaser of the Doral
Resort at Palmas del Mar, for a period of 49 years (beginning in 1996), based on
revenues from the operation of the resort and a percentage of revenues from
certain other assets. The Doral Resort at Palmas del Mar and certain other
current or former assets of Palmas are being managed for the purchaser and PDMPI
by an affiliate of MeriStar Hotels & Resorts, Inc.

      Palmas Country Club, Inc., a subsidiary of PDMPI, owns the Palmas Country
Club which consists of the two golf courses at Palmas, a clubhouse, tennis
courts and other facilities.

      Fountain Hills. In 1968, a subsidiary of the Company purchased and began
developing approximately 12,100 acres of real property at Fountain Hills,
Arizona, which is located near Phoenix and adjacent to Scottsdale, Arizona. As
of December 31, 1999, the Company's subsidiaries had approximately 1,988 acres
of undeveloped residential land, 33 developed commercial and industrial lots, 33
acres of undeveloped commercial and industrial land and 20 developed residential
lots available for sale. The year-round population of Fountain Hills is
approximately 18,000. The Company is planning the development of certain
remaining acreage at Fountain Hills. Future sales are expected to consist mainly
of undeveloped acreage, semi-developed parcels and fully-developed lots. During
1999, 29 residential lots, 7 commercial parcels, and 320 acres were sold for an
aggregate of $17.0 million, $0.8 million of which has been deferred to future
periods. These inventory and sales figures do not include those in connection
with the SunRidge Canyon and FireRock developments described in the following
paragraphs.

      In 1994, a subsidiary of the Company entered into a joint venture to
develop an area in Fountain Hills known as SunRidge Canyon. The development is a
residential, golf-oriented, upscale master-planned community. The project
includes 950 acres, of which 185 acres have been developed into a
championship-quality, public golf course which opened for play in November 1995.
The remaining 765 acres are being developed into approximately 825 single family
lots, approximately 760 of which had been sold as of December 31, 1999. Sales of
the individual lots began in November 1995. The project consists of both custom
lots, marketed on an individual basis, and production lots, marketed to home
builders. There are currently three homebuilders actively involved in the
construction and sale of new production homes within SunRidge Canyon. During
1999, 83 custom lots and 103 production lots were sold for an aggregate of $17.5
million. The development is owned by SunRidge Canyon L.L.C., an Arizona limited
liability company organized by a subsidiary of the Company and SunCor
Development Company. A subsidiary of the Company holds a 50% equity interest in
the joint venture.

      In 1998, a subsidiary of the Company entered into a joint venture to
develop an area in Fountain Hills known as FireRock Country Club. The
development is a residential, golf-oriented, upscale master-planned community.
The project includes 808 acres, of which 283 acres are being developed into a
private country club offering an 18-hole championship golf course, a 29,000
square foot clubhouse facility, and supporting swim, tennis and fitness
facilities. The remaining 525 acres are being developed into approximately 375
single family lots and 254 multi-family units. The golf course opened in
February 2000, and construction of the country club and the first phase of the
residential component is currently underway. In 1999, 62 lots were sold for
$17.0 million, $3.6 million of which has been deferred to future periods. The
development is owned by FireRock, L.L.C., a limited liability company organized
by a subsidiary of the Company (which holds a 50% equity interest in the joint
venture) and an unaffiliated third party.

      Rancho Mirage. In 1991, a subsidiary of the Company acquired Mirada, a
220-acre luxury resort-residential project located in Rancho Mirage, California.
Mirada is a master planned community built into the Santa Rosa Mountains, 650
feet above the Coachella Valley floor. Two of the six parcels within the project
have been developed, one of which is a custom lot subdivision of 46 estate lots.
The Ritz-Carlton Rancho Mirage Hotel, which is owned and operated by a third
party, was developed on the second parcel. The four remaining parcels encompass
approximately 130 acres, which, under a development agreement with the City of
Rancho Mirage which extends until 2011, may be developed with a variety of
residential and commercial uses. During 1999, four lots and one house were sold
for an aggregate of $4.5 million, excluding $0.5 million of deferred income
recognized in 1999 which related to prior period sales. The Company is currently
planning to develop and/or market the remaining parcels. The Company has made
significant progress in obtaining final regulatory and environmental approvals
for development of all three of its remaining parcels within Mirada. There can
be no assurance that the Company can satisfy the requirements of such regulatory
and environmental approvals or any additional conditions of such final
approvals.

      Other Properties. The Company through its subsidiaries, owns a number of
other properties in Arizona, New Mexico and Texas. Efforts are underway to sell
most of these properties.

      Marketing
      The Company is engaged in marketing and sales programs of varying
magnitudes at its real estate developments. In recent years, the Company has
constructed residential units and sold time-share intervals at certain of its
real estate developments. The Company intends to continue selling land to
builders and developers and lots to individuals and expects to continue to
construct and sell completed residential units at certain of its developments.
All sales are made directly to purchasers through the Company's marketing
personnel, independent contractors or through independent real estate brokers
who are compensated through the payment of customary real estate brokerage
commissions. The Company may also continue to enter into joint ventures with
third parties similar to those entered into in connection with its SunRidge
Canyon and FireRock developments.

      Competition and Regulation and Other Industry Factors
      There is intense competition among companies in the real estate investment
and development business. Sales and payments on real estate sales obligations
depend, in part, on available financing and disposable income and, therefore,
are affected by changes in general economic conditions and other factors. The
real estate development business and commercial real estate business are subject
to other risks such as shifts in population, fluctuations in the real estate
market, and unpredictable changes in the desirability of residential, commercial
and industrial areas. The resort and time-sharing business of Palmas competes
with similar businesses in the Caribbean, Florida and other locations. The
golfing operations in connection with the SunRidge Canyon and FireRock
developments compete with similar businesses in the areas in and surrounding
Phoeniz, Arizona.

      The Company's real estate operations are subject to comprehensive federal,
state and local regulation. Applicable statutes and regulations may require
disclosure of certain information concerning real estate developments and credit
policies of the Company and its subsidiaries. Periodic approval is required from
various agencies in connection with the design of developments, the nature and
extent of improvements, construction activity, land use, zoning, and numerous
other matters. Failure to obtain such approval, or periodic renewal thereof,
could adversely affect the real estate development and marketing operations of
the Company and its subsidiaries. Various jurisdictions also require inspection
of properties by appropriate authorities, approval of sales literature,
disclosure to purchasers of specific information, bonding for property
improvements, approval of real estate contract forms and delivery to purchasers
of a report describing the property.

      Employees
      As of March 1, 2000, the Company's real estate operations had
approximately 190 employees.

   RACING OPERATIONS

      General
      MAXXAM, through various wholly owned subsidiaries, holds a 98.9% equity
interest in, and 99.0% (or $56.3 million face amount) of the 11% Senior Secured
Extendible Notes of, Sam Houston Race Park, Ltd. ("SHRP, LTD."). SHRP, Ltd. is a
Texas limited partnership which owns and operates Sam Houston Race Park (the
"SAM HOUSTON RACE PARK"), a Texas Class 1 horse racing facility located within
the greater Houston metropolitan area. Another wholly owned subsidiary of MAXXAM
is the managing general partner of SHRP, Ltd. On January 24, 2000, a wholly
owned subsidiary of SHRP, Ltd. acquired Valley Race Park ("VALLEY RACE PARK"), a
greyhound racing facility located in Harlingen, Texas which has been closed
since 1995.

      Racing Operations and Facilities
      The Sam Houston Race Park offers pari-mutuel wagering on live thoroughbred
or quarter horse racing or simulcast racing seven days a week throughout the
year. Simulcasting is the process by which live races held at one facility are
broadcast simultaneously to other locations at which additional wagers are
placed on the race being broadcast. The Sam Houston Race Park's principal
sources of revenue are its statutory and contractual share of total wagering on
live and simulcast racing. The Sam Houston Race Park also derives revenues from
admission fees, food services, club memberships, luxury suites, advertising
sales and other sources.

      SHRP, Ltd. anticipates that Valley Race Park will be open for simulcast
wagering by mid-March of 2000, and that live greyhound racing will begin by the
end of December 2000.

      Regulation of Racing Operations
      The ownership and operation of horse and greyhound racetracks in Texas are
subject to significant regulation by the Texas Racing Commission (the "RACING
COMMISSION") under the Texas Racing Act and related regulations (collectively,
the "RACING ACT"). The Racing Act provides, among other things, for the
allocation of wagering proceeds among betting participants, purses, racetracks,
the State of Texas and for other purposes, and empowers the Racing Commission to
license and regulate substantially all aspects of horse racing in the state. The
Racing Commission must approve the number of live race days that may be offered
each year, as well as all simulcast agreements. Class 1 horse racetracks in
Texas are entitled to conduct at least seventeen weeks of live racing for each
breed of horses (thoroughbreds and quarter horses).

      Marketing and Competition
      The Sam Houston Race Park believes that the majority of its patrons reside
within a 20-mile radius, which includes most of the greater Houston metropolitan
area, and that a secondary market of occasional patrons can be developed outside
the 20-mile radius but within a 50-mile radius of the Sam Houston Race Park. The
Sam Houston Race Park uses a number of marketing strategies in an attempt to
reach these people and make them more frequent visitors to the Sam Houston Race
Park. The Sam Houston Race Park competes with other forms of entertainment,
including casinos located approximately 125 to 150 miles from Houston, a
greyhound racetrack located 60 miles from the Sam Houston Race Park and a wide
range of sporting events and other entertainment activities in the Houston area.
The Sam Houston Race Park could in the future also compete with other forms of
gambling in Texas, including casino gambling on Indian reservations or
otherwise. While the Sam Houston Race Park believes that the location of the Sam
Houston Race Park is a competitive advantage over the other more distant gaming
ventures mentioned above, the most significant challenge for the Sam Houston
Race Park is to develop and educate new racing fans in a market where
pari-mutuel wagering has been absent since the 1930s. Other competitive factors
faced by the Sam Houston Race Park include the allocation of sufficient live
race days by the Racing Commission and attraction of sufficient race horses to
run at the Sam Houston Race Park. The Sam Houston Race Park had 134 days of live
racing during 1999. The Sam Houston Race Park currently has 136 days of live
racing scheduled for 2000.

      Employees
      As of March 1, 2000, the Company's racing operations had approximately 690
employees, approximately 500 of whom are seasonal employees during live racing.

EMPLOYEES

      At March 1, 2000, MAXXAM and its subsidiaries employed approximately 2,200
persons, excluding those employees involved in Aluminum Operations.


ITEM 2.         PROPERTIES

      For information concerning the principal properties of the Company, see
Item 1. "Business."


ITEM 3.         LEGAL PROCEEDINGS

GENERAL

      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" as well as the following paragraph for
cautionary information with respect to such forward-looking statements.

      The following describes certain legal proceedings in which the Company or
its subsidiaries are involved. The Company and certain of its subsidiaries are
also involved in various claims, lawsuits and other proceedings not discussed
herein which relate to a wide variety of matters. Uncertainties are inherent in
the final outcome of those and the below-described matters, and it is presently
impossible to determine the actual costs that ultimately may be incurred.
Nevertheless, the Company believes (unless otherwise indicated below) 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. However, there can be no assurance that
there will not be adverse determinations or settlements in one or more of the
matters identified below or other proceedings that could have a material adverse
effect on the Company's financial condition, results of operations and
liquidity.

      Certain present and former directors and officers of the Company are
defendants in certain of the actions described below. The Company's bylaws
provide for indemnification of its officers and directors to the fullest extent
permitted by Delaware law. The Company is obligated to advance defense costs to
its officers and directors, subject to the individual's obligation to repay such
amount if it is ultimately determined that the individual was not entitled to
indemnification. In addition, the Company's indemnity obligation can under
certain circumstances include amounts other than defense costs, including
judgments and settlements.

MAXXAM INC. LITIGATION

      This section describes certain legal proceedings in which MAXXAM Inc. (and
in some instances, certain of its subsidiaries) is involved. The term "Company,"
as used in this section, refers to MAXXAM Inc., except where reference is made
to the Company's consolidated financial position, results of operations or
liquidity.

   USAT MATTERS

      In October 1994, the Company learned that the United States Department of
Treasury's Office of Thrift Supervision ("OTS") had commenced an investigation
into United Financial Group, Inc. ("UFG") and the insolvency of its wholly owned
subsidiary, United Savings Association of Texas ("USAT"). In December 1988, the
Federal Home Loan Bank Board ("FHLBB") placed USAT into receivership and
appointed the Federal Savings & Loan Insurance Corp. as receiver. At the time of
the receivership, the Company owned approximately 13% of the voting stock of
UFG.

      On December 26, 1995, the OTS initiated a formal administrative proceeding
(the "OTS ACTION") against the Company and others by filing a Notice of Charges
(No. AP 95-40; the "NOTICE"). The Notice alleged, among other things, misconduct
by the Company, Federated Development Company ("FEDERATED"), Mr. Charles Hurwitz
and others (the "RESPONDENTS") with respect to the failure of USAT. Mr. Hurwitz
is the Chairman of the Board and Chief Executive Officer of the Company. Mr.
Hurwitz is also the Chairman of the Board and Chief Executive Officer of
Federated, a Texas corporation wholly owned by Mr. Hurwitz, members of his
immediate family and trusts for the benefit thereof. Mr. Hurwitz and a wholly
owned subsidiary of Federated collectively own approximately 68% of the
aggregate voting power of the Company. The Notice claims, among other things,
that the Company was a savings and loan holding company, that with others it
controlled USAT, and that, as a result of such status, it was obligated to
maintain the net worth of USAT. The Notice makes numerous other allegations
against the Company and the other Respondents, including that through USAT it
was involved in prohibited transactions with Drexel, Burnham, Lambert Inc.
("DREXEL"). The OTS's pre-hearing statement alleged unspecified damages in
excess of $560 million from the Company and Federated for restitution and
reimbursement against loss for their pro rata portion (allegedly 35%) of the
amount of USAT's capital deficiency and all imbedded losses as of the date of
USAT's receivership (allegedly $1.6 billion). The OTS also seeks civil money
penalties and a removal from, and prohibition against the Company and the other
remaining Respondents engaging in, the banking industry. The hearing on the
merits of this matter commenced on September 22, 1997 and concluded March 1,
1999. On February 10, 1999, the OTS and the FDIC settled with all of the
Respondents except Mr. Hurwitz, the Company and Federated for $1.0 million and
limited cease and desist orders.

      Post hearing briefing concluded on January 31, 2000. In its post-hearing
brief, the OTS claims, among other things, that the remaining Respondents, Mr.
Hurwitz, the Company and Federated, are jointly and severally liable to pay
either $821.3 million in restitution or reimbursement of $362.6 million for
alleged unjust enrichment. The OTS also claims that each remaining Respondent
should be required to pay $4.6 million in civil money penalties, and that Mr.
Hurwitz should be prohibited from engaging in the banking industry. The
Respondents' brief claims that none of them has any liability in this matter. A
recommended decision by the administrative law judge is not expected any sooner
than early to mid-2000. A final agency decision would be issued by the OTS
Director thereafter. Such decision would then be subject to appeal by any of the
parties to a federal appellate court.

      On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC")
filed a civil action entitled Federal Deposit Insurance Corporation, as manager
of the FSLIC Resolution Fund v. Charles E. Hurwitz (the "FDIC ACTION") in the
U.S. District Court for the Southern District of Texas (No. H-95-3956). The
original complaint was against Mr. Hurwitz and alleged damages in excess of
$250.0 million based on the allegation that Mr. Hurwitz was a controlling
shareholder, de facto senior officer and director of USAT, and was involved in
certain decisions which contributed to the insolvency of USAT. The original
complaint further alleged, among other things, that Mr. Hurwitz was obligated to
ensure that UFG, Federated and MAXXAM maintained the net worth of USAT. In
January 1997, the FDIC filed an amended complaint which seeks, conditioned on
the OTS prevailing in the OTS action, unspecified damages from Mr. Hurwitz
relating to amounts the OTS does not collect from the Company and Federated with
respect to their alleged obligations to maintain USAT's net worth. On February
6, 1998, Mr. Hurwitz filed a motion seeking dismissal of this action. On
November 2, 1998, Mr. Hurwitz filed a supplement to his motion to dismiss and on
December 9, 1998, Mr. Hurwitz filed a supplemental motion for sanctions against
the FDIC. On March 12, 1999, the Court held a hearing on pending motions,
including the motion to dismiss, and on March 15, 1999, the Court confirmed that
it had taken the motion to dismiss under advisement.

      With respect to the OTS action and the FDIC action, it is impossible for
the Company to assess the ultimate outcome of these matters or their potential
impact on the Company; however, any adverse outcome of these matters could have
a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.

KAISER LITIGATION

   ASBESTOS-RELATED LITIGATION

      Kaiser is a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with Kaiser or exposure to products
containing asbestos produced or sold by Kaiser. For additional information, see
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Condition and Investing and Financing
Activities--Aluminum Operations-- Commitments and Contingencies" and Note 13 to
the Consolidated Financial Statements under the headings "Environmental
Contingencies" and "Asbestos Contingencies."

      GRAMERCY LITIGATION

      On July 5, 1999, Kaiser's Gramercy, Louisiana, alumina refinery was
extensively damaged by an explosion in the digestion area of the plant. The
cause of the accident is under investigation by Kaiser and various governmental
agencies. In January 2000, MSHA issued 21 citations in connection with its
investigation of the Gramercy incident. The citations allege, among other
things, that certain aspects of the plant's operations were unsafe and that such
mode of operation contributed to the explosion. To date, no monetary penalty has
been proposed by MSHA. Although Kaiser expects that a fine will be levied, it
cannot predict the amount of any such fine. It is possible that other civil or
criminal fines or penalties could be levied against Kaiser. Kaiser has
previously announced that it disagrees with the substance of the citations and
has challenged them. Twenty-four employees were injured in the incident, several
of them severely. Kaiser may be liable for claims relating to the injured
employees. The incident has also resulted in 36 class action lawsuits, being
filed against KACC on behalf of more than 13,000 claimants. The lawsuits allege,
among other things, property damage and personal injury. Such lawsuits were
initially filed, on dates ranging from July 5, 1999, through December 26, 1999,
in the Fortieth Judicial District Court for the Parish of St. John the Baptist,
State of Louisiana, or in the Twenty-Third Judicial District Court for the
Parish of St. James, State of Louisiana, and such lawsuits have been removed to
the United States District Court, Eastern District of Louisiana and are
consolidated under the caption Carl Bell, et al. v. Kaiser Aluminum & Chemical
Corporation, No. 99-2078, et seq. Plaintiffs have filed motions to remand the
actions to state court, and the federal court has taken the matter under
advisement. The cases are currently stayed pending mediation between the
parties. The aggregate amount of damages sought in the lawsuits cannot be
determined at this time. For further information regarding the Gramercy
incident, see Item 1. "Business--Aluminum Operations--Incident at Gramercy
Facility," Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations--Aluminum Operations--Recent
Events and Developments--Incident at Gramercy Facility" and Note 2 to the
Consolidated Financial Statements.

   LABOR MATTERS

      In connection with the USWA strike and subsequent lock-out by Kaiser,
certain allegations of unfair labor practices ("ULPS") were filed by the USWA
with the National Labor Relations Board ("NLRB"). In July 1999, the Oakland,
California regional office of the NLRB dismissed all material charges filed
against Kaiser. In September 1999, the union filed an appeal of this ruling with
the NLRB general counsel's office in Washington, D.C. If the original decision
were to be reversed, the matter would be referred to an administrative law judge
for a hearing whose outcome would be subject to an additional appeal either by
the USWA or Kaiser. This process could take months or years. If these
proceedings eventually resulted in a definitive ruling against Kaiser, it could
be obligated to provide back pay to USWA members at the five plants and such
amount could be significant. However, while uncertainties are inherent in the
final outcome of such matters, the Company believes that the resolution of the
alleged ULPs should not result in a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.

   OTHER MATTERS

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

PACIFIC LUMBER LITIGATION

   TIMBER HARVESTING LITIGATION

      On May 27, 1998, an action entitled Mateel Environmental Justice
Foundation v. Pacific Lumber, Scotia Pacific Holding Company, Salmon Creek
Corporation and MAXXAM Group Inc. (No. DR 980301) was brought in the Superior
Court of Humboldt County. This action alleged, among other things, violations of
California's business and professions code based on citations and violations
(primarily water quality related) issued against the defendants since 1994 in
connection with a substantial number of THPs. On December 1, 1999, the Court
dismissed this action with prejudice.

      On December 2, 1997, a lawsuit 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") was filed in the Superior
Court of Humboldt County. A similar action entitled Jennie Rollins, et al. v.
Charles Hurwitz, John Campbell, Pacific Lumber, MAXXAM Group Holdings Inc.,
Scotia Pacific Holding Company, MAXXAM Group Inc., MAXXAM Inc., Barnum Timber
Company, et al. (No. 9700400) (the "ROLLINS LAWSUIT") was also filed on December
2, 1997 in the Superior Court of Humboldt County. These actions allege, among
other things, that defendants' logging practices have damaged the plaintiffs'
properties and property values by contributing to landslides in the Stafford
area (Rollins lawsuit) and the destruction of certain watersheds in the Elk
River watershed (Wrigley lawsuit). 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
("RICO"). In connection with the Rollins lawsuit, on September 27, 1999 the
Court accepted the plaintiffs' amended complaint which, among other things,
eliminated the RICO claims and reduced the number of THPs involved in the
lawsuit from 343 to seven. In connection with the Wrigley lawsuit, the
plaintiffs filed an application seeking to eliminate allegations concerning the
seven THPs involved in the Rollins lawsuit, reducing to 336 the number of THPs
involved in the Wrigley lawsuit. The Rollins lawsuit has been set for trial on
July 10, 2000. The Company believes that it has strong factual and legal
defenses with respect to these matters; however, there can be no assurance that
they 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 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 state and federal agencies to defend
the USWA lawsuit and the EPIC-SYP/Permits lawsuit.

   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. 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 the Company's acquisition 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.

OTHER MATTERS

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


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

      Not applicable.


                                     PART II


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

      The Company's common stock, $.50 par value ("COMMON STOCK"), is traded on
the American, Pacific and Philadelphia Stock Exchanges. The stock symbol is MXM.
The following table sets forth, for the calendar periods indicated, the high and
low sales prices per share of the Company's Common Stock as reported on the
American Stock Exchange Consolidated Composite Tape.

<TABLE>
<CAPTION>

                                                                              1999                    1998
                                                                     ----------------------  ----------------------
                                                                        HIGH         LOW        HIGH         LOW
                                                                     ----------  ----------  ----------  ----------
<S>                                                                  <C>         <C>         <C>         <C>
   First quarter...................................................     64.75       43.00       65.25       41.50
   Second quarter..................................................     64.50       50.25       63.63       54.13
   Third quarter...................................................     64.25       50.13       63.69       53.63
   Fourth quarter..................................................     51.44       41.38       57.75       45.81

</TABLE>

      The following table sets forth the number of record holders of each class
of publicly owned securities of the Company at March 1, 2000:

<TABLE>
<CAPTION>

                                                                                                     NUMBER OF
                                                                                                      RECORD
                                          TITLE OF CLASS                                              HOLDERS
--------------------------------------------------------------------------------------------------- -----------
<S>                                                                                                 <C>
Common Stock.......................................................................................       3,268
Class A $.05 Non-cumulative Participating Convertible Preferred Stock..............................          26

</TABLE>

      The Company has not declared any cash dividends on its Common Stock and
has no present intention to do so.


ITEM 6.         SELECTED FINANCIAL DATA

      The following summary of consolidated financial information for each of
the five years ended December 31, 1999 is not reported upon herein by
independent public accountants and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto which are contained in
Item 8 herein.

<TABLE>
<CAPTION>

                                                                         YEARS ENDED DECEMBER 31,
                                                       ------------------------------------------------------------
                                                          1999        1998        1997         1996        1995
                                                       ----------  ----------- -----------  ----------  -----------
                                                              (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<S>                                                    <C>         <C>         <C>          <C>         <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
   Net sales.........................................  $ 2,311.4   $  2,572.7  $  2,729.1   $ 2,543.3   $  2,565.2
   Operating income (loss)...........................      (51.5)       125.6       236.4       131.3        257.6
   Income (loss) before extraordinary item (1).......       73.6        (14.7)       65.2        22.9         57.5
   Extraordinary item, net (2).......................          -        (42.5)          -           -            -
   Net income (loss).................................       73.6        (57.2)       65.2        22.9         57.5

CONSOLIDATED BALANCE SHEET AT END OF PERIOD:
   Total assets......................................    4,393.1      4,075.2     4,114.2     4,115.7      3,832.3
   Long-term debt, less current maturities...........    1,956.8      1,971.7     1,888.0     1,881.9      1,585.1
   Stockholders' equity (deficit) (3)................       27.8        (56.8)       (2.9)      (50.8)       (83.8)

PER SHARE INFORMATION:
   Basic:
      Income (loss) before extraordinary item........  $   10.49   $    (2.10) $     7.81   $    2.63   $     6.60
      Extraordinary item.............................          -        (6.07)          -           -            -
                                                       ----------  ----------- -----------  ----------  -----------
      Net income (loss)..............................  $   10.49   $    (8.17) $     7.81   $    2.63   $     6.60
                                                       ==========  =========== ===========  ==========  ===========
   Diluted:
      Income (loss) before extraordinary item........  $    9.49   $    (2.10) $     7.14   $    2.42   $     6.08
      Extraordinary item.............................          -        (6.07)          -           -            -
                                                       ----------  ----------- -----------  ----------  -----------
      Net income (loss)..............................  $    9.49   $    (8.17) $     7.14   $    2.42   $     6.08
                                                       ==========  =========== ===========  ==========  ===========

<FN>
-----------------------------------
(1)  1999 results include a pre-tax gain of $239.8 million ($142.1 million net
     of deferred taxes or $18.17 per share) on the sale of the Headwaters
     Timberlands, a pre-tax gain on the involuntary conversion at the Gramercy
     facility of $85.0 million, a pre-tax charge of $53.2 million for
     asbestos-related claims and a pre-tax gain of $50.5 million on the sale of
     AKW.
(2)  The extraordinary loss for 1998 relates to refinancing of long-term debt,
     net of an income tax benefit of $22.9 million.
(3)  MAXXAM Inc. has not declared or paid any cash dividends during the five
     year period ended December 31, 1999.
</FN>
</TABLE>

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

      The following should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto which are contained in
Item 8.

RESULTS OF OPERATIONS

   ALUMINUM OPERATIONS

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

      Industry Overview
      Kaiser's operating results are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products, and also depend to a
significant degree on the volume and mix of all products sold and on Kaiser's
hedging strategies. Primary aluminum prices have historically been subject to
significant cyclical price fluctuations (see Notes 1 and 14 to the Consolidated
Financial Statements for a discussion of Kaiser's hedging activities).

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

      During 1999, the Average Midwest United States transaction price ("AMT
PRICE") per pound of primary aluminum declined to a low of approximately $.57
per pound in February 1999 and then began a steady increase, ending 1999 at $.79
per pound. During 1998, the AMT Price experienced a steady decline during the
year, beginning the year in the $.70 to $.75 per pound range and ending the year
in the low $.60 per pound range. During 1997, the AMT Price per pound of primary
aluminum remained in the $.75 to $.80 per pound price range for the first eleven
months before declining to the low $.70 per pound range in December. Subsequent
to December 31, 1999, the AMT Price continued to rise. At January 28, 2000, the
AMT Price was approximately $.84 per pound.

      Summary
      The following table presents selected operational and financial
information with respect to the Company's aluminum operations for the years
ended December 31, 1999, 1998, and 1997.

<TABLE>
<CAPTION>

                                                                                 YEARS ENDED DECEMBER 31,
                                                                              ----------------------------------
                                                                                1999          1998       1997
                                                                              ---------     --------   ---------
                                                                                 (IN MILLIONS OF DOLLARS,
                                                                               EXCEPT SHIPMENTS AND PRICES)
<S>                                                                           <C>           <C>        <C>
Shipments:(1)
   Alumina:
      Third party...........................................................   2,093.9(2)   2,250.0     1,929.8
      Intersegment..........................................................     757.3(2)     750.7       968.0
                                                                              ---------    --------    ---------
        Total alumina.......................................................   2,851.2      3,000.7     2,897.8
                                                                              ---------    --------    ---------
   Primary aluminum:
      Third party...........................................................     295.6        263.2       327.9
      Intersegment..........................................................     171.2        162.8       164.2
                                                                              ---------    --------    ---------
        Total primary aluminum..............................................     466.8        426.0       492.1
                                                                              ---------    --------    ---------
   Flat-rolled products.....................................................     217.9        235.6       247.9
                                                                              ---------    --------    ---------
   Engineered products......................................................     171.1        169.4       152.1
                                                                              ---------    --------    ---------
Average realized third party sales price:(3)
   Alumina (per ton)........................................................  $    177      $   197    $    198
   Primary aluminum (per pound).............................................      0.67         0.71        0.75
Net sales:
   Bauxite and alumina:
      Third party (includes net sales of bauxite)...........................  $  397.9      $ 472.7    $  411.7
      Intersegment..........................................................     129.0        135.8       201.7
                                                                              ---------    --------    ---------
        Total bauxite and alumina...........................................     526.9        608.5       613.4
                                                                              ---------    --------    ---------
   Primary aluminum:
      Third party...........................................................     439.1        409.8       543.4
      Intersegment..........................................................     240.6        233.5       273.8
                                                                              ---------    --------    ---------
        Total primary aluminum..............................................     679.7        643.3       817.2
                                                                              ---------    --------    ---------
   Flat-rolled products.....................................................     576.2        714.6       743.3
   Engineered products......................................................     542.6        581.3       581.0
   Minority interests.......................................................      88.5         78.0        93.8
   Eliminations.............................................................    (369.6)      (369.3)     (475.5)
                                                                              ---------    --------    ---------
        Total net sales.....................................................  $2,044.3     $2,256.4    $2,373.2
                                                                              =========    ========    =========
Operating income (loss).....................................................  $  (23.0)(4) $   96.5(5) $  174.0(6)
                                                                              =========    ========    =========
Income (loss) before income taxes and minority interests....................  $  (84.0)    $  (10.0)   $   66.3
                                                                              =========    ========    =========
Capital expenditures and investments in unconsolidated affiliates(7)........  $   68.4     $   77.6    $  128.5
                                                                              =========    ========    =========
<FN>
-----------------------------------------
(1)  Shipments are expressed in thousands of metric tons.  A metric ton is
     equivalent to 2,204.6 pounds.
(2)  Shipments and net sales for the year ended December 31, 1999 include
     approximately 264,000 tons of alumina purchased from third parties and
     resold to certain unaffiliated customers and 131,000 tons of alumina
     purchased from third parties and transferred to Kaiser's primary aluminum
     business unit.
(3)  Average realized prices for Kaiser's flat-rolled products and engineered
     products segments are not presented as such prices are subject to
     fluctuations due to changes in product mix.  Average realized third party
     sales prices for alumina and primary aluminum include the impact of
     hedging activities.
(4)  The operating loss for the year ended December 31, 1999 includes:
     charges of $5.0 million related to insurance deductibles and self-insurance
     provisions, estimated business interruption insurance recoveries totaling
     $41.0 million, potline restart costs of $12.8 million and a non-cash charge
     of $19.1 million related to the impairment of Kaiser's Micromill assets.
     Additionally, depreciation was suspended for the Gramercy, Louisiana,
     alumina refinery for the last six months of 1999, as a result of the
     July 5, 1999, incident. Depreciation expense for the Gramercy refinery for
     the six months ended June 30, 1999, was approximately $6.0 million.
(5)  Operating income for the year ended December 31, 1998 includes unfavorable
     strike-related impacts of approximately $60.0 million and a non-cash charge
     of $45.0 million related to the impairment of the Micromill assets.
(6)  Operating income for the year ended December 31, 1997 includes pre-tax
     charges of $19.7 million related to restructuring of operations.
(7)  Includes $4.8 million, $7.2 million and $6.6 million funded by Kaiser's
     minority partners in certain foreign joint ventures in 1999, 1998 and
     1997, respectively.

</FN>
</TABLE>

      Results for 1999 include a non-cash pre-tax charge of $19.1 million to
reduce the carrying value of Kaiser's Micromill assets, pre-tax charges of $32.8
million to reflect mark-to-market adjustments on certain primary aluminum
hedging transactions and non-cash pre-tax charges of $53.2 million for
asbestos-related claims. The 1999 charges were offset by a pre-tax gain of $85.0
million on the involuntary conversion at the Gramercy facility and a pre-tax
gain of $50.5 million on the sale of Kaiser's 50% interest in AKW. Results for
1998 include the effect of two nonrecurring items including approximately $60.0
million of pre-tax incremental expense and the earnings impact of lost volume
associated with a strike by members of the USWA at five U.S. locations that
began on September 30, 1998 and a $45.0 million pre-tax non-cash charge to
reduce the carrying value of Kaiser's Micromill assets. In addition to the
reductions in carrying value in 1999 and 1998, Kaiser had operating losses of
$11.6 million, $18.4 million and $24.5 million associated with its Micromill
assets in 1999, 1998 and 1997.

      Results for 1997 include the effect of a nonrecurring pre-tax charge of
$19.7 million related to restructuring of operations.

      Recent Events and Developments
      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.

      Incident at Gramercy Facility
     On July 5, 1999, Kaiser's Gramercy, Louisiana, alumina refinery was
extensively damaged by an explosion in the digestion area of the plant.
Twenty-four employees were injured in the incident, several of them severely. As
a result of the incident, alumina production at the facility was completely
curtailed. Production at the plant is expected to remain completely curtailed
until the third quarter of 2000 when Kaiser expects to begin partial production.
Based on current estimates, full production is expected to be achieved during
the first quarter of 2001 or shortly thereafter. Kaiser has received the
regulatory permit required to operate the plant once the facility is ready to
resume production. The cause of the incident is under investigation by Kaiser
and governmental agencies. In January 2000, MSHA issued 21 citations in
connection with its investigation of the incident. The citations allege, among
other things, that certain aspects of the plant's operations were unsafe and
that such mode of operation contributed to the explosion. To date, no monetary
penalty has been proposed by MSHA. Although Kaiser expects that a fine will be
levied, it cannot predict the amount of any such fine. It is possible that other
civil or criminal fines or penalties could be levied against Kaiser. Kaiser has
previously announced that it disagrees with the substance of the citations and
has challenged them. However, as more fully explained below, based on what is
known to date and discussions with Kaiser's advisors, Kaiser believes that the
financial impact of this incident (in excess of insurance deductibles and
self-retention provisions) will be largely offset by insurance coverage.
Deductibles and self-retention provisions under the insurance coverage for the
incident total $5.0 million, which amounts were charged to cost of sales and
operations in 1999.

      Kaiser's insurance policies provide that it will be reimbursed for the
costs of repairing or rebuilding the damaged portion of the facility using new
materials of like kind and quality with no deduction for depreciation. Based on
discussions with the insurance carriers and their representatives and third
party engineering reports, Kaiser recorded a pre-tax gain of $85.0 million in
1999, representing the difference between the minimum expected property damage
amount and the net carrying value of the damaged property of $15.0 million. The
receivable attributable to the minimum expected property damage reimbursement
has been reflected in long-term receivables and other assets, despite the fact
that substantially all such amounts are expected to be spent during 2000, as
such proceeds will be invested in property, plant and equipment. The overall
impact of recognizing the gain was a significant increase in stockholders'
equity in 1999. In future years once production is restored, Kaiser will
recognize an increase in depreciation expense.

      The Gramercy facility has incurred incremental costs for clean-up and
other activities during 1999 and will continue to incur such costs in 2000.
These clean-up and site preparation activities have been offset by accruals of
approximately $14.0 million for estimated insurance recoveries.

      Kaiser's insurance policies provide for the reimbursement of specified
continuing expenses incurred during the interruption period plus lost profits
(or less expected losses) plus other expenses incurred as a result of the
incident. Kaiser has recorded expected business interruption insurance
recoveries totaling $41.0 million for the year ended December 31, 1999, as a
reduction of cost of sales and operations, which amounts substantially offset
actual expenses incurred during the period. However, the business interruption
insurance amounts recorded represent estimates of Kaiser's business interruption
coverage, based on preliminary discussions with the insurance carriers and their
representatives, and are, therefore, subject to change. Kaiser believes that
additional amounts may be recoverable. Any adjustments to the recorded amounts
of expected recovery will be reflected from time to time as such amounts are
agreed to by the insurance carriers. The amounts of such adjustments could be
material.

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

      The incident has also resulted in 36 class action lawsuits being filed
against Kaiser alleging, among other things, property damage and personal
injury. In addition, a claim for alleged business interruption losses has been
made by a neighboring business. The aggregate amount of damages sought in the
lawsuits and other claims cannot be determined at this time; however, Kaiser
does not believe the damages will exceed the amount of coverage under its
liability policies.

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

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

      As a result of the USWA strike, Kaiser temporarily curtailed three out of
a total of 11 potlines at its Mead and Tacoma, Washington, aluminum smelters
at September 30, 1998 (representing approximately 70,000 tons per year of
production capacity out of a total combined production capacity of 273,000 tons
per year at the facilities). Restarts of the two Mead potlines were completed
during mid-1999. While a portion of the curtailed potline at Tacoma has been
restarted to meet internal requirements, the timing for a complete restart of
the potline (representing approximately 10,000 tons of idle production capacity)
has yet to be determined and will depend upon market conditions and other
factors.

      While Kaiser initially experienced an adverse strike-related impact on its
profitability in the fourth quarter of 1998, Kaiser believes that its operations
at the affected facilities have been substantially stabilized and will be able
to run at, or near, full capacity, and that the incremental costs associated
with operating the affected plants during the dispute were virtually eliminated
in early 1999 (excluding the impacts of the restart costs discussed above and
the effect of market factors such as the continued market-related curtailment at
the Tacoma smelter). However, no assurances can be given that Kaiser's efforts
to run the plants in this manner on a sustained basis, without a significant
business interruption or material adverse impact on Kaiser's operating results,
will be successful. Kaiser and the USWA continue to communicate. The objective
of Kaiser has been, and continues to be, to negotiate a fair labor contract
that is consistent with its business strategy and the commercial realities of
the marketplace.

      Strategic Initiatives
      Kaiser's strategy is to improve its financial results by: increasing the
competitiveness of its existing plants; continuing its cost reduction
initiatives; adding assets to businesses it expects to grow; pursuing
divestitures of non-core businesses; and strengthening its financial position.

      Kaiser has devoted significant efforts analyzing its existing asset
portfolio with the intent of focusing its efforts and capital in sectors of the
industry that are considered most attractive, and in which Kaiser believes it is
well positioned to capture value. The initial steps of this process resulted in
the June 1997 acquisition of the Bellwood extrusion facility, the May 1997
formation of AKW, the rationalization of certain of Kaiser's engineered products
operations and Kaiser's investment to expand its capacity for heat treat
flat-rolled products at its Trentwood, Washington, rolling mill.

      This process continued in 1999. In February 1999, Kaiser completed the
acquisition of the remaining 45% interest in KLHP, an alumina marketing venture,
from its joint venture partner for a cash purchase price of approximately $10.0
million. Additionally, in April 1999, Kaiser completed the sale of its 50%
interest in AKW to its partner for $70.4 million. The strategic analysis process
also resulted in Kaiser's decision in the latter part of 1998 to seek a
strategic partner for the further development and deployment of Kaiser's
Micromill technology and in Kaiser's later agreement in January 2000 to sell the
Micromill assets and technology, for a nominal payment at closing and future
payments based on subsequent performance and profitability of the Micromill
technology.

      Another area of emphasis has been a continuing focus on managing Kaiser's
legacy liabilities. Kaiser believes that it has insurance coverage available to
recover certain incurred and future environmental costs and a substantial
portion of its asbestos-related costs and is actively pursing claims in this
regard. During 1998, Kaiser received recoveries totaling approximately $35.0
million from certain of its insurers related to current and future environmental
claims. The timing and amount of future recoveries of asbestos-related claims
from insurance carriers remain a major priority of Kaiser, but will depend on
the pace of claims review and processing by such carriers and the resolution of
any disputes regarding coverage under the insurance policies. However, during
1999, Kaiser reached preliminary agreements under which it expects to collect a
substantial portion of its expected asbestos-related payments from certain
insurance carriers in 2000.

      Valco Operating Level
      In 1999, the power allocation for Kaiser's 90%-owned Valco smelter in
Ghana was sufficient for the smelter to operate three out of a total of five
potlines as of January 1. Each of Valco's potlines is capable of producing
approximately 40,000 tons per year of primary aluminum. However, production was
well below this level in the first half of the year due to the timing of
restarts for the two incremental potlines. Consequently, to compensate for the
low production in the first half of the year, Valco operated above an equivalent
three-potline annual rate during the last six months of 1999. At December 31,
1999, Valco was operating four potlines.

      Valco operated only one potline during most of 1998. However, Valco earned
compensation in 1998 (in the form of energy credits to be utilized over the last
half of 1998 and during 1999) from the VRA in lieu of the power necessary to run
two of the potlines that were curtailed during 1998. The compensation
substantially mitigated the financial impact in 1998 of the curtailment of such
lines. However, Valco did not receive any compensation from the VRA for one
additional potline which was curtailed in January 1998.

      Under a December 1999 agreement between Valco and the VRA, Valco's power
allocation for 2000 and 2001 will be sufficient for the smelter to operate four
of its five potlines. Valco and the VRA also reached an agreement in December
1999 that provides a framework for resolving longer-term issues. This framework,
among other things, is anticipated to result in an improvement in the
reliability of Valco's long-term power supply and an increase in the price for
power beginning in 2000. The increase in the price for power will be partially
offset by net payments of approximately $13.0 million Valco will receive from
the VRA over the period 2000 to 2001 with respect to the provision of power in
1998 and 1999.

      Flat-Rolled Products
      In December 1999, Kaiser announced that its flat-rolled products business
unit expects to accelerate its product mix shift toward higher value added
product lines such as heat-treat, beverage can lid and tab stock, automotive and
other niche businesses, and away from beverage can body stock. The initial steps
of this process should be completed by early 2000, at which point Kaiser will
assess related issues such as employment levels at the Trentwood facility.
Although the shift in product mix is expected to have a favorable impact on
Kaiser's results and financial position over the long term, it is possible that
such a product mix shift may result in certain nonrecurring charges that would
have an adverse impact on Kaiser's near term results.

      Net Sales
      Bauxite and alumina. Third party net sales were down 16% in 1999 as
compared to 1998 as a result of a 10% decline in third party average realized
prices and a 7% decrease in third party alumina shipments. The decline in the
average realized prices in 1999 as compared to 1998 was primarily attributable
to a decrease in net gains from Kaiser's hedging activities. The decrease in
year-over-year shipments was primarily the net effect of the Gramercy incident
after considering the 264,000 tons of alumina purchased by Kaiser from third
parties to fulfill third party sales contracts.

      Intersegment net sales for 1999 declined 5% as compared to 1998. The
decline was primarily due to a 6% decline in the intersegment average realized
price, offset in part by a 1% increase in intersegment shipments, resulting from
potline restarts at the Valco and Washington smelters. Intersegment net sales
include approximately 131,000 tons of alumina purchased from third parties and
transferred to the primary aluminum business unit.

      Third party net sales of bauxite and alumina were up 16% in 1998 as
compared to 1997 primarily due to a 17% increase in third party shipments. The
increase in 1998 third party shipments (and offsetting decrease in 1998
intersegment shipments) resulted from reduced shipments to Valco, as more fully
discussed above and to a lesser extent, the fourth quarter strike-related
curtailment of three potlines at Kaiser's Washington smelters. The average
realized price for third party alumina sales was down only slightly as the
allocated net gains from Kaiser's hedging activities substantially offset the
decline in market prices related to Kaiser's primary aluminum-linked customer
sales contracts. In addition to being impacted by the reduced shipments to the
Valco and Washington smelters as discussed above, intersegment sales were
adversely affected by a substantial market-related decline in intersegment
average sales prices.

      Primary aluminum. Third party net sales of primary aluminum were up 7% in
1999 as compared to 1998 as a result of a 12% increase in third party shipments
offset by a 6% decrease in the average realized third party sales prices. The
increase in shipments was primarily due to the favorable impact of Valco
operating three potlines in 1999 as compared to one potline in 1998. While
average primary aluminum market prices for 1999 were approximately the same as
1998, Kaiser experienced a reduction in third party average realized prices as a
result of a decrease in net gains from its hedging activities.

      Intersegment net sales for 1999 were up 3% as compared to 1998.
Intersegment shipments increased 5% due to the timing of shipments to Kaiser's
fabricated business units while intersegment average realized prices were down
2%.

      1998 third party net sales of primary aluminum were down 25% as compared
to 1997 primarily as a result of a 20% reduction in shipments, caused by the
1998 potline curtailments at the Valco and Washington smelters. A 5% reduction
in average realized third party sales prices between 1998 and 1997 (reflecting
lower market prices offset, in part, by allocated net gains from Kaiser's
hedging activities), also adversely impacted third party net sales. Intersegment
net sales were down approximately 15% between 1998 and 1997. While intersegment
shipments were essentially unchanged from the prior year, average realized
prices dropped by 14% reflecting lower market prices for primary aluminum.

      Flat-rolled products. Net sales of flat-rolled products for 1999 declined
by 19% compared to 1998 as a result of a 13% decline in average realized prices
and an 8% decline in product shipments. The decline in average realized prices
resulted primarily from a shift in product mix (from aerospace products, which
have a higher price and operating margin, to other products) and a reduction in
prices resulting from reduced demand for heat treat products. The reduction in
shipments was primarily due to reduced demand in 1999 for aerospace heat treat
products offset, in small part, by increased shipments of general engineered
products.

      Net sales of flat-rolled products decreased by 4% during 1998 as compared
to 1997 as a 5% reduction in product shipments was modestly offset by the price
impact of changes in product mix. The mix of product shipments in 1998 reflects
a higher demand for heat treat products, primarily in the first half of the
year, offset by reduced can sheet shipments and an increased level of tolling,
all as compared to 1997.

      Engineered products. Net sales of engineered products for 1999 decreased
7% compared to 1998 primarily due to an 8% decline in average realized prices.
Product shipments were essentially flat. The decline in the average realized
prices in 1999 was attributable to a change in product mix (higher ground
transportation products offset by lower aerospace shipments). While there was a
strong increase in 1999 in the demand for ground transportation products it was
offset by a reduced demand for aerospace products.

      Net sales of engineered products were relatively flat from 1997 to 1998.
An 11% increase in product shipments in 1998 compared to 1997 was effectively
offset by market-related reductions in product prices as well as by the price
impact of changes in product mix. The increase in shipments is in part due to
the impact of Kaiser's ownership of the Bellwood extrusion facility for all of
1998 versus only half of 1997, offset in part by a decline in sales attributable
to the AKW wheels joint venture formation in May 1997 and reduced shipments
caused by labor difficulties at two major customers.

      Operating Income (Loss)
      Bauxite and alumina. Bauxite and alumina operating income was down in 1999
as compared to 1998 primarily as a result of the price and volume factors
discussed above. Operating income for 1999 was also adversely affected by the
$5.0 million cost of insurance deductibles and self-retention provisions related
to the Gramercy incident and was favorably impacted by the fact that
depreciation on the Gramercy facility was suspended in July 1999. Bauxite and
alumina operating income for 1998 included the adverse impact of approximately
$11.0 million of incremental strike- related costs.

      Operating income was essentially unchanged from 1997 to 1998, excluding
the impact of approximately $11.0 million of incremental strike-related costs.
The adverse impact of reduced intersegment realized prices was essentially
offset by improved operating performance resulting from higher production as
well as lower energy costs.

      Primary aluminum. Primary aluminum operating income for 1999 was down
compared to 1998. The most significant component of this decline was the
reduction in the average realized prices discussed above. Results for 1999 were
also adversely impacted by costs of approximately $12.8 million for the year
associated with preparing and restarting potlines at the Valco and Washington
smelters. The favorable impact of Valco operating at a higher rate in 1999 (as
compared to 1998) was substantially offset by the fact that Valco earned
mitigating compensation of approximately $29.0 million in 1998 for two of its
curtailed potlines. Operating income for 1998 also included the adverse impact
of approximately $29.0 million of incremental strike-related costs.

      Primary aluminum operating income in 1998 was down significantly from
1997. The operating income impact of the Valco potline curtailments was
partially mitigated by the compensation from the VRA for two of the three
curtailed potlines. In addition to the impact of the one uncompensated potline
curtailment at Valco, 1998 results were also negatively affected by the impact
of the potline curtailments at Kaiser's Washington smelters, reduced average
realized prices (primarily on intersegment sales) and an adverse striked-related
impact of approximately $29.0 million.

      Flat-rolled products. The decline in 1999 prices and shipments as compared
to 1998 was responsible for the decline in flat-rolled products operating income
for 1999. Results for 1998 included the adverse impact of approximately $16.0
million of incremental strike-related costs.

      Operating income for flat-rolled products increased significantly in 1998
primarily as a result of the increased demand for heat treat products in the
first half of 1998 and improved operating efficiencies. Results for 1998 were
particularly strong in light of the unfavorable strike-related impact of
approximately $16.0 million. Results for 1997 included a non-cash charge in
connection with restructuring activities.

      Engineered products. Engineered products operating income for 1999
decreased compared to 1998 as a result of the decrease in net sales discussed
above as well as the reduced equity in earnings of AKW (which partnership
interests were sold in April 1999). Operating income for 1998 included the
adverse impact of approximately $4.0 million of incremental strike-related
costs.

      Operating income for engineered products declined by approximately 6% in
1998 as compared to 1997, excluding the 1997 pre-tax net charge related to
restructuring of operations and approximately $4.0 million of adverse
incremental strike-related impact in 1998, as a result of the market impact of
the previously mentioned labor difficulties at two major customers and due to an
overall softening in demand, particularly in the second half of the year.

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

      Corporate and Other. Corporate operating expenses for 1999 were lower than
1998 primarily due to reduced incentive compensation expense resulting from the
decline in operating results. Excluding the 1997 pre-tax charge associated with
Kaiser's restructuring of operations, corporate expenses were lower in 1998 than
in 1997 primarily as a result of lower consulting and other costs associated
with Kaiser's ongoing profit improvement program and portfolio review
initiatives.

      Income (Loss) Before Income Taxes and Minority Interests
      Kaiser's loss before income taxes and minority interests for 1999
increased as compared to 1998 mainly due to the operating loss for 1999
discussed above, affects of a non-cash pre-tax charge of $19.1 million to reduce
the carrying value of Kaiser's Micromill assets, pre-tax charges of $32.8
million to reflect mark-to-market adjustments on certain primary aluminum
hedging transactions and non-cash pre-tax charges of $53.2 million for
asbestos-related claims. The 1999 charges were offset by a pre-tax gain of $85.0
million on the involuntary conversion at the Gramercy facility and a pre-tax
gain of $50.5 million on the sale of Kaiser's 50% interest in AKW. Loss
before income taxes and minority interests for 1998 included approximately $60.0
million of pre-tax incremental expense and the earnings impact of lost volume
associated with the strike by members of the USWA and a non-cash pre-tax charge
of $45.0 million to reduce the carrying value of Kaiser's Micromill assets.

   FOREST PRODUCTS OPERATIONS

      Industry Overview

      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.

      The Company's forest products operations are conducted by MGI, through
Pacific Lumber and Britt. MGI's business is somewhat seasonal and has
historically been higher in the months of April through November than in the
months of December through March. Management expects that MGI's revenues and
cash flows will continue to be markedly 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 following table presents selected operational and financial
information for the years ended December 31, 1999, 1998 and 1997 for the
Company's forest products operations.

<TABLE>
<CAPTION>

                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       1999      1998       1997
                                                                                     --------- ---------  ---------
                                                                                        (IN MILLIONS OF DOLLARS,
                                                                                      EXCEPT SHIPMENTS AND PRICES)
<S>                                                                                  <C>       <C>        <C>
Shipments:
   Lumber: (1)
      Redwood upper grades.........................................................      24.6      41.9       52.4
      Redwood common grades........................................................     137.4     230.1      244.2
      Douglas-fir upper grades.....................................................      10.4       6.9       11.5
      Douglas-fir common grades....................................................      61.5      47.5       75.3
      Other........................................................................       8.7       7.0       14.5
                                                                                     --------- ---------  ---------
   Total lumber....................................................................     242.6     333.4      397.9
                                                                                     ========= =========  =========
   Wood chips (2)..................................................................     163.7     176.7      237.8
                                                                                     ========= =========  =========
Average sales price:
   Lumber: (3)
      Redwood upper grades.........................................................  $  1,531  $  1,478   $  1,443
      Redwood common grades........................................................       629       540        531
      Douglas-fir upper grades.....................................................     1,290     1,280      1,203
      Douglas-fir common grades....................................................       430       346        455
   Wood chips (4)..................................................................        77        70         73
Net sales:
   Lumber, net of discount.........................................................  $  165.3  $  211.6   $  256.1
   Wood chips......................................................................      12.5      12.3       17.4
   Cogeneration power..............................................................       3.8       3.9        4.5
   Other...........................................................................       6.2       5.8        9.2
                                                                                     --------- ---------  ---------
      Total net sales .............................................................  $  187.8  $  233.6   $  287.2
                                                                                     ========= =========  =========
Operating income (loss)............................................................  $   (4.1) $   40.9   $   84.9
                                                                                     ========= =========  =========
Operating cash flow (5)............................................................  $   12.9  $   63.4   $  111.0
                                                                                     ========= =========  =========
Income (loss) before income taxes, minority interests and extraordinary item (6)...  $  196.1  $  (24.7)  $   21.0
                                                                                     ========= =========  =========
Capital expenditures...............................................................  $   23.1  $   22.0   $   22.9
                                                                                     ========= =========  =========
<FN>
------------------------------------

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

      Net Sales
      Net sales 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. See "--Trends" below. 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.

      Net sales declined from $287.2 million for the year ended December 31,
1997 to $233.6 million for the year ended December 31, 1998 primarily due to
lower shipments of lumber, logs and wood chips. The decline in shipments which
occurred during the first half of 1998 was principally due to well-above-normal
rainfall which reduced demand for lumber products and severely limited the
availability of rail transportation. The increased rainfall, combined with
additional restrictions on Pacific Lumber's wet weather operations pursuant to
the terms of Pacific Lumber's 1998 Timber Operator's License, and the
applicability of logging restrictions during the nesting seasons for both the
northern spotted owl and the marbled murrelet, also impeded Pacific Lumber's
ability to transport logs to its mills and hindered logging operations, thereby
reducing the volume of logs available for the production of lumber products.
Revenues for the second half of 1998 were primarily affected by a reduction in
the volume of logs harvested and converted into lumber products. Pacific
Lumber's reduced harvest level during the second half of 1998 was due in large
part to the absence of a sufficient number of THPs available for harvest to
enable it to conduct its operations at levels consistent with those in the
comparable period of 1997. The diminished supply of available THPs was
attributable to a reduced volume of approved THPs as well as regulatory and
judicial restrictions imposed upon harvesting activities in areas covered by
previously approved THPs. See "--Trends" below. These difficulties in harvesting
and transporting logs affected the types of logs available for the mills and
Pacific Lumber's ability to produce a desirable mix of lumber products which in
turn adversely affected sales.

      Operating Income (Loss)
      The forest products segment had an operating loss for the year ended
December 31, 1999 as compared to operating income for the comparable prior year
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.

      Operating income for 1998 decreased from 1997 principally due to the
decrease in net sales discussed above. This impact was partially offset by a
decrease in depletion expense as a result of the decline in volumes discussed
above and a decrease in logging costs for the year ended December 31, 1998 from
the prior year.

      Income (Loss) Before Income Taxes, Minority Interests and Extraordinary
      Item
      Income before income taxes, minority interests and extraordinary item 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 ($142.1 million net of deferred taxes or $18.17 per share) offset by the
operating loss discussed above. Income before income taxes, minority interests
and extraordinary item for the year ended December 31, 1999 also reflects
interest income earned from investing the net proceeds from the sale of the
Headwaters Timberlands and higher earnings from marketable securities.

      Forest products operations had a loss before income taxes, minority
interests and extraordinary item for the year ended December 31, 1998 as
compared to income for the 1997 period, primarily due to the decrease in
operating income discussed above. Results for the 1998 period were also affected
by a decrease in investment income from marketable securities.

   REAL ESTATE OPERATIONS

      Industry Overview
      The Company, principally through its wholly owned subsidiaries, invests in
and develops residential and commercial real estate primarily in Puerto Rico,
Arizona and California.

<TABLE>
<CAPTION>

                                                                                      YEARS ENDED DECEMBER 31,
                                                                                  ---------------------------------
                                                                                     1999       1998        1997
                                                                                  ----------  ---------  ----------
                                                                                      (IN MILLIONS OF DOLLARS)
<S>                                                                               <C>         <C>        <C>
   Net sales....................................................................  $    52.0   $   58.6   $    48.7
   Operating loss...............................................................       (5.2)         -        (3.4)
   Income before income taxes and minority interests............................       13.7       14.4        12.8
   Capital expenditures.........................................................        3.1       22.2        22.0

</TABLE>

      Net Sales
      Net sales for the real estate segment include revenues from (i) sales of
developed lots, bulk acreage and real property associated with the Company's
real estate developments (ii) resort and other commercial operations conducted
at certain of the Company's real estate developments and (iii), in 1997, rental
revenues associated with a portfolio of properties purchased from the Resolution
Trust Corporation in 1991 (the "RTC PORTFOLIO"). Net sales do not include any
amounts from the sale of income producing properties, such as the RTC Portfolio
properties and loans, which are recorded net of costs as investment, interest
and other income (expense), net. As of December 31, 1997 substantially all of
the RTC Portfolio assets had been sold.

      Net sales decreased in 1999 from 1998 primarily due to lower revenues from
real estate development projects in Puerto Rico. Net sales increased in 1998
from 1997 primarily due to higher revenues from real estate development
projects, partially offset by a decline in revenues from resort and commercial
operations reflecting various asset dispositions.

      Operating Loss
      The real estate segment had an operating loss for 1999 as compared to
breakeven operating income for 1998 primarily due to lower net sales from the
Company's real estate development in Puerto Rico discussed above. The operating
loss for 1998 decreased as compared to 1997 due to higher net sales discussed
above. Included in the operating loss for 1997 is profit from two bulk land
sales at the Fountain Hills, Arizona, development.

      Income Before Income Taxes and  Minority Interests
      Income before income taxes and minority interests for 1999 decreased
compared to 1998 primarily due to the operating loss in 1999. In addition, 1998
included gains on the sale of a portion of the Company's Waterwood development
project and other asset sales in 1998, whereas 1999 included a $7.4 million gain
associated with insurance recoveries from property damage resulting from a 1998
hurricane in Puerto Rico. The increase in income before income taxes and
minority interests for 1998 over 1997 is primarily due to the decrease in the
operating loss discussed above and the gain from the sale of the Waterwood
development offset somewhat by lower pre-tax gains from the sale of RTC
Portfolio assets in 1998.

   RACING OPERATIONS

      Industry Overview
      The Company, through its subsidiaries, has a 98.9% ownership interest in
SHRP, Ltd., a Texas limited partnership, which owns and operates the Sam Houston
Race Park (the "RACE PARK"), a Class 1 horse racing facility in Houston, Texas.
Results of operations between periods are generally not comparable due to the
timing, varying lengths and types of racing meets held. Historically, the Race
Park has derived a significant amount of its annual net pari-mutuel commissions
from live racing and simulcasting. Net pari-mutuel commissions have typically
been highest during the first and fourth quarters of the year, the time during
which live thoroughbred racing has historically been conducted.

<TABLE>
<CAPTION>

                                                                                       YEARS ENDED DECEMBER 31,
                                                                                   --------------------------------
                                                                                     1999       1998        1997
                                                                                   ---------  ---------  ----------
                                                                                       (IN MILLIONS OF DOLLARS)
<S>                                                                                <C>        <C>        <C>
   Net sales.....................................................................  $   27.3   $   24.1   $    20.0
   Operating income (loss).......................................................       3.8        1.8        (1.6)
   Income (loss) before income taxes and minority interests......................       3.1       (1.0)       (4.6)
   Capital expenditures..........................................................       0.6        1.0         0.3

</TABLE>

      Net Sales
      Net sales for the racing segment increased in 1999 from 1998 due to an
increase in average daily attendance and an increase in wagering at facilities
receiving the Race Park's simulcast signal.

      Net sales for the year ended December 31, 1998 increased compared to the
year ended December 31, 1997 due to the addition of wagering on greyhound racing
and an increase in wagering at facilities receiving the Race Park's simulcast
signal.

      Operating Income (Loss)
      Operating income for the racing segment increased for the year ended
December 31, 1999 from the same period in 1998 due to the increase in net sales
discussed above. Although costs and expenses increased with the higher
attendance and the increase in live racing days, expenses as a percentage of net
sales declined between the years. The racing segment had operating income for
the year ended December 31, 1998 compared to an operating loss for the year
ended December 31, 1997 due to higher net sales discussed above as well as
reduced operating costs and expenses.

      Income (Loss) Before Income Taxes and Minority Interests
      Racing operations had income before income taxes and minority interests
for 1999 as compared to a loss before income taxes and minority interests for
1998 primarily due to the increase in operating income discussed above and to
lower interest expense as the percentage of bonds held by non-affiliates
declined from 2.5% in 1998 to 0.5% in 1999. Loss before income taxes for 1998
decreased from 1997 due to the increase in operating income discussed above.

   OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS

<TABLE>
<CAPTION>

                                                                                      YEARS ENDED DECEMBER 31,
                                                                                  ---------------------------------
                                                                                     1999       1998        1997
                                                                                  ----------  ---------  ----------
                                                                                      (IN MILLIONS OF DOLLARS)
<S>                                                                               <C>         <C>        <C>
Operating loss..................................................................  $   (23.0)  $  (13.6)  $   (17.5)
Loss before income taxes and minority interests.................................      (34.4)     (25.3)      (21.0)
Capital expenditures............................................................        0.6        0.1         0.3

</TABLE>

      Operating Loss
      The operating loss represents corporate general and administrative
expenses that are not attributable to the Company's industry segments. The
change in operating loss between 1999 and 1998 is principally due to an $11.7
million non-cash charge related to a bonus awarded in the form of restricted
stock. Changes in the operating loss between 1999, 1998 and 1997 were also due
to accruals for certain legal contingencies, which were $0.5 million, $3.0
million and $5.6 million in 1999, 1998 and 1997, respectively (see Note 13 to
the Consolidated Financial Statements).

      Loss Before Income Taxes and Minority Interests
      The loss before income taxes and minority interests includes operating
losses, investment, interest and other income (expense) and interest expense,
including amortization of deferred financing costs, that are not attributable to
the Company's industry segments. The loss for 1999 increased from 1998
principally due to the higher operating losses described above, offset by higher
earnings from marketable securities. The loss for 1998 increased compared to
1997 primarily due to lower earnings from marketable securities and short-term
investments.

      Credit (Provision) for Income Taxes
      The Company's credit (provision) for income taxes differs from the federal
statutory rate due principally to (i) revision of prior years' tax estimates and
other changes in valuation allowances, (ii) percentage depletion, and (iii)
foreign, state and local taxes, net of related federal tax benefits. Revision of
prior years' tax estimates includes amounts for the reversal of reserves which
the Company no longer believes are necessary. The Company's credit (provision)
for income taxes for 1999, 1998 and 1997 reflects benefits of $4.0 million,
$11.5 million and $32.1 million, respectively, for such reversals of reserves.

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


FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

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

      Note 8 to the Consolidated Financial Statements contains information
concerning the Company's indebtedness and information concerning certain
restrictive debt covenants.

   PARENT COMPANY AND MGHI

      Financing Activities and Liquidity
      The Company conducts its operations primarily through its subsidiaries.
Creditors of subsidiaries of the Company as well as KACC's preferred
stockholders have priority with respect to the assets and earnings of such
subsidiaries over the claims of the creditors of the Company. As of December 31,
1999, the indebtedness of the subsidiaries and the minority interests
attributable to KACC's preferred stockholders reflected on the Company's
Consolidated Balance Sheet were $1,984.3 million and $19.5 million,
respectively. Certain of the Company's subsidiaries, principally Kaiser and MGHI
(and in turn MGHI's subsidiaries), are restricted by their various debt
instruments as to the amount of funds that can be paid in the form of dividends
or loaned to the Company. As of December 31, 1999, the Company's other
subsidiaries (principally real estate) had an aggregate of nonrestricted cash
and unused borrowing availability of approximately $27.1 million which could
have been paid to the Company.

      As of December 31, 1999, the Company (excluding its subsidiaries) had cash
and marketable securities of $44.6 million and MGHI (excluding its subsidiaries)
had cash and marketable securities of $9.0 million. In January and February
2000, MGHI received an aggregate of $108.4 million in dividends from MGI, $90.0
million of which were made available using proceeds from the sale of the
Headwaters Timberlands. MGHI in turn paid a $45.0 million dividend to the
Company.

      In December 1996, MGHI issued $130.0 million aggregate principal amount of
12% Senior Secured Notes due 2003 (the "MGHI NOTES"), which have been guaranteed
by the Company on a senior, unsecured basis. Net proceeds of $125.0 million
received from the offering of the MGHI Notes were loaned to the Company pursuant
to an intercompany note (the "INTERCOMPANY NOTE"). The Company expects that
interest payments on the MGHI Notes will be paid with MGHI's existing cash and
dividends paid by MGI to MGHI. The indenture governing the MGHI Notes (the "MGHI
INDENTURE") contains covenants which generally limit dividends from MGI to MGHI
to the greater of $18.4 million per year or, on a cumulative basis since
September 30, 1996, to MGI's consolidated net income plus consolidated
depreciation and depletion.

      In December 1999, MGI repurchased $4.8 million of the MGHI Notes, reducing
the outstanding balance to $125.2 million at December 31, 1999.

      Although there are no restrictions on the Company's ability to pay
dividends on its capital stock, the Company has not paid any dividends for a
number of years and has no present intention to do so. The Company has stated
that, from time to time, it may purchase its Common Stock on national exchanges
or in privately negotiated transactions.

      MAXXAM Inc., excluding its subsidiaries, had short-term borrowings of
$18.5 million outstanding as of December 31, 1999. The Company had no long-term
debt as of such date other than that owed by its subsidiaries. Short-term
borrowings of $16.0 million under an agreement with the Custodial Trust Company
(the "CUSTODIAL TRUST AGREEMENT") are due on October 21, 2000. This loan is
secured by 7,915,000 shares of Kaiser common stock.

      The remaining $2.5 million of short-term borrowings outstanding as of
December 31, 1999 were made pursuant to a credit facility with an investment
bank providing for up to $25.0 million in borrowings payable on demand.
Borrowings are secured by 400,000 shares of Kaiser common stock for each $1.0
million of borrowings. No further borrowings were available as of December 31,
1999, as the trading price of Kaiser's common stock was below the minimum
required under this agreement.

      Kaiser has an effective shelf registration statement covering the offering
of up to 10.0 million shares of Kaiser common stock owned by the Company.

      The Company expects that its general and administrative costs, net of cost
reimbursements from subsidiaries and excluding expenses related to legal
contingencies, will range from $9.0 million to $11.0 million for the next year.
The Company cannot predict when or whether the expenses represented by the
accrual for legal contingencies will be incurred. Furthermore, there can be no
assurance that such accrual will be adequate or that the Company's cash
requirements for its corporate general and administrative expenses will not
increase.

      The Company has realized a substantial portion of its cash flows during
1999 from its real estate segment. The Company expects cash flows from real
estate activities during 2000 to be at or near recent levels as a result of
further sales and asset dispositions at the Palmas del Mar and Fountain Hills
real estate developments.

      The Company believes that its existing resources, together with the cash
available from subsidiaries and financing sources, will be sufficient to fund
its working capital requirements for the next year. With respect to its
long-term liquidity, the Company believes that its existing cash and cash
resources, together with the cash proceeds from the sale of assets and
distributions from its subsidiaries, should be sufficient to meet its working
capital requirements. However, there can be no assurance that the Company's cash
resources, together with the cash proceeds from the sale of assets,
distributions from its subsidiaries and other sources of financing, will be
sufficient for such purposes. Any adverse outcome of the litigation described
below under "--Contingencies" or the regulatory and environmental matters
described under "--Trends" below could materially adversely affect the Company's
consolidated financial position, results of operations or liquidity.

      Investing Activities
      In 1998, the Company purchased $11.0 million aggregate initial principal
amount of SHRP, Ltd.'s 11% Senior Secured Extendible Notes (the "SHRP NOTES")
and the corresponding equity interest in SHRP Equity, Inc. for $10.6 million. In
1997, the Company purchased $11.0 million aggregate initial principal amount of
SHRP Notes for $5.9 million.

      Contingencies
      As described further in Item 3. "Legal Proceedings" and Note 13 to the
Consolidated Financial Statements, on December 26, 1995, the OTS initiated a
formal administrative proceeding against the Company and others by filing the
Notice which alleges, among other things, misconduct by the respondents (the
Company, Federated, Mr. Charles Hurwitz and others) with respect to the failure
of USAT. On January 31, 2000, the OTS filed its post-hearing brief in which it
claims, among other things, that the remaining respondents, Mr. Hurwitz, the
Company and Federated, are jointly and severally liable to pay either $821.3
million in restitution or reimbursement of $362.6 million for alleged unjust
enrichment. The OTS also claims that each remaining respondent should be
required to pay $4.6 million in civil money penalties. The respondents' brief,
which was also filed on January 31, 2000, claims that none of them has any
liability in the OTS action.

      In the FDIC action, the FDIC seeks, conditioned on the OTS prevailing in
its administrative proceeding, unspecified damages from Mr. Hurwitz relating to
amounts the OTS does not collect from the Company and Federated with respect to
their alleged obligations to maintain USAT's net worth.

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

   ALUMINUM OPERATIONS

      Financing Activities and Liquidity
      Kaiser is highly leveraged and has significant debt services requirements.
As of December 31, 1999, Kaiser's total debt was $972.9 million, which does not
give effect to $103.6 million of guaranteed debt of unconsolidated affiliates as
of December 31, 1999.

      Under the KACC Credit Agreement, KACC is able to borrow by means of
revolving credit advances and letters of credit (up to $125.0 million) in an
aggregate amount equal to the lesser of $325.0 million or a borrowing base
relating to eligible accounts receivable plus eligible inventory. The KACC
Credit Agreement matures in August 2001. The KACC Credit Agreement does not
permit Kaiser, and significantly restricts KACC's ability, to pay any dividends
on their common stock. The indentures governing KACC's public debt also include
various restrictions on KACC and its subsidiaries and repurchase obligations
upon a Change of Control (as defined therein). As of December 31, 1999, $10.4
million of borrowings were outstanding under the revolving credit facility of
the KACC Credit Agreement. KACC had $212.6 million of unused availability
remaining under the KACC Credit Agreement at February 29, 2000, after allowing
for $30.0 million of outstanding borrowings and $82.4 million for outstanding
letters of credit.

      In 1999, Kaiser's operating activities used $90.6 million of cash. This
amount compares with 1998 and 1997 when operating activities provided cash of
$170.7 million and $45.0 million, respectively. The decrease in cash flows from
operating activities between 1999 and 1998 was due primarily to the impact of
1999 results, excluding non-cash charges, and an increased investment in working
capital (excluding cash). The increase in cash flows from operating activities
between 1998 and 1997 was due primarily to a reduced investment in working
capital (excluding cash), the receipt of $35.0 million of environmental
insurance recoveries and the impact of 1998 results (excluding non-cash
charges).

      Kaiser's near-term liquidity will be, as more fully discussed below,
affected by three significant items: the Gramercy incident, aluminum hedging
margin requirements and the amount of net payments for asbestos liabilities.

     As of December 31, 1999, Kaiser had recorded estimated recoveries for
clean-up, site preparation and business interruption costs incurred relating to
the Gramercy incident of approximately $55.0 million. As of December 31, 1999,
approximately $50.0 million had been received. Additionally, through February
29, 2000, Kaiser had received approximately $25.0 million of additional
insurance recoveries. During 2000, capital spending related to rebuilding the
Gramercy facility is expected to be approximately $200.0 million. Kaiser
believes that between 50% and 80% of such expenditures will ultimately be funded
by proceeds from Kaiser's insurance contracts. The remainder of the
Gramercy-related capital expenditures will be funded by Kaiser using existing
cash resources, funds from operations and/or borrowings under the KACC Credit
Agreement. The amount of capital expenditures to be funded by Kaiser will depend
on, among other things, the ultimate cost and timing of the rebuild and
negotiations with the insurance carriers. In addition, Kaiser will incur
continuing expenses and experience lost profits subsequent to 1999 as a result
of the Gramercy incident which amounts (based on current primary aluminum prices
and available facts and circumstances) are expected to total another $100.0
million, which amount is expected to be largely offset by insurance recoveries.
Kaiser continues to work with the insurance carriers to maximize the amount of
recoveries and to minimize, to the extent possible, the period of time between
when Kaiser expends funds and when it is reimbursed. Kaiser will likely have to
fund an average of 30 - 60 days of property damage and business interruption
activity, unless some other arrangement is agreed to with the insurance
carriers, and such amounts will be significant. Kaiser believes it has
sufficient financial resources to fund the construction and business
interruption costs on an interim basis. However, no assurances can be given in
this regard. If insurance recoveries were to be delayed or if there were other
significant uses of its existing capacity under the KACC Credit Agreement,
delays in the rebuilding of the Gramercy refinery could occur and could have a
material adverse impact on Kaiser's liquidity and operating results.

      Hedging activities could also have an adverse impact on Kaiser's near-term
liquidity. At December 31, 1999, Kaiser had made margin advances of $38.0
million and had posted letters of credit totaling $40.0 million in lieu of
making margin advances. Increases in primary aluminum prices subsequent to
December 31, 1999, could result in Kaiser having to make additional margin
advances or post additional letters of credit and such amounts could be
significant. Kaiser's exposure to margin advances is expected to improve
throughout 2000 as its year 2000 positions, which have a lower average maximum
contract price than its 2001 positions, expire. Kaiser is considering various
financing and hedging strategies to limit its exposure to further margin
advances in the event of aluminum price increases. However, no assurance can be
given that Kaiser will be successful in this regard.

      Kaiser's estimated annual cash payments, prior to insurance recoveries,
for asbestos-related costs will be approximately $75.0 million to $85.0 million
for each of the years 2000 through 2002. Kaiser believes that it will recover a
substantial portion of these payments from insurance. Preliminary agreements
have been reached with certain insurance carriers under which Kaiser expects to
collect a substantial portion of its 2000 asbestos-related payments. However,
delays in receiving these or future insurance repayments would have an adverse
impact on Kaiser's liquidity.

      While no assurance can be given that the existing cash sources will be
sufficient to meet Kaiser's short-term liquidity requirements, Kaiser believes
that its existing cash resources, together with cash flows from operations and
borrowings under the KACC Credit Agreement, will be sufficient to satisfy its
working capital and capital expenditure requirements for the next year.

      Kaiser's ability to make payments on and to refinance its debt on a
long-term basis depends on its ability to generate cash in the future. This, to
a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors beyond Kaiser's control. Kaiser will
need to refinance all or a substantial portion of its debt on or before its
maturity. No assurance can be given that Kaiser will be able to refinance its
debt on acceptable terms. However, with respect to long-term liquidity, Kaiser
believes that operating cash flow, together with the ability to obtain both
short and long-term financing, should provide sufficient funds to meet its
working capital and capital expenditure requirements.

      Capital Structure
      The Company owns approximately 63% of Kaiser's common stock ("KAISER
COMMON STOCK"), with the remaining 37% of Kaiser's Common Stock being held
publicly.

     In addition to the shelf registration covering 10.0 million shares of
Kaiser Common Stock owned by the Company discussed above (the proceeds of which
sale would be paid to the Company rather than Kaiser), Kaiser has an effective
shelf registration statement covering the offering of up to $150.0 million of
Kaiser equity securities.

      In January 2000, Kaiser increased the number of authorized shares of
Kaiser Common Stock to 125,000,000 from 100,000,000 to improve its flexibility
to issue Kaiser Common Stock under its employee benefit plans, under the
existing shelf registration statement, and in connection with other
transactions.

      During August 1997, the 8,673,850 outstanding shares of Kaiser's 8.255%
Preferred Redeemable Increased Equity Securities (the "PRIDES") were converted
into 7,227,848 shares of Kaiser Common Stock pursuant to the terms of the PRIDES
Certificate of Designations.

      Investing Activities
      Kaiser's capital expenditures were $68.4 million, $77.6 million, and
$128.5 million in 1999, 1998, and 1997, respectively (of which $4.8 million,
$7.2 million, and $6.6 million were funded by the minority partners in certain
foreign joint ventures). Except for the purchase in 1999 of the remaining 45%
interest in KLHP for approximately $10.0 million, capital expenditures were made
primarily to improve production efficiency, reduce operating costs and expand
capacity at existing facilities. Total capital expenditures, excluding the
expenditures to rebuild the Gramercy, Louisiana facility which will be partially
funded with insurance proceeds (see Note 2 to the Consolidated Financial
Statements), are expected to be between $80.0 million and $115.0 million per
year in each of the years 2000 through 2002 (of which approximately 10% is
expected to be funded by Kaiser's minority partners in certain foreign joint
ventures). Kaiser continues to evaluate numerous projects, all of which would
require substantial capital, both in the United States and overseas. The level
of capital expenditures may be adjusted from time to time depending on Kaiser's
price outlook for primary aluminum and other products, Kaiser's ability to
assure future cash flows through hedging or other means, Kaiser's financial
position and other factors.

      Commitments and Contingencies
      Kaiser is subject to a number of environmental laws, to fines or penalties
assessed for alleged breaches of the environmental laws, and to claims and
litigation based upon such laws. Based on Kaiser's evaluation of these and other
environmental matters, Kaiser has established environmental accruals of $48.9
million at December 31, 1999. However, Kaiser believes that it is reasonably
possible that changes in various factors could cause costs associated with these
environmental matters to exceed current accruals by amounts that could range, in
the aggregate, up to an estimated $30.0 million.

      Kaiser is also a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with Kaiser or exposure to products
containing asbestos produced or sold by Kaiser. Based on past experience and
reasonably anticipated future activity, Kaiser has established a $387.8 million
accrual at December 31, 1999, for estimated asbestos-related costs for claims
filed and estimated to be filed through 2009, before consideration of insurance
recoveries. However, Kaiser believes that substantial recoveries from insurance
carriers are probable. Accordingly, Kaiser has recorded an estimated aggregate
insurance recovery of $315.5 million (determined on the same basis as the
asbestos-related cost accrual) at December 31, 1999. Although Kaiser has settled
asbestos-related coverage matters with certain of its insurance carriers, other
carriers have not yet agreed to settlements. The timing and amount of future
recoveries from these carriers will depend on the pace of claims review and
processing by such carriers and on the resolution of any disputes regarding
coverage under such policies that may arise.

      While uncertainties are inherent in the final outcome of these matters and
it is presently impossible to determine the actual costs that ultimately may be
incurred and insurance recoveries that ultimately may be received, Kaiser
believes that the resolution of these uncertainties and the incurrence of
related costs, net of any related insurance recoveries, should not have a
material adverse effect on its consolidated financial position, results of
operations, or liquidity.

      In connection with the USWA strike and subsequent lock-out by Kaiser,
certain allegations of unfair labor practices have been filed with the NLRB by
the USWA. In July 1999, the Oakland, California, regional office of the NLRB
dismissed all material charges filed against Kaiser. In September 1999, the
union filed an appeal of this ruling. If these proceedings eventually resulted
in a definitive ruling against Kaiser, it could be obligated to provide back pay
to USWA members at the five plants and such amount could be significant.
However, while uncertainties are inherent in the final outcome of such matters,
Kaiser believes that the resolution of the alleged unfair labor practices should
not result in a material adverse effect on its consolidated financial position,
results of operations, or liquidity.

      See Note 13 to the Consolidated Financial Statements for a more detailed
discussion of these contingencies and the factors affecting Kaiser's beliefs.

   FOREST PRODUCTS OPERATIONS

      Financing Activities and Liquidity
      As of December 31, 1999, MGI and its subsidiaries had cash and marketable
securities of $224.6 million as well as long-term restricted cash of $158.9
million. Long-term restricted cash includes $153.2 million held in the SAR
Account (see below). Long-term debt, including current maturities, was $860.2
million as of December 31, 1999 as compared to $868.5 million at December 31,
1998. The decrease in long-term debt was primarily due to principal payments on
the Timber Notes. Current maturities of long-term debt and short-term borrowings
were $16.0 million as of December 31, 1999.

      Substantially all of MGI'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 ($859.1 million outstanding
as of December 31, 1999) 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.

      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 (the "OLD TIMBER NOTES") 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 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, which is available for making principal payments on the Timber Notes.

      The Timber Notes Indenture contains various covenants which, among other
things, limit the ability to incur additional indebtedness and liens, to engage
in transactions with affiliates, to pay dividends and to make investments. Under
the terms of the Timber Notes Indenture, Scotia LLC will generally have
available cash for distribution to Pacific Lumber when Scotia LLC's cash flows
from operations exceed the amounts required by the Timber Notes Indenture to be
reserved for the payment of current debt service (including interest, principal
and premiums) on the Timber Notes, capital expenditures, certain other operating
expenses and replenishment of the SAR Account.

      In 1999, Scotia LLC's agreement with a group of banks, pursuant to which
Scotia LLC may borrow to pay interest on the Timber Notes (the "SCOTIA LLC LINE
OF CREDIT"), was extended to July 16, 2000 and is expected to be renewed
annually. At December 31, 1999, Scotia LLC could have borrowed a maximum of one
year's interest due on the Timber Notes (or $63.0 million) under the Scotia LLC
Line of Credit. As of December 31, 1999, no borrowings were outstanding under
the Scotia LLC Line of Credit.

      On the January 20, 2000 note payment date for the Timber Notes, Scotia LLC
had $2.2 million in cash available to pay the $31.5 million of interest due.
Scotia LLC borrowed the remaining $29.3 million in funds under the Scotia LLC
Line of Credit. In addition, Scotia LLC repaid $12.9 million of principal on the
Timber Notes (an amount equal to Scheduled Amortization) using funds held in the
SAR Account.

      With respect to short-term liquidity, the Company believes that Scotia LLC
will not generate sufficient cash from operations to pay all of the interest on
the Timber Notes on the July 20, 2000 payment date. However, the Company expects
that any such shortfall will be borrowed under the Scotia LLC Line of Credit and
that funds to pay the Scheduled Amortization amount will be provided from the
SAR Account.

      Pacific Lumber's revolving 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.
Commencing in April 2001, borrowings for timberland acquisitions 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, 1999, $34.1
million of borrowings was available under the agreement, no borrowings were
outstanding and letters of credit outstanding amounted to $12.5 million.

      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 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
working capital and capital expenditure 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 Note 13 to the
Consolidated Financial Statements), increased competition from other lumber
producers or alternative building products and general economic conditions.

      Investing Activities
      Capital expenditures were made during the past three years to improve
production efficiency, reduce operating costs and acquire additional
timberlands. MGI's consolidated capital expenditures were $23.1 million, $22.0
million and $22.9 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Capital expenditures, excluding expenditures for timberlands, are
estimated to be between $10.0 million and $12.0 million per year for the 2000 -
2002 period. Included in capital expenditures for 1999 and 1998 is $15.9 million
and $12.4 million, respectively, for timberland acquisitions. Pacific Lumber and
Scotia LLC may purchase additional timberlands from time to time as appropriate
opportunities arise.

   REAL ESTATE OPERATIONS

      Financing Activities and Liquidity
      As of December 31, 1999, the real estate segment had cash and marketable
securities of $24.3 million, $5.8 million of which is restricted. Long-term
debt, including current maturities, was $25.5 million as of December 31, 1999 as
compared to $27.4 million as of December 31, 1998. Current maturities of
long-term debt and short-term borrowings were $11.1 million as of December 31,
1999. As of December 31, 1999, the real estate segment had $8.6 million
available for use under a $14.0 million revolving bank credit facility. There
were no outstanding borrowings, and letters of credit outstanding amounted to
$1.6 million. The Company believes that the existing cash and credit facilities
of its real estate subsidiaries are sufficient to fund the working capital and
capital expenditure requirements of such subsidiaries for the next year. With
respect to the long-term liquidity of such subsidiaries, the Company believes
that their ability to generate cash from the sale of their existing real estate,
together with their ability to obtain financing and joint venture partners
should provide sufficient funds to meet their working capital and capital
expenditure requirements.

      Investing Activities
      Capital expenditures were $3.1 million, $22.2 million and $22.0 million
for the years ended December 31, 1999, 1998 and 1997, respectively. Capital
expenditures are expected to be approximately $6.0 million in 2000. Capital
expenditures in 1999 and 1998 include expenditures for the construction of a
golf course at the Company's Palmas del Mar resort.

RACING OPERATIONS

      Financing Activities and Liquidity
      At December 31, 1999, SHRP, Ltd. had cash and cash equivalents of $10.2
million, $3.5 million of which is restricted for payment of purses and property
taxes, and a line of credit from its partners of $1.7 million, substantially all
of which is the Company's portion. Long-term debt before discount, excluding
$56.3 million of debt held by affiliates, was $0.6 million as of December 31,
1999. SHRP, Ltd. is able to defer cash interest payments on its long-term debt
until September 1, 2001 or until certain conditions are met, and to defer the
payment of management fees until two consecutive interest payments on its
long-term debt have been paid in cash. The deferral of these items has
significantly improved SHRP, Ltd.'s liquidity.

      With respect to long-term liquidity, although only $0.6 million of SHRP,
Ltd.'s debt is owned by non-affiliates, there can be no assurance that SHRP,
Ltd. will be able to repay or refinance its long-term debt or that alternative
sources of funding will be available, if needed.

      Investing Activities
      Capital expenditures were $0.6 million, $1.0 million and $0.3 million for
the years ended December 31, 1999, 1998 and 1997, respectively. Capital
expenditures and investments in new ventures are expected to be approximately
$4.5 million in 2000.

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.

      The Company's forest products operations are conducted by MGI through
Pacific Lumber and Britt. Regulatory and environmental matters play a
significant role in Pacific Lumber's operations, which are subject to a variety
of California and federal laws and regulations, as well as the HCP, SYP and
Pacific Lumber's 2000 TOL, dealing with timber harvesting practices, threatened
and endangered species and habitat for such species, and air and water quality.
Moreover, these laws and regulations are modified from time to time and are
subject to judicial and administrative interpretation. Compliance with such
laws, regulations and judicial and administrative interpretations, and related
litigation have increased the cost of logging operations. The Company's forest
products segment has also been adversely affected by a lack of available logs as
a result of a severely diminished supply of available THPs. Prior to the
consummation of the Headwaters Agreement on March 1, 1999, the reduced number of
approved THPs was attributable to several factors, including a significantly
reduced level of THPs submitted by Pacific Lumber to the CDF during the second
half of 1998 and during the first two months of 1999 due to (a) the extensive
amount of time devoted by Pacific Lumber's foresters, wildlife and fisheries
biologists and other personnel to (i) amending a significant number of
previously submitted THPs to incorporate various new requirements which Pacific
Lumber agreed to in February 1998 in the course of completing the Headwaters
Agreement (the "PRE-PERMIT AGREEMENT"), (ii) preparing the Environmental Plans
and all the related data, responding to comments on the Environmental Plans,
assessing and responding to federal and state proposals and changes concerning
the Environmental Plans, and evaluating the Environmental Plans, (iii)
responding to comments received by Pacific Lumber from various federal and state
governmental agencies with respect to its filed THPs in light of the new and
more stringent requirements that Pacific Lumber agreed to observe pursuant to
the Pre-Permit Agreement, and (iv) responding to newly filed litigation
involving certain of Pacific Lumber's approved THPs and (b) implementation of a
provision contained in the Pre-Permit Agreement which required, for the first
time, a licensed geologist to review virtually all of Pacific Lumber's THPs
prior to submission to the CDF. Pacific Lumber also experienced an unexpected
significantly slower rate of review and approval with respect to its filed THPs
due, in large part, to the issues that emerged in applying the requirements
embodied in the Pre-Permit Agreement to Pacific Lumber's THPs, certain of which
requirements imposed new forestry practices that applied solely to Pacific
Lumber's operations.

      With the consummation of the Headwaters Agreement, Pacific Lumber has
completed its work in connection with preparation of the 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 is expected to continue into 2000. Pacific
Lumber believes that the rate of submissions of THPs during 2000 will increase
significantly. However, Pacific Lumber believes that the review and approval
process for THPs through at least the first quarter of 2000 will continue to be
slower than Pacific Lumber has historically experienced as Pacific Lumber, the
CDF and other agencies continue to develop procedures for implementing the
Environmental Plans. 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 13 to the Consolidated Financial Statements for further
information regarding regulatory and legal proceedings affecting the Company's
operations.

YEAR 2000

      The transition to the year 2000 date change was made without any
significant problems or interruption of business activity. Each of the Company's
segments had implemented programs to assess the impact of the year 2000 date
change on software and related technologies. Testing and modifications of the
Company's critical information systems, some of which began as early as 1997,
were completed prior to December 31, 1999. In some instances, it was cost
effective to purchase and implement new systems. Total spending to make these
systems year 2000 compliant for all segments was approximately $8.6 million, of
which $8.3 million related to Kaiser. System modification costs were expensed as
incurred. Costs associated with new systems were capitalized and will be
amortized over the lives of the systems.

ACCOUNTING PRONOUNCEMENTS

      Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities ("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. SFAS No. 133
initially required adoption by January 1, 2000. However, Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Financial Instruments
and Hedging Activities-Deferral of Effective Date of SFAS No. 133," issued in
June 1999, delayed the required implementation date of SFAS No. 133 to no later
than January 1, 2001. Under SFAS No. 133, the Company will be required to
"mark-to-market" its hedging positions at the end of each period in advance of
the period of recognition for the transactions to which the hedges relate.
Changes in the fair value of the Company's open hedging positions will be
reflected as an increase or reduction in stockholders' equity through
comprehensive income. The impact of the changes in fair value of the Company's
hedging positions will be reversed from comprehensive income (net of any
fluctuations in other "open" positions) and will be reflected in traditional net
income upon the occurrence of the transactions to which the hedges relate.
Currently, the dollar amount of the Company's comprehensive income adjustments
is not significant so there is no significant difference between "traditional"
net income and comprehensive income. However, differences between comprehensive
income and traditional net income may become significant in future periods as
SFAS No. 133 will result in fluctuations in comprehensive income and
stockholders' equity in periods of price volatility, despite the fact that the
Company's cash flow and earnings will be "fixed" to the extent hedged. The
Company is currently evaluating how and when to implement SFAS No. 133.

ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      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 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. As discussed
more fully in Notes 1 and 14 to the Consolidated Financial Statements, Kaiser
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. The following sets forth the impact
on future earnings of adverse market changes related to Kaiser's hedging
positions with respect to commodity and foreign exchange contracts described
more fully in Note 14 to the Consolidated Financial Statements. The impact of
market changes on energy derivative activities is generally not significant.

      Alumina and Primary Aluminum
      Alumina and primary aluminum production in excess of internal requirements
is sold in domestic and international markets, exposing Kaiser to commodity
price opportunities and risks. Kaiser's hedging transactions are intended to
provide price risk management in respect of the net exposure of earnings
resulting from (i) anticipated sales of alumina, primary aluminum and fabricated
aluminum products, less (ii) expected purchases of certain items, such as
aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with the
price of primary aluminum. On average, before consideration of hedging
activities, any fixed price contracts with fabricated aluminum products
customers, variations in production and shipment levels, and timing issues
related to price changes, Kaiser estimates that each $.01 increase (decrease) in
the market price per price-equivalent pound of primary aluminum increases
(decreases) Kaiser's annual pre-tax earnings by approximately $15.0 million.

      As of December 31, 1999, approximately 65% and 45% of Kaiser's net
hedgeable volume with respect to 2000 and 2001, respectively, is subject to a
minimum and maximum contract price. Based on the average December 31, 1999,
London Metal Exchange ("LME") cash price for primary aluminum of approximately
$.71 per pound, Kaiser estimates that it would realize a net aggregate pre-tax
reduction of operating income of approximately $70.0 million from its hedging
positions and fixed price customer contracts during 2000 and 2001. Kaiser
estimates that a hypothetical $.10 increase from the above stated December 1999
price would result in an additional net aggregate pre-tax reduction of operating
income of approximately $130.0 million being realized during 2000 and 2001
related to its hedging positions and fixed price customer contracts.
Approximately 40% of the total reductions in operating income would occur in the
first half of 2000. Both amounts are versus what Kaiser's results would have
been without the derivative commodity contracts and fixed price customer
contracts discussed above. Conversely, Kaiser estimates that a hypothetical $.10
decrease from the above stated December 1999 price level would result in an
aggregate pre-tax increase in operating income of approximately $30.0 million
being realized during 2000 and 2001 related to Kaiser's hedging positions and
fixed price customer contracts. It should be noted, however, that, since the
hedging positions and fixed price customer contracts lock-in a specified price
or range of prices, any increase or decrease in earnings attributable to
Kaiser's hedging positions or fixed price customer contracts would be
significantly offset by a decrease or increase in the value of the hedged
transactions.

     As stated in Note 14 to the Consolidated Financial Statements, Kaiser has
certain hedging positions which do not qualify for treatment as a "hedge" under
current accounting guidelines and thus must be marked-to-market each period.
Fluctuations in forward market prices for primary aluminum would likely result
in additional earnings volatility as a result of these positions. Kaiser
estimates that a hypothetical $.10 increase in spot market prices from the
December 31, 1999 LME cash price of $.74 per pound would, if the forward market
were in a "contango" position (i.e., where future prices exceed spot prices),
result in additional aggregate mark-to-market charges of between $20.0 to $30.0
million during 2000 and 2001. Conversely, Kaiser estimates that a hypothetical
$.10 decrease in year end 1999 spot market prices would result in aggregate
mark-to-market income of between $20.0 to $30.0 million during 2000 and 2001.
For purposes of this computation, Kaiser assumed that the forward market would
be essentially "flat" (i.e., future prices would approximate the current forward
market price).

      The foregoing estimated earnings impact on 2001 excludes the possible
effect on pre-tax income of SFAS No. 133 which must be adopted by the Company no
later than January 1, 2001.

      In addition to having an impact on Kaiser's earnings, a hypothetical
$.10-per-pound change in primary aluminum prices would also impact Kaiser's cash
flows and liquidity through changes in possible margin advance requirements. At
December 31, 1999, Kaiser had made margin advances of $38.0 million and had
posted letters of credit totaling $40.0 million in lieu of paying margin
advances. Increases in primary aluminum prices subsequent to December 31, 1999,
could result in Kaiser having to make additional margin advances or post
additional letters of credit and such amounts could be significant. If primary
aluminum prices increased by $.10 per pound (from the year-end 1999 price) by
March 31, 2000 and the forward curve were as described above, it is estimated
that Kaiser could be required to make additional margin advances in the range of
$75.0 to $100.0 million. On the other hand, a hypothetical $.10 decrease in
primary aluminum prices by March 31, 2000, using the same forward curve
assumptions stated above, would be expected to result in Kaiser receiving a
substantial majority of its previous margin advances. Kaiser's exposure to
margin advances is expected to improve throughout 2000 as its year 2000
positions, which have a lower average maximum contract price than Kaiser's 2001
positions, expire. Kaiser is considering various financing and hedging
strategies to limit its exposure to further margin advances in the event of
aluminum price increases. However, no assurance can be given that Kaiser will be
successful in this regard.

Foreign Currency

      Kaiser enters into forward exchange contracts to hedge material cash
commitments for foreign currencies. Kaiser's primary foreign exchange exposure
is related to its Australian dollar ("A$") commitments in respect of activities
associated with its 28.3%-owned affiliate, QAL. Kaiser estimates that, before
consideration of any hedging activities, a US $0.01 increase (decrease) in the
value of the A$ results in an approximate $1.0 million to $2.0 million
(decrease) increase in Kaiser's annual pre-tax earnings.

      At December 31, 1999, Kaiser held derivative foreign currency contracts
hedging approximately 82% and 27% of its A$ currency commitments for 2000 and
2001, respectively. Kaiser estimates that a hypothetical 10% reduction in the A$
exchange rate would result in Kaiser recognizing a net aggregate pre-tax cost of
approximately $3.0 million to $10.0 million during 2000 and 2001 related to its
foreign currency hedging positions. This cost is versus what Kaiser's results
would have been without Kaiser's derivative foreign currency contracts. It
should be noted, however, that since the hedging positions lock-in specified
rates, any increase or decrease in earnings attributable to currency hedging
instruments would be offset by a corresponding decrease or increase in the value
of the hedged commitments.


ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To MAXXAM Inc.:

We have audited the accompanying consolidated balance sheets of MAXXAM Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, cash flows and stockholders'
equity (deficit) for each of the three years in the period ended December 31,
1999. These consolidated 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 consolidated 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 Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, 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 the 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


Houston, Texas
March 7, 2000


                          MAXXAM INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               1999        1998
                                                                                            ----------- -----------
<S>                                                                                         <C>         <C>
ASSETS
Current assets:
   Cash and cash equivalents............................................................... $    275.7  $    294.2
   Marketable securities...................................................................       58.3        19.4
   Receivables:
      Trade, net of allowance for doubtful accounts of $6.0 and $6.4, respectively.........      169.4       184.5
      Other................................................................................      116.0       122.6
   Inventories.............................................................................      590.7       587.5
   Prepaid expenses and other current assets...............................................      192.7       152.4
                                                                                            ----------- -----------
        Total current assets...............................................................    1,402.8     1,360.6
Property, plant and equipment, net of accumulated depreciation of $977.9 and
   $921.5, respectively....................................................................    1,222.2     1,278.9
Timber and timberlands, net of accumulated depletion of $180.6 and $178.4,
   respectively............................................................................      254.1       302.3
Investments in and advances to unconsolidated affiliates...................................      112.6       146.5
Deferred income taxes......................................................................      549.1       555.8
Restricted cash and marketable securities..................................................      159.0        17.5
Long-term receivables and other assets.....................................................      693.3       413.6
                                                                                            ----------- -----------
                                                                                            $  4,393.1  $  4,075.2
                                                                                            =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Accounts payable........................................................................ $    243.1  $    182.9
   Accrued interest........................................................................       72.4        72.4
   Accrued compensation and related benefits...............................................      124.8       133.7
   Other accrued liabilities...............................................................      194.7       180.6
   Payable to affiliates...................................................................       85.8        77.1
   Short-term borrowings and current maturities of long-term debt..........................       46.0        37.0
                                                                                            ----------- -----------
        Total current liabilities..........................................................      766.8       683.7
Long-term debt, less current maturities....................................................    1,956.8     1,971.7
Accrued postretirement medical benefits....................................................      688.9       704.5
Other noncurrent liabilities...............................................................      810.1       604.8
                                                                                            ----------- -----------
        Total liabilities..................................................................    4,222.6     3,964.7
                                                                                            ----------- -----------
Commitments and contingencies
Minority interests.........................................................................      142.7       167.3
Stockholders' equity (deficit):
   Preferred stock, $0.50 par value; 12,500,000 shares authorized; Class A $0.05
      Non-Cumulative Participating Convertible Preferred Stock; 669,355 and
       669,435 shares issued, respectively.................................................        0.3         0.3
   Common stock, $0.50 par value; 28,000,000 shares authorized;
      10,063,359 shares issued.............................................................        5.0         5.0
   Additional capital......................................................................      225.3       222.8
   Accumulated deficit.....................................................................     (102.1)     (175.7)
   Accumulated other comprehensive loss - additional minimum pension liability.............       (0.7)          -
    Treasury stock, at cost (shares held:  preferred - 845; common - 2,805,608
      and  3,062,496, respectively)........................................................     (100.0)     (109.2)
                                                                                            ----------- -----------
        Total stockholders' equity (deficit)...............................................       27.8       (56.8)
                                                                                            ----------- -----------
                                                                                            $  4,393.1  $  4,075.2
                                                                                            =========== ===========

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


                          MAXXAM INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>

                                                                                    YEARS ENDED DECEMBER 31,
                                                                             --------------------------------------
                                                                                1999         1998          1997
                                                                             -----------  -----------  ------------
<S>                                                                          <C>          <C>          <C>
Net sales:
   Aluminum operations.....................................................  $  2,044.3   $  2,256.4   $   2,373.2
   Forest products operations..............................................       187.8        233.6         287.2
   Real estate operations..................................................        52.0         58.6          48.7
   Racing operations.......................................................        27.3         24.1          20.0
                                                                             -----------  -----------  ------------
                                                                                2,311.4      2,572.7       2,729.1
                                                                             -----------  -----------  ------------
Cost and expenses:
   Cost of sales and operations:
      Aluminum operations..................................................     1,859.2      1,906.2       1,951.2
      Forest products operations...........................................       159.5        155.3         162.0
      Real estate operations...............................................        29.7         33.5          28.0
      Racing operations....................................................        15.9         15.7          14.4
   Selling, general and administrative expenses............................       170.4        171.0         190.0
   Depreciation, depletion and amortization................................       108.4        120.4         127.4
   Impairment of assets....................................................        19.8         45.0             -
   Restructuring of aluminum operations....................................           -            -          19.7
                                                                             -----------  -----------  ------------
                                                                                2,362.9      2,447.1       2,492.7
                                                                             -----------  -----------  ------------

Operating income (loss)....................................................       (51.5)       125.6         236.4

Other income (expense):
   Gain on sale of Headwaters Timberlands..................................       239.8            -             -
   Gain on involuntary conversion at Gramercy facility.....................        85.0            -             -
   Investment, interest and other income (expense), net....................        18.3         36.3          49.7
   Interest expense........................................................      (190.1)      (201.3)       (201.4)
   Amortization of deferred financing costs................................        (7.0)        (7.2)        (10.2)
                                                                             -----------  -----------  ------------
Income (loss) before income taxes and minority interests ..................        94.5        (46.6)         74.5
Credit (provision) for income taxes........................................       (43.7)        32.1           6.9
Minority interests.........................................................        22.8         (0.2)        (16.2)
                                                                             -----------  -----------  ------------
Income (loss) before extraordinary item....................................        73.6        (14.7)         65.2
Extraordinary item:
   Loss on early extinguishment of debt, net of income tax benefit
        of $22.9...........................................................           -        (42.5)            -
                                                                             -----------  -----------  ------------
Net income (loss)..........................................................  $     73.6   $    (57.2)  $      65.2
                                                                             ===========  ===========  ============

Basic earnings (loss) per common share:
   Income (loss) before extraordinary item.................................  $    10.49   $    (2.10)  $      7.81
   Extraordinary item......................................................           -        (6.07)            -
                                                                             -----------  -----------  ------------
   Net income (loss).......................................................  $    10.49   $    (8.17)  $      7.81
                                                                             ===========  ===========  ============

Diluted earnings (loss) per common and common equivalent share:
   Income (loss) before extraordinary item.................................  $     9.49   $    (2.10)  $      7.14
   Extraordinary item......................................................           -        (6.07)            -
                                                                             -----------  -----------  ------------
   Net income (loss).......................................................  $     9.49   $    (8.17)  $      7.14
                                                                             ===========  ===========  ============


<FN>

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

                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>

                                                                                         YEARS ENDED DECEMBER 31,
                                                                                       ----------------------------
                                                                                         1999      1998      1997
                                                                                       --------  --------  --------
<S>                                                                                    <C>       <C>       <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss).................................................................. $  73.6   $ (57.2)  $  65.2
   Adjustments to reconcile net income (loss) to net cash provided
      by (used for) operating activities:
      Depreciation, depletion and amortization........................................   108.4     120.4     127.4
      Gain on sale of Headwaters Timberlands..........................................  (239.8)        -         -
      Gain on involuntary conversion at Gramercy facility.............................   (85.0)        -         -
      Impairment of assets............................................................    19.8      45.0         -
      Extraordinary loss on early extinguishment of debt, net.........................       -      42.5         -
      Restructuring of aluminum operations............................................       -         -      19.7
      Stock-based compensation expense................................................    11.7         -         -
      Net gain on other asset dispositions............................................   (45.3)        -      (7.9)
      Net gains on marketable securities..............................................   (18.2)     (8.6)    (18.1)
      Net sales (purchases) of marketable securities..................................   (20.7)     73.8     (16.2)
      Minority interests..............................................................   (22.8)      0.2      16.2
      Amortization of deferred financing costs and discounts on long-term debt........     7.3      17.9      24.8
      Equity in (earnings) loss of unconsolidated affiliates, net of dividends received   (4.6)     (0.5)     23.3
      Increase (decrease) in cash resulting from changes in:
        Receivables...................................................................    24.4      70.1     (86.1)
        Inventories...................................................................    (4.7)     38.7       0.4
        Prepaid expenses and other assets.............................................   (60.4)     24.3     (26.3)
        Accounts payable..............................................................    59.9      (4.7)    (14.8)
        Accrued and deferred income taxes.............................................    19.7     (23.9)     (4.4)
        Payable to affiliates and other liabilities...................................    16.8     (47.4)    (14.7)
        Accrued interest..............................................................       -       4.0       8.4
        Long-term assets and long-term liabilities....................................    20.7     (53.7)    (29.6)
      Other...........................................................................    (6.6)      4.3       1.3
                                                                                       --------  --------  --------
        Net cash provided by (used for) operating activities..........................  (145.8)    245.2      68.6
                                                                                       --------  --------  --------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net proceeds from dispositions of property and investments.........................   375.1      23.1      40.6
   Capital expenditures...............................................................   (95.8)   (122.1)   (164.5)
   Restricted cash withdrawals used to acquire timberlands............................    12.9       8.9         -
   Investment in subsidiaries and joint ventures......................................       -     (10.6)     (7.2)
   Other..............................................................................    (3.3)      2.9      (7.8)
                                                                                       --------  --------  --------
        Net cash provided by (used for) investing activities..........................   288.9     (97.8)   (138.9)
                                                                                       --------  --------  --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of long-term debt...........................................     2.9     875.5      30.1
   Premiums for early retirement of debt..............................................       -     (45.5)        -
   Redemptions, repurchase of and principal payments on long-term debt................   (19.6)   (804.0)    (78.4)
   Net borrowings under revolving and short-term credit facilities....................    10.4      16.0       2.5
   Restricted cash withdrawals (deposits), net........................................  (154.4)      7.3      (3.7)
   Treasury stock repurchases.........................................................       -     (35.1)    (52.8)
   Incurrence of deferred financing costs.............................................    (0.7)    (23.4)     (1.8)
   Other..............................................................................    (0.2)     (8.6)      2.4
                                                                                       --------  --------  --------
        Net cash used for financing activities........................................  (161.6)    (17.8)   (101.7)
                                                                                       --------  --------  --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................   (18.5)    129.6    (172.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................................   294.2     164.6     336.6
                                                                                       --------  --------  --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............................................. $ 275.7   $ 294.2   $ 164.6
                                                                                       ========  ========  ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                          MAXXAM INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
               (IN MILLIONS OF DOLLARS, EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>


                                                                                  ACCUMU-
                                                                                  LATED
                                                                                  OTHER
                                  PREFERRED     COMMON STOCK     ADDI-   ACCUMU-  COMPRE-                     COMPRE-
                                    STOCK                       TIONAL    LATED   HENSIVE  TREASURY           HENSIVE
                                  ($.50 PAR)  Shares ($.50 Par) CAPITAL  DEFICIT   INCOME    STOCK    TOTAL   INCOME
                                  ---------   ----------------  ------- --------- -------- --------- -------- -------
<S>                               <S>         <C>               <C>     <C>       <C>      <C>       <C>      <C>
Balance, December 31, 1996....... $    0.3       8.7  $   5.0   $155.9  $ (185.6) $  (5.1) $  (21.3) $ (50.8)
   Net income....................        -         -        -        -      65.2        -         -     65.2  $ 65.2
   Reduction of pension
      liability..................        -         -        -        -         -      1.8         -      1.8     1.8
                                                                                                              -------
   Comprehensive income..........                                                                             $ 67.0
                                                                                                              =======
   Gain from issuance of
      Kaiser Aluminum
      Corporation common
      stock due to PRIDES
      conversion.................        -         -        -     62.9       1.9        -         -     64.8
   Gain from other issuances
      of Kaiser Aluminum
      Corporation common
      stock......................        -         -        -      1.1         -        -         -      1.1
   Treasury stock
      repurchases................        -      (1.7)       -        -         -        -     (87.9)   (87.9)
   Gain on settlement
      of shareholder
      litigation.................        -         -        -      2.9         -        -         -      2.9
                                  ---------   ------- --------  ------- --------- -------- --------- --------

Balance, December 31, 1997.......      0.3       7.0      5.0    222.8    (118.5)    (3.3)   (109.2)    (2.9)
   Net loss......................        -         -        -        -     (57.2)       -         -    (57.2) $(57.2)
   Reduction of pension
      liability..................        -         -        -        -         -      3.3         -      3.3     3.3
                                                                                                              -------
   Comprehensive loss............                                                                             $(53.9)
                                  ---------   ------- --------  ------- --------- -------- --------- -------- =======

Balance, December 31, 1998.......      0.3       7.0      5.0    222.8    (175.7)       -    (109.2)   (56.8)
   Net income....................        -         -        -        -      73.6        -         -     73.6  $ 73.6
   Increase in pension liability.        -         -        -        -         -     (0.7)        -     (0.7)   (0.7)
                                                                                                              -------
   Comprehensive income..........                                                                             $ 72.9
                                                                                                              =======
   Treasury stock issuances......        -         -        -      2.5         -        -       9.2     11.7
                                  ---------   ------- --------  ------- --------- -------- --------- --------
Balance, December 31, 1999....... $    0.3       7.0  $   5.0   $225.3  $ (102.1) $  (0.7) $ (100.0) $  27.8
                                  =========   ======= ========  ======= ========= ======== ========= ========

<FN>

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


                          MAXXAM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PRESENTATION

      The Company
      The consolidated financial statements include the accounts of MAXXAM Inc.
and its majority and wholly owned subsidiaries. All references to the "COMPANY"
include MAXXAM Inc. and its majority owned and wholly owned subsidiaries, unless
otherwise indicated or the context indicates otherwise. Intercompany balances
and transactions have been eliminated. Investments in affiliates (20% to
50%-owned) are accounted for utilizing the equity method of accounting. Certain
reclassifications have been made to prior years' consolidated financial
statements to be consistent with the current year's presentation.

      The Company is a holding company and, as such, conducts substantially all
of its operations through its subsidiaries. The Company operates in four
principal industries: aluminum, through its majority owned subsidiary, Kaiser
Aluminum Corporation ("KAISER", 63% owned as of December 31, 1999), an
integrated aluminum producer; forest products, through MAXXAM Group Inc. ("MGI")
and MGI's wholly owned subsidiaries, The Pacific Lumber Company ("PACIFIC
LUMBER") and Britt Lumber Co., Inc. ("BRITT"); real estate investment and
development, managed through its wholly owned subsidiary, MAXXAM Property
Company, and racing operations through Sam Houston Race Park, Ltd. ("SHRP,
LTD."), a Texas limited partnership, in which the Company owned a 98.9% interest
as of December 31, 1999. MAXXAM Group Holdings Inc. ("MGHI") owns 100% of MGI
and is a wholly owned subsidiary of the Company.

      Description of the Company's Operations
      Kaiser, through its wholly owned principal operating subsidiary, Kaiser
Aluminum & Chemical Corporation ("KACC"), operates in several principal aspects
of the aluminum industry - the mining of bauxite (the major aluminum- bearing
ore), the refining of bauxite into alumina (the intermediate material), the
production of aluminum and the manufacture of fabricated and semi-fabricated
aluminum products. Kaiser's production levels of alumina, before consideration
of the Gramercy incident described in Note 2, and primary aluminum exceed its
internal processing needs, which allows it to be a major seller of alumina and
primary aluminum in domestic and international markets. A substantial portion of
the Company's consolidated assets, liabilities, revenues, results of operations
and cash flows are attributable to Kaiser (see Note 15).

      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.

      The Company, principally through its wholly owned subsidiaries, is also
engaged in the business of residential and commercial real estate investment and
development, primarily in Puerto Rico, Arizona and California.

      Racing operations are conducted through SHRP, Ltd. which owns and operates
a Class 1, pari-mutuel horse racing facility in the greater Houston metropolitan
area.

      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
their publication. Adjustments made with respect to the use of estimates often
relate to improved information not previously available. Uncertainties with
respect to such estimates and assumptions are inherent in the preparation of
the Company's consolidated financial statements; accordingly, it is possible
that the subsequent resolution of any one of the contingent matters described
in Note 13 could differ materially from current estimates. The results of an
adverse resolution of such uncertainties could have a material effect on
the Company's consolidated financial position, results of operations or
liquidity.

   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Cash Equivalents
      Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less. See "Restricted Cash and Marketable
Securities" below.

      Marketable Securities
      Marketable securities which are considered "held-to-maturity" securities
consist of commercial paper with original maturities in excess of three months
and other types of corporate and government debt obligations. These securities
are carried at cost adjusted for discount and premium amortization. As of
December 31, 1999 and 1998, the carrying amount approximated fair value.
Marketable securities which are considered "trading" or "available for sale"
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, 1999 were: 1999 - net unrealized holding losses of
$1.4 million and net realized gains of $18.8 million; 1998 - net unrealized
holding losses of $3.8 million and net realized gains of $11.9 million; and 1997
- net unrealized holding gains of $5.0 million and net realized gains of $11.9
million. See "Restricted Cash and Marketable Securities" below.

      Inventories
      Inventories are stated at the lower of cost or market. Cost for the
aluminum and forest products operations inventories 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. Other inventories of the
aluminum operations, principally operating supplies and repair and maintenance
parts, are stated at the lower of average cost or market. Inventory costs
consist of material, labor and manufacturing overhead, including depreciation
and depletion.

      Inventories consist of the following (in millions):

<TABLE>
<CAPTION>

                                                                            DECEMBER 31,
                                                                        --------------------
                                                                          1999       1998
                                                                        ---------  ---------
<S>                                                                     <C>        <C>
Aluminum operations:
   Finished fabricated products........................................ $  118.5   $  112.4
   Primary aluminum and work in process................................    189.4      205.6
   Bauxite and alumina.................................................    124.1      109.5
   Operating supplies and repair and maintenance parts.................    114.1      116.0
                                                                        ---------  ---------
                                                                           546.1      543.5
                                                                        ---------  ---------
Forest products operations:
   Lumber..............................................................     23.2       36.0
   Logs................................................................     21.4        8.0
                                                                        ---------  ---------
                                                                            44.6       44.0
                                                                        ---------  ---------
                                                                        $  590.7   $  587.5
                                                                        =========  =========
</TABLE>

      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.

      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.

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

      Restricted Cash and Marketable Securities
      Cash and cash equivalents and marketable securities includes restricted
investments of $70.0 million and $96.1 million at December 31, 1999 and 1998,
respectively. Restricted investments are primarily held as security for short
positions in marketable securities and for debt service payments on the
Company's Class A-1, Class A-2 and Class A-3 Timber Collateralized Notes due
2028 (the "TIMBER NOTES").

      Long-term restricted cash and marketable securities of $159.0 million at
December 31, 1999 primarily represents amounts held in a Scheduled Amortization
Reserve Account (the "SAR ACCOUNT") to support principal payments on the Timber
Notes, whereas long-term restricted cash of $17.5 million at December 31, 1998
primarily represents the amount held in an account by the trustee (the
"PREFUNDING ACCOUNT") under the indenture governing the Timber Notes (the
"TIMBER NOTES INDENTURE") to enable Scotia Pacific Company LLC ("SCOTIA LLC"), a
limited liability company wholly owned by Pacific Lumber, to acquire
timberlands.

      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 within the same issue.

      Investment, Interest and Other Income (Expense), Net
      Investment, interest and other income (expense), net for the years ended
December 31, 1999, 1998 and 1997 includes $53.2 million, $12.7 million, and $8.8
million, respectively, of pre-tax charges related principally to establishing
additional litigation reserves for asbestos claims, net of estimated insurance
recoveries, pertaining to operations which were discontinued prior to the
acquisition of Kaiser by the Company in 1988. Other investment, interest and
other income (expense), net in 1999 also includes $32.8 million of pre-tax
charges to reflect mark-to-market adjustments on certain primary aluminum
hedging transactions, a net pre-tax gain of $50.5 million on the sale of
Kaiser's 50% interest in AKW L.P. ("AKW"), an aluminum wheels joint venture, and
a $7.4 million gain related to insurance recoveries for property damage
resulting from a hurricane which hit Puerto Rico in 1998. Other investment,
interest and other income (expense), net in 1998 includes $12.0 million
attributable to insurance recoveries related to certain environmental costs
incurred. Also included in investment, interest and other income (expense), net
are net gains from sales of real estate and equity in earnings from real estate
joint ventures of $8.7 million, $11.2 million and $13.5 million for the years
ended December 31, 1999, 1998 and 1997, respectively.

      Foreign Currency Translation
      The Company uses the United States dollar as the functional currency for
its foreign operations.

      Derivative Financial Instruments
      Hedging transactions using derivative financial instruments are primarily
designed to mitigate Kaiser's exposure to changes in prices for certain of the
products which Kaiser sells and consumes and, to a lesser extent, to mitigate
Kaiser's exposure to changes in foreign currency exchange rates. Kaiser does not
utilize derivative financial instruments for trading or other speculative
purposes. Kaiser's derivative activities are initiated within guidelines
established by Kaiser's management and approved by Kaiser's board of directors.
Hedging transactions are executed centrally on behalf of all of Kaiser's
business segments to minimize transaction costs, monitor consolidated net
exposures and allow for increased responsiveness to changes in market factors.

      Most of Kaiser's hedging activities involve the use of option contracts
(which establish a maximum and/or minimum amount to be paid or received) and
forward sales contracts (which effectively fix or lock-in the amount Kaiser will
pay or receive). Option contracts typically require the payment of an up-front
premium in return for the right to receive the amount (if any) by which the
price at the settlement date exceeds the strike price. Any interim fluctuations
in prices prior to the settlement date are deferred until the settlement date of
the underlying hedged transaction, at which point they are reflected in net
sales or cost of sales (as applicable) together with the related premium cost.
Forward sales contracts do not require an up-front payment and are settled by
the receipt or payment of the amount by which the price at the settlement date
varies from the contract price. No accounting recognition is accorded to interim
fluctuations in prices of forward sales contracts.

      Kaiser has established margin accounts and credit limits with certain
counterparties related to open forward sales and option contracts. When
unrealized gains or losses are in excess of such credit limits, Kaiser is
entitled to receive advances from the counterparties on open positions or is
required to make margin advances to counterparties, as the case may be. At
December 31, 1999, Kaiser had made margin advances of $38.0 million and had
posted letters of credit totaling $40.0 million in lieu of paying margin
advances. At December 31, 1998, Kaiser had received $9.9 million of margin
advances. Increases in primary aluminum prices subsequent to December 31, 1999,
could result in Kaiser having to make additional margin advances or post
additional letters of credit and such amounts could be significant. Kaiser
considers credit risk related to possible failure of the counterparties to
perform their obligations pursuant to the derivative contracts to be minimal.

      Deferred gains or losses as of December 31, 1999, are included in prepaid
expenses and other current assets and other accrued liabilities. See Note 14.

      Fair Value of Financial Instruments
      The carrying amounts of cash equivalents approximate fair value.
Marketable securities are carried at fair value which is determined based on
quoted market prices. As of December 31, 1999 and 1998, the estimated fair value
of debt, including current maturities, was $1,897.5 million and $1,939.9
million, respectively. The estimated fair value of debt is determined based on
the quoted market prices for the publicly traded issues and on the current rates
offered for borrowings similar to the other debt. Some of the Company's publicly
traded debt issues are thinly traded financial instruments; accordingly, their
market prices at any balance sheet date may not be representative of the prices
which would be derived from a more active market.

      Stock-Based Compensation
      The Company applies the "intrinsic value" method described by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations to account for stock and stock-based compensation awards
(see Note 12). In accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," the Company calculated pro
forma compensation cost for all stock options granted using the "fair value"
method. The fair values of the stock options granted were estimated using the
Black-Scholes option pricing model. The Company's pro forma income (loss) before
extraordinary item and diluted earnings per share before extraordinary item
would have been $69.1 million and $8.91 per share, respectively, for the year
ended December 31, 1999, $(17.8) million and $(2.54) per share, respectively,
for the year ended December 31, 1998, and $64.0 million and $7.00 per share,
respectively, for the year ended December 31, 1997.

      Per Share Information
      Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period including the weighted average impact of the shares of common stock
issued and treasury stock acquired during the year from the date of issuance or
repurchase. The weighted average common shares outstanding were 7,013,547
shares, 7,000,663 shares and 8,357,062 shares for the years ended December 31,
1999, 1998 and 1997, respectively.

      Diluted earnings (loss) per share calculations also include the dilutive
effect of the Class A Preferred Stock (which is convertible into Common Stock)
as well as common and preferred stock options. The weighted average number of
common and common equivalent shares was 7,755,147 shares, 7,812,377 shares and
9,143,920 shares for the years ended December 31, 1999, 1998 and 1997,
respectively. The impact of outstanding convertible stock and stock options of
811,714 shares was excluded from the weighted average share calculation for the
year ended December 31, 1998, as its effect would have been antidilutive.

      Labor Related Costs
      Kaiser is currently operating five of its United States facilities with
salaried employees and other workers as a result of the September 30, 1998
strike by the United Steelworkers of America ("USWA") and the subsequent "lock-
out" by Kaiser in January 1999. However, Kaiser has continued to accrue certain
benefits (such as pension and other postretirement benefit costs/liabilities)
for the USWA members during the period of the strike and subsequent lock-out.
For purposes of computing the benefit-related costs and liabilities to be
reflected in the accompanying Consolidated Financial Statements for the year
ended December 31, 1999, Kaiser has based its accruals on the terms of the
previously existing (expired) USWA contract. Any differences between the amounts
accrued and the amounts ultimately agreed to during the collective bargaining
process will be reflected in future results during the term of any new contract.

      All incremental operating costs incurred as a result of the USWA strike
and subsequent lockout are being expensed as incurred. During 1998, such costs
were substantial, totaling approximately $50.0 million. Kaiser's 1998 results
also reflect reduced profitability of approximately $10.0 million resulting from
the strike-related curtailment of three potlines (representing approximately
70,000 tons of annual capacity) at Kaiser's Mead and Tacoma, Washington,
smelters and certain other shipment delays experienced at the other affected
facilities at the outset of the USWA strike. (All references to tons refer to
metric tons of 2,204.6 pounds.) During 1999, strike related costs were virtually
eliminated except for the restart costs of approximately $12.8 million
associated with restarting potlines at Kaiser's smelters and the impact of
reduced volume.

2.    INCIDENT AT GRAMERCY FACILITY

      On July 5, 1999, Kaiser's Gramercy, Louisiana, alumina refinery was
extensively damaged by an explosion in the digestion area of the plant.
Twenty-four employees were injured in the incident, several of them severely. As
a result of the incident, alumina production at the facility was completely
curtailed. Production at the plant is expected to remain completely curtailed
until the third quarter of 2000 when Kaiser expects to begin partial production.
Based on current estimates, full production is expected to be achieved during
the first quarter of 2001 or shortly thereafter. Kaiser has received the
regulatory permit required to operate the plant once the facility is ready to
resume production.

      The cause of the incident is under investigation by Kaiser and
governmental agencies. In January 2000, the U.S. Mine Safety and Health
Administration ("MSHA") issued 21 citations in connection with its investigation
of the incident. The citations allege, among other things, that certain aspects
of the plant's operations were unsafe and that such mode of operation
contributed to the explosion. To date, no monetary penalty has been proposed by
MSHA. Although Kaiser expects that a fine will be levied, Kaiser cannot predict
the amount of any such fine. It is possible that other civil or criminal fines
or penalties could be levied against Kaiser. Kaiser has previously announced
that it disagrees with the substance of the citations and has challenged them.
However, as more fully explained below, based on what is known to date and
discussions with Kaiser's advisors, Kaiser believes that the financial impact of
this incident (in excess of insurance deductibles and self-retention provisions)
will be largely offset by insurance coverage. Deductibles and self-retention
provisions under the insurance coverage for the incident total $5.0 million,
which amounts have been charged to cost of sales and operations in 1999.

      Kaiser has significant amounts of insurance coverage related to the
Gramercy incident. Kaiser's insurance coverage has five separate components:
property damage, clean-up and site preparation, business interruption, liability
and workers' compensation. The insurance coverage components are discussed
below.

      Property Damage
      Kaiser's insurance policies provide that it will be reimbursed for the
costs of repairing or rebuilding the damaged portion of the facility using new
materials of like kind and quality with no deduction for depreciation. Based on
discussions with the insurance carriers and their representatives and third
party engineering reports, Kaiser recorded a pre-tax gain of $85.0 million,
representing the difference between the minimum expected property damage
reimbursement amount and the carrying value of the damaged property of $15.0
million. The receivable attributable to the minimum expected property damage
reimbursement has been reflected in long-term receivables and other assets,
despite the fact that substantially all such amounts are expected to be spent
during 2000, as such proceeds will be invested in property, plant and equipment.
The overall impact of recognizing the gain was a significant increase in
stockholders' equity. In future years once production is restored, Kaiser will
recognize an increase in depreciation expense.

      Clean-up and Site Preparation
      The Gramercy facility has incurred incremental costs for clean up and
other activities during 1999 and will continue to incur such costs in 2000.
These clean-up and site preparation activities have been offset by accruals of
approximately $14.0 million for estimated insurance recoveries.

      Business Interruption
      Kaiser's insurance policies provide for the reimbursement of specified
continuing expenses incurred during the interruption period plus lost profits
(or less expected losses) plus other expenses incurred as a result of the
incident. Operations at the Gramercy facility and a sister facility in Jamaica,
which supplies bauxite to Gramercy, will continue to incur operating expenses
until production at the Gramercy facility is restored. Kaiser will also incur
increased costs as a result of agreements to supply certain of Gramercy's major
customers with alumina, despite the fact that Kaiser had declared force majeure
with respect to the contracts shortly after the incident. Kaiser is purchasing
alumina from third parties, in excess of the amounts of alumina available from
other Kaiser-owned facilities, to supply these customers' needs as well as to
meet intersegment requirements. In consideration of the foregoing items, Kaiser
recorded expected business interruption insurance recoveries totaling $41.0
million for the year ended December 31, 1999 as a reduction of cost of sales and
operations, which amounts substantially offset actual expenses incurred during
the year. Such business interruption insurance amounts represent estimates of
Kaiser's business interruption coverage based on discussions with the insurance
carriers and their representatives and are therefore subject to change.

      Since production has been completely curtailed at the Gramercy facility,
Kaiser has, for the time being, suspended depreciation of the facility.
Depreciation expense for the first six months of 1999 was approximately $6.0
million.

      Liability
      The incident has also resulted in 36 class action lawsuits being filed
against Kaiser alleging, among other things, property damage and personal
injury. In addition, a claim for alleged business interruption losses has been
made by a neighboring business. The aggregate amount of damages sought in the
lawsuits and other claims cannot be determined at this time; however, Kaiser
does not believe the damages will exceed the amount of coverage under its
liability policies.

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

      Timing of Insurance Recoveries
     As of December 31, 1999, Kaiser had recorded estimated recoveries for
clean-up, site preparation and business interruption costs incurred of
approximately $55.0 million. As of December 31, 1999, approximately $50.0
million of insurance recoveries had been received. Additionally through February
29, 2000, Kaiser had received approximately $25.0 million of additional
insurance recoveries. Kaiser continues to work with the insurance carriers to
maximize the amount of recoveries and to minimize, to the extent possible, the
period of time between when Kaiser expends funds and when it is reimbursed.
However, Kaiser will likely have to fund an average of 30 - 60 days of property
damage and business interruption activity, unless some other arrangement is
agreed to with the insurance carriers, and such amounts will be significant.
Kaiser believes it has sufficient financial resources to fund the construction
and business interruption costs on an interim basis. However, no assurances can
be given in this regard. If insurance recoveries were to be delayed or if there
were to be other significant uses of the capacity existing under a credit
agreement which Kaiser entered into in February 1994 (the "KACC CREDIT
AGREEMENT"), delays in the rebuilding of the Gramercy refinery could occur and
could have a material adverse impact on Kaiser's liquidity and operating
results.

3.    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 LLC ("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 13 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 or $18.17 per share) 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 future sale of two timber properties known as the Owl Creek grove and
the Grizzly Creek grove. Under these agreements, Scotia LLC would sell the Owl
Creek grove to California, no later than June 30, 2001, for the lesser of the
appraised fair market value or $79.7 million, and California must purchase from
Pacific Lumber, no later than October 31, 2000, a portion of the Grizzly Creek
grove for a purchase price determined based on fair market value, but not to
exceed $20.0 million. California also has a five year option under these
agreements to purchase additional property adjacent to the Grizzly Creek grove.
The sale of the Owl Creek grove or Grizzly Creek grove will not be reflected in
the Company's financial statements until each has been concluded.

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

      Disposition of Interest in AKW
      On April 1, 1999, Kaiser completed the sale of its 50% interest in AKW to
its partner, Accuride Corporation, for $70.4 million. The sale resulted in the
Company recognizing a net pre-tax gain of $50.5 million in the second quarter of
1999. The Company's equity in income of AKW for the years ended December 31,
1999, 1998 and 1997 was $2.5 million, $7.8 million and $4.8 million,
respectively.

4.    RESTRUCTURING OF OPERATIONS

      During 1997, Kaiser recorded a $19.7 million restructuring charge to
reflect actions taken and plans initiated to achieve reduced production costs,
decreased corporate selling, general and administrative expenses, and enhanced
product mix. The significant components of the restructuring charge were: (i) a
net loss of approximately $1.4 million as a result of the contribution of
certain net assets of Kaiser's Erie, Pennsylvania fabrication plant in
connection with the formation of AKW and the subsequent decision to close the
remainder of the Erie plant in order to consolidate its forging operations into
two other facilities; (ii) a charge of $15.6 million associated with asset
dispositions regarding product rationalization and geographical optimization,
and (iii) a charge of approximately $2.7 million for benefit and other costs
associated with the consolidation or elimination of certain corporate and other
staff functions.

5.    INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

      Summary combined financial information is provided below for
unconsolidated aluminum investments, most of which supply and process raw
materials. The investees are Queensland Alumina Limited ("QAL") (28.3% owned),
Anglesey Aluminium Limited ("ANGLESEY") (49% owned), Kaiser Jamaica Bauxite
Company (49% owned), and AKW (50% owned). Kaiser's equity in earnings (loss)
before income taxes of such operations is treated as a reduction (increase) in
cost of sales and operations. At December 31, 1999 and 1998, Kaiser's net
receivables from these affiliates were not material. On April 1, 1999, Kaiser
sold its 50% interest in AKW to its partner for $70.4 million, which resulted in
the Company recognizing a net pre-tax gain of $50.5 million (included in
investment, interest and other income (expense), net) The Company's equity in
earnings of AKW was $2.5 million, $7.8 million, and $4.8 million for the years
ended December 31, 1999, 1998, and 1997, respectively.

      Kaiser has a variety of financial commitments, including purchase
agreements, tolling arrangements, forward foreign exchange and forward sales
contracts (see Note 14), letters of credit, and guarantees. Such purchase
agreements and tolling arrangements include long-term agreements for the
purchase and tolling of bauxite into alumina in Australia by QAL. These
obligations expire in 2008. Under the agreements, Kaiser is unconditionally
obligated to pay its proportional share of debt, operating costs, and certain
other costs of QAL. Kaiser's share of the aggregate minimum amount of required
future principal payments at December 31, 1999, is $103.6 million which matures
as follows: $11.3 million in 2000, $14.1 million in 2001, $43.0 million in 2002,
and $35.2 million in 2003. Kaiser's share of payments, including operating costs
and certain other expenses under the agreements, has ranged between $92.0
million to $100.0 million over the past three years. Kaiser also has agreements
to supply alumina to and to purchase aluminum from Anglesey.

<TABLE>
<CAPTION>

                                                                                  DECEMBER 31,
                                                                             -----------------------
                                                                                1999        1998
                                                                             ----------  -----------
                                                                             (In millions of dollars)
<S>                                                                          <C>         <C>
Current assets.............................................................  $   370.4   $    356.0
Long-term assets (primarily property, plant and equipment, net)............      344.1        393.9
                                                                             ----------  -----------
   Total assets............................................................  $   714.5   $    749.9
                                                                             ==========  ===========

Current liabilities........................................................  $   120.4   $     92.2
Long-term liabilities (primarily long-term debt)...........................      368.3        396.6
Stockholders' equity.......................................................      225.8        261.1
                                                                             ----------  -----------
   Total liabilities and stockholders' equity..............................  $   714.5   $    749.9
                                                                             ==========  ===========

</TABLE>

<TABLE>
<CAPTION>

                                                                  YEARS ENDED DECEMBER 31,
                                                            ------------------------------------
                                                               1999         1998        1997
                                                            -----------  ----------  -----------
                                                                  (In millions of dollars)
<S>                                                         <C>          <C>         <C>
Net sales.................................................. $    594.9   $   659.2   $    644.1
Costs and expenses.........................................     (582.9)     (651.7)      (637.8)
Benefit (provision) for income taxes.......................        0.8        (2.7)        (8.2)
                                                            -----------  ----------  -----------
Net income (loss).......................................... $     12.8   $     4.8   $     (1.9)
                                                            ===========  ==========  ===========

Kaiser's equity in earnings................................ $      4.9   $     5.4   $      2.9
                                                            ===========  ==========  ===========

Dividends received......................................... $        -   $     5.5   $     10.7
                                                            ===========  ==========  ===========

</TABLE>

      Kaiser's equity in earnings differs from the summary net income (loss) due
to varying percentage ownerships in the entities and equity method accounting
adjustments. At December 31, 1999, Kaiser's investment in its unconsolidated
affiliates exceeded its equity in their net assets by approximately $9.2
million. Amortization of the excess investment totaling $9.9 million, $10.0
million, and $11.4 million is included in depreciation, depletion and
amortization for the years ended December 31, 1999, 1998, and 1997,
respectively.

      Kaiser and its affiliates have interrelated operations. Kaiser provides
some of its affiliates with services such as financing, management, and
engineering. Significant activities with affiliates include the acquisition and
processing of bauxite, alumina, and primary aluminum. Purchases from these
affiliates were $152.9 million, $235.1 million, and $245.2 million, in the years
ended December 31, 1999, 1998, and 1997, respectively.

      Other Investees
      In October 1998, pursuant to a joint agreement with Westbrook Firerock LLC
("WESTBROOK") for the purpose of developing and managing a real estate project
in Arizona, the Company, through a wholly owned real estate subsidiary,
contributed 808 acres of undeveloped land having an agreed upon value of $11.0
million in exchange for a 50% initial interest in the joint venture. Westbrook
contributed $5.5 million in cash in 1998 and an additional $5.5 million in cash
in 1999. At December 31, 1999, the joint venture had assets of $43.1 million,
liabilities of $17.4 million and equity of $25.7 million. At December 31, 1998,
the joint venture had assets of $17.6 million, liabilities of $1.1 million and
equity of $16.5 million. For the year ended December 31, 1999, the joint venture
had income of $3.7 million. For the year ended December 31, 1998, the joint
venture's income was not significant.

      The Company and SunCor Development Company ("SUNCOR") each hold a 50%
interest in a joint venture which develops and manages a real estate project in
Arizona. At December 31, 1999, the joint venture had assets of $19.7 million,
liabilities of $10.2 million and equity of $9.5 million. At December 31, 1998,
the joint venture had assets of $28.0 million, liabilities of $8.7 million and
equity of $19.3 million. For the years ended December 31, 1999, 1998 and 1997,
the joint venture had income of $4.8 million, $3.8 million and $3.8 million,
respectively.

6.    PROPERTY, PLANT AND EQUIPMENT

      The major classes of property, plant and equipment are as follows (dollar
amounts in millions):

<TABLE>
<CAPTION>

                                                                                                 DECEMBER 31,
                                                                         ESTIMATED USEFUL   -----------------------
                                                                               LIVES           1999        1998
                                                                         -----------------  ----------  -----------
<S>                                                                      <C>                <C>         <C>
Land and improvements...................................................     5 - 30 years   $   236.2   $    225.9
Buildings...............................................................     5 - 45 years       303.6        328.0
Machinery and equipment.................................................     3 - 22 years     1,590.8      1,595.8
Construction in progress................................................                         69.5         50.7
                                                                                            ----------  -----------
                                                                                              2,200.1      2,200.4
Less:  accumulated depreciation.........................................                       (977.9)      (921.5)
                                                                                            ----------  -----------
                                                                                            $ 1,222.2   $  1,278.9
                                                                                            ==========  ===========

</TABLE>


      Depreciation expense for the years ended December 31, 1999, 1998 and 1997
was $101.5 million, $97.7 million and $99.9 million, respectively.

      In the latter part of 1998, Kaiser decided to seek a strategic partner for
the further development and deployment of its Micromill technology. This change
in strategic course was based on management's conclusion that additional time
and investment would be required to achieve a commercial success. Given its
other strategic priorities, Kaiser believed that introducing added commercial
and financial resources was the appropriate course of action for capturing the
maximum long-term value. A number of third parties were contacted regarding
joint ventures or other arrangements. In September 1999, based on negotiations
with these third parties, Kaiser concluded that a sale of the Micromill assets
and technology was more likely than a partnership. Kaiser signed an agreement to
sell the Micromill assets and technology in January 2000 for a nominal payment
at closing and future payments based on subsequent performance and profitability
of the Micromill technology. As a result of the changes in strategic course in
1999 and 1998, the carrying value of the Micromill assets was reduced by
recording impairment charges of $19.1 million and $45.0 million, respectively.

7.    SHORT-TERM BORROWINGS

      During 1999 and 1998, the Company had average short-term borrowings
outstanding of $18.5 million and $18.6 million, respectively, under the debt
instruments described below. The weighted average interest rate during 1999 and
1998 was 7.2% and 9.1%, respectively.

      MAXXAM Loan Agreement (the "CUSTODIAL TRUST AGREEMENT")
      On October 19, 1998, the Company drew down $16.0 million, the amount
available as of such date, under the Custodial Trust Agreement which provided
for up to $25.0 million in borrowings. The borrowing converted to a term loan
bearing interest at LIBOR plus 2% per annum and is secured by 7,915,000 shares
of Kaiser common stock. The loan matures on October 21, 2000.

      Demand Note
      On November 26, 1997, the Company entered into a credit facility with an
investment bank providing for up to $25.0 million in borrowings payable on
demand. Borrowings are secured by 400,000 shares of Kaiser common stock for each
$1.0 million of borrowings. As of December 31, 1999, $2.5 million of borrowings
were outstanding under this facility. No additional borrowings were available
under this facility as of December 31, 1999 as the per share market price for
the Kaiser common stock was below the minimum required by the facility.

      Notes to NL Industries, Inc. ("NL") and the Combined Master Retirement
      Trust ("CMRT")
      On May 14, 1998, the Company repaid the $35.1 million 10% one-year notes
issued to NL and CMRT in connection with the October 1997 repurchase of
1,277,250 shares of the Company's common stock.

      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, 1999, $34.1 million of borrowings was available under the
agreement, no borrowings were outstanding and letters of credit outstanding
amounted to $12.5 million.

      Scotia LLC Line of Credit Agreement
      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, 1999, the
Required Liquidity Amount was $63.0 million. The Scotia LLC Line of Credit
expires on July 16, 2000. 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, 1999, Scotia LLC had no borrowings
outstanding under the Scotia LLC Line of Credit.

8.    LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               1999        1998
                                                                                            ----------  -----------
<S>                                                                                         <C>         <C>
12% MGHI Senior Secured Notes due August 1, 2003..........................................  $   125.2   $    130.0
6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028..................      152.6        160.7
7.11% Scotia LLC Class A-2 Timber Collateralized Notes due July 20, 2028..................      243.2        243.2
7.71% Scotia LLC Class A-3 Timber Collateralized Notes due July 20, 2028..................      463.3        463.3
10 7/8% KACC Senior Notes due October 15, 2006, including premium.........................      225.6        225.7
9 7/8% KACC Senior Notes due February 15, 2002, net of discount...........................      224.6        224.4
Alpart CARIFA Loans.......................................................................       60.0         60.0
12 3/4% KACC Senior Subordinated Notes due February 1, 2003...............................      400.0        400.0
Other aluminum operations debt............................................................       62.6         52.9
Other notes and contracts, primarily secured by receivables, buildings, real estate
   and equipment..........................................................................       27.2         30.0
                                                                                            ----------  -----------
                                                                                              1,984.3      1,990.2
      Less: current maturities............................................................      (27.5)       (18.5)
                                                                                            ----------  -----------
                                                                                            $ 1,956.8   $  1,971.7
                                                                                            ==========  ===========
</TABLE>

      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 the Company. The MGHI Notes are also secured by a pledge of the
27,938,250 shares of Kaiser common stock owned by MGHI as well as the common
stock of MGI. Interest on the MGHI Notes is payable semi-annually. The
outstanding balance of the MGHI Notes declined from $130.0 million as of
December 31, 1998 to $125.2 million as of December 31, 1999 as a result of MGI
repurchasing $4.8 million of the MGHI Notes. Approximately 500,000 shares of
Kaiser common stock may be released from the pledge as a result of such
repurchase.

      The net proceeds from the offering of the MGHI Notes after expenses were
approximately $125.0 million, all of which was loaned to the Company pursuant to
an intercompany note (the "INTERCOMPANY NOTE") which is pledged to secure the
MGHI Notes. The Intercompany 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. The Company is entitled to defer the
payment of interest on the Intercompany Note on any interest payment date to the
extent that MGHI 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 Intercompany Note and will be payable at maturity. As of
December 31, 1999, $22.8 million of interest had been deferred and added to
principal. An additional $8.1 million of interest was deferred and added to
principal on February 1, 2000.

      Scotia LLC Timber Collateralized Notes due 2028
      On July 20, 1998, Scotia LLC issued $867.2 million aggregate principal
amount of Timber Notes. Net proceeds from the offering of the Timber Notes were
used primarily to prepay certain debt, and accordingly the Company recognized an
extraordinary loss of $42.5 million, net of the related income tax benefit of
$22.9 million, in 1998 for the early extinguishment.

      The Timber Notes and the Scotia LLC Line of Credit 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
$152.6 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.

      As a result of the sale of the Headwaters Timberlands, Salmon Creek
received proceeds of $299.9 million in cash. See Note 3 to the Consolidated
Financial Statements. 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. See Note 1 to the Consolidated Financial Statements. 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 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.

      Principal and interest on the Timber Notes are payable semi-annually on
January 20 and July 20. On the January 20, 2000 note payment date for the Timber
Notes, Scotia LLC had $2.2 million in cash available to pay the $31.5 million of
interest due. Scotia LLC borrowed the remaining $29.3 million in funds under the
Scotia LLC Line of Credit. In addition, Scotia LLC repaid $12.9 million of
principal on the Timber Notes (an amount equal to Scheduled Amortization). The
SAR Account was used to make the January 20, 2000 principal payment.

      1994 KACC Credit Agreement (as amended)
      KACC is able to borrow under this facility through August 2001 by means of
revolving credit advances and letters of credit (up to $125.0 million) in an
aggregate amount equal to the lesser of $325.0 million or a borrowing base
relating to eligible accounts receivable plus eligible inventory. As of February
29, 2000, $212.6 million (of which $42.6 million could have been used for
letters of credit) was available under the KACC Credit Agreement. The KACC
Credit Agreement is unconditionally guaranteed by Kaiser and by certain
significant subsidiaries of KACC. Outstanding balances bear interest at a
premium (which varies based on the results of a financial test) over either a
base rate or LIBOR, at KACC's option.

      The KACC Credit Agreement requires KACC to comply with certain financial
covenants and places restrictions on Kaiser's and KACC's ability to, among other
things, incur debt and liens, make investments, pay dividends, undertake
transactions with affiliates, make capital expenditures and enter into unrelated
lines of business. The KACC Credit Agreement is secured by, among other things,
(i) mortgages on KACC's major domestic plants (excluding KACC's Gramercy alumina
plant), (ii) subject to certain exceptions, liens on the accounts receivable,
inventory, equipment, domestic patents and trademarks and substantially all
other personal property of KACC and certain of its subsidiaries, (iii) a pledge
of all of the stock of KACC owned by Kaiser, and (iv) pledges of all of the
stock of a number of KACC's wholly owned domestic subsidiaries, pledges of a
portion of the stock of certain foreign subsidiaries and pledges of a portion of
the stock of certain partially owned foreign affiliates.

      10 7/8 % KACC Senior Notes due 2006 (the "KACC 10 7/8 % SENIOR NOTES"),
      9 7/8 % KACC Senior Notes due 2002 (the "KACC 9 7/8 % SENIOR NOTES") and
      12 3/4 % KACC Senior Subordinated Notes due 2003 (the "KACC SENIOR
      SUBORDINATED NOTES" and collectively, the "KACC NOTES")
      The KACC Notes, are guaranteed, jointly and severally, by certain
subsidiaries of KACC. The indentures governing the KACC Notes, (the "KACC
INDENTURES") restrict, among other things, KACC's ability to incur debt,
undertake transactions with affiliates, and pay dividends. Furthermore, the KACC
Indentures provide that KACC must offer to purchase the KACC Notes upon the
occurrence of a Change of Control (as defined therein) and the KACC Credit
Agreement provides that the occurrence of a Change of Control shall constitute
an Event of Default thereunder. The KACC Credit Agreement does not permit
Kaiser, and significantly restricts KACC's ability, to pay dividends on their
common stock.

      Alpart CARIFA Loans
      In December 1991, Alumina Partners of Jamaica ("ALPART", a majority owned
subsidiary of KACC) entered into a loan agreement with the Caribbean Basin
Projects Financing Authority ("CARIFA"). Alpart's obligations under the loan
agreement are secured by two letters of credit aggregating $64.2 million. KACC
is a party to one of the two letters of credit in the amount of $41.7 million in
respect of its ownership interest in Alpart. Alpart has also agreed to indemnify
bondholders of CARIFA for certain tax payments that could result from events, as
defined, that adversely affect the tax treatment of the interest income on the
bonds.

      Maturities
      Scheduled maturities and redemptions of long-term debt outstanding at
December 31, 1999 are as follows (in millions):

<TABLE>
<CAPTION>

                                                                 YEARS ENDING DECEMBER 31,
                                        ---------------------------------------------------------------------------
                                           2000         2001        2002         2003         2004      THEREAFTER
                                        -----------  ----------- -----------  -----------  -----------  -----------
<S>                                     <C>          <C>         <C>          <C>          <C>          <C>
MGHI Notes............................  $        -   $        -  $        -   $    125.2   $        -   $        -
Timber Collateralized Notes...........        15.9         16.3        17.1         19.3         22.2        768.3
KACC 10 7/8% Senior Notes.............           -            -           -            -            -        225.6
KACC 9 7/8% Senior Notes..............           -            -       224.6            -            -            -
Alpart CARIFA Loans...................           -            -           -            -            -         60.0
KACC 12 3/4% Senior Subordinated
   Notes..............................           -            -           -        400.0            -            -
Other aluminum operations debt........         0.3         10.7         0.3          0.3          0.2         50.8
Other.................................        11.3          2.9         1.4          1.1          1.0          9.5
                                        -----------  ----------- -----------  -----------  -----------  -----------
                                        $     27.5   $     29.9  $    243.4   $    545.9   $     23.4   $  1,114.2
                                        ===========  =========== ===========  ===========  ===========  ===========

</TABLE>

      Capitalized Interest
      Interest capitalized during the years ended December 31, 1999, 1998 and
1997 was $3.5 million, $3.5 million and $7.2 million, respectively.

      Restricted Net Assets of Subsidiaries and Pledges of Subsidiary Stock
      Certain debt instruments restrict the ability of the Company's
subsidiaries to transfer assets, make loans and advances and pay dividends to
the Company. As of December 31, 1999, all of the assets relating to the
Company's aluminum, forest products and racing operations are subject to such
restrictions and certain assets of the Company's real estate operations are
pledged or serve as collateral. The Company and MGHI have pledged a total of
36,853,250 shares of Kaiser common stock (representing a 46.4% interest in
Kaiser) under various indentures and loan agreements.

9.    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.

      Income (loss) before income taxes and minority interests by geographic
area is as follows (in millions):

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                                  -----------------------------------
                                                     1999        1998        1997
                                                  ----------  ----------  -----------
<S>                                               <C>         <C>         <C>
Domestic........................................  $   109.5   $  (118.7)  $    (93.0)
Foreign.........................................      (15.0)       72.1        167.5
                                                  ----------  ----------  -----------
                                                  $    94.5   $   (46.6)  $     74.5
                                                  ==========  ==========  ===========

</TABLE>

      Income taxes are classified as either domestic or foreign based on whether
payment is made or due to the United States or a foreign country. Certain income
classified as foreign is subject to domestic income taxes.

      The credit (provision) for income taxes on income (loss) before income
taxes and minority interests consists of the following (in millions):

<TABLE>
<CAPTION>

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   1999        1998        1997
                                                                                ----------  ----------  -----------
<S>                                                                             <C>         <C>         <C>
Current:
   Federal....................................................................  $    (0.6)  $    (1.8)  $     (1.5)
   State and local............................................................          -        (0.4)        (0.4)
   Foreign....................................................................      (23.1)      (16.5)       (28.7)
                                                                                ----------  ----------  -----------
                                                                                    (23.7)      (18.7)       (30.6)
                                                                                ----------  ----------  -----------
Deferred:
   Federal....................................................................       (8.9)       54.9         48.4
   State and local............................................................      (18.2)        8.4         (3.9)
   Foreign....................................................................        7.1       (12.5)        (7.0)
                                                                                ----------  ----------  -----------
                                                                                    (20.0)       50.8         37.5
                                                                                ----------  ----------  -----------
                                                                                $   (43.7)  $    32.1   $      6.9
                                                                                ==========  ==========  ===========
</TABLE>

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

<TABLE>
<CAPTION>

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   1999        1998        1997
                                                                                ----------  ----------  -----------
<S>                                                                             <C>         <C>         <C>
Income (loss) before income taxes and minority interests .....................  $    94.5   $   (46.6)  $     74.5
                                                                                ==========  ==========  ===========

Amount of federal income tax credit (provision) based upon the
   statutory rate.............................................................  $   (33.1)  $    16.3   $    (26.1)
Revision of prior years' tax estimates and other changes in valuation
   allowances.................................................................        4.1        14.5         33.8
Percentage depletion..........................................................        2.8         3.2          4.2
Foreign taxes, net of federal tax benefit.....................................       (3.2)       (1.9)        (3.1)
State and local taxes, net of federal tax effect..............................      (12.7)       (0.6)        (2.8)
Other.........................................................................       (1.6)        0.6          0.9
                                                                                ----------  ----------  -----------
                                                                                $   (43.7)  $    32.1   $      6.9
                                                                                ==========  ==========  ===========
</TABLE>

      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. For the years ended December 31, 1999, 1998 and 1997, the
reversal of reserves which the Company believes are no longer necessary resulted
in a credit to the income tax provision of $4.0 million, $11.5 million and $32.1
million, respectively.

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

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                               1999        1998
                                                                                            ----------  -----------
<S>                                                                                         <C>         <C>
Deferred income tax assets:
   Postretirement benefits other than pensions............................................  $   279.3   $    284.0
   Loss and credit carryforwards..........................................................      254.2        199.1
   Other liabilities......................................................................      283.0        174.6
   Costs capitalized only for tax purposes................................................       63.7         62.8
   Real estate............................................................................       33.4         41.8
   Timber and timberlands.................................................................          -         37.4
   Other..................................................................................       38.7         89.0
   Valuation allowances...................................................................     (141.4)      (123.1)
                                                                                            ----------  -----------
      Total deferred income tax assets, net...............................................      810.9        765.6
                                                                                            ----------  -----------
Deferred income tax liabilities:
   Property, plant and equipment..........................................................     (109.5)      (116.0)
   Timber and timberlands.................................................................      (72.1)           -
   Other..................................................................................      (85.7)       (84.8)
                                                                                            ----------  -----------
      Total deferred income tax liabilities...............................................     (267.3)      (200.8)
                                                                                            ----------  -----------
Net deferred income tax assets............................................................  $   543.6   $    564.8
                                                                                            ==========  ===========

</TABLE>

      As of December 31, 1999, $437.4 million of the net deferred income tax
assets listed above are attributable to Kaiser. A principal component of this
amount is the $244.5 million tax benefit, net of certain valuation allowances,
associated with the accrual for postretirement benefits other than pensions. The
future tax deductions with respect to the turnaround of this accrual will occur
over a 30 to 40 year period. If such deductions create or increase a net
operating loss, Kaiser has the ability to carry forward such loss for 20 taxable
years. For reasons discussed below, the Company believes a long-term view of
profitability is appropriate and has concluded that this net deferred income tax
asset will more likely than not be realized. Included in the remaining $192.9
million of Kaiser's net deferred income tax assets is $95.7 million attributable
to the tax benefit of loss and credit carryforwards, net of valuation
allowances. A substantial portion of the valuation allowances for Kaiser relate
to loss and credit carryforwards. The Company 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. With regard to future levels
of income, the Company believes that Kaiser, based on the cyclical nature of its
business, its history of operating earnings and its expectations for future
years, will more likely than not generate sufficient taxable income to realize
the benefit attributable to the loss and credit carryforwards for which
valuation allowances were not provided.

      The net deferred income tax assets listed above which are not attributable
to Kaiser are $106.2 million as of December 31, 1999. This amount includes
$128.8 million attributable to the tax benefit of loss and credit carryforwards,
net of valuation allowances. Based on an evaluation of the appropriate factors,
as discussed above, 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 these carryforwards for which valuation allowances were
not provided. As of December 31, 1999, the deferred income tax liabilities
listed above include $72.1 million with respect to timber and timberlands. As of
December 31, 1998, there was a deferred income tax asset of $37.4 million with
respect to timber and timberlands. The deferred income tax liability resulted
primarily from the sale of the Headwaters Timberlands during 1999.

      As of December 31, 1999 and 1998, $51.1 million and $56.6 million,
respectively, of the net deferred income tax assets listed above are included in
prepaid expenses and other current assets. Certain other portions of the
deferred income tax liabilities listed above are included in other accrued
liabilities and other noncurrent liabilities.

      The Company files consolidated federal income tax returns together with
its domestic subsidiaries, other than Kaiser and its subsidiaries. Kaiser and
its domestic subsidiaries are members of a separate consolidated return group
which files its own consolidated federal income tax returns.

      The following table presents the estimated tax attributes for federal
income tax purposes at December 31, 1999 attributable to the Company and Kaiser
(in millions). The utilization of certain of these tax attributes is subject to
limitations.

<TABLE>
<CAPTION>

                                                                         THE COMPANY                 KAISER
                                                                   -----------------------  -----------------------
                                                                                 EXPIRING                EXPIRING
                                                                                 THROUGH                  THROUGH
                                                                                ----------              -----------
<S>                                                                <C>          <C>         <C>         <C>
Regular Tax Attribute Carryforwards:
   Current year net operating loss...............................  $     62.7        2019   $   111.7         2019
   Prior year net operating losses...............................       283.1        2018        34.4         2018
   General business tax credits..................................         0.4        2002         2.5         2011
   Foreign tax credits...........................................           -           -        33.7         2004
   Alternative minimum tax credits...............................         1.8   Indefinite       24.0   Indefinite

Alternative Minimum Tax Attribute Carryforwards:
   Current year net operating loss...............................  $     61.8        2019   $   101.1         2019
   Prior year net operating losses...............................       296.4        2018         5.6         2011
   Foreign tax credits...........................................           -           -        66.9         2004

</TABLE>

      The income tax credit (provision) related to other comprehensive income
was $0.7 million and $(0.6) million for the years ended December 31, 1999 and
1997, respectively. There was no tax provision related to other comprehensive
income for the year ended December 31, 1998.

10.     EMPLOYEE BENEFIT AND INCENTIVE PLANS

      Pension and Other Postretirement Benefit Plans
      The Company has various retirement plans which cover essentially all
employees. Most of the Company's employees are covered by defined benefit plans.
The benefits are determined under formulas based on the employee's years of
service, age and compensation. The Company's funding policy is to contribute
annually an amount at least equal to the minimum cash contribution required by
the Employee Retirement Income Security Act of 1974, as amended.

      The Company has unfunded postretirement medical benefit plans which cover
most of its employees. Under the plans, employees are eligible for health care
benefits (and life insurance benefits for Kaiser employees) upon retirement.
Retirees from companies other than Kaiser 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. Postretirement medical
benefits are generally provided through a self insured arrangement. The Company
has not funded the liability for these benefits, which are expected to be paid
out of cash generated by operations.

      The following tables present the changes, status and assumptions of the
Company's pension and other postretirement benefit plans as of December 31, 1999
and 1998, respectively (in millions):

<TABLE>
<CAPTION>


                                                                      PENSION BENEFITS      MEDICAL/LIFE BENEFITS
                                                                   -----------------------  -----------------------
                                                                               YEARS ENDED DECEMBER 31,
                                                                   ------------------------------------------------
                                                                      1999         1998        1999        1998
                                                                   -----------  ----------  ----------  -----------
<S>                                                                <C>          <C>         <C>         <C>
Change in benefit obligation:
   Benefit obligation at beginning of year.......................  $    924.5   $   918.0   $   623.6   $    551.7
   Service cost..................................................        17.5        16.8         5.6          4.6
   Interest cost.................................................        63.5        63.1        42.0         37.9
   Plan participants' contributions..............................           -           -         0.4          0.3
   Actuarial (gain) loss.........................................       (51.6)       17.3        (1.0)        70.9
   Currency exchange rate change.................................        (5.7)       (0.4)          -            -
   Curtailments and settlements..................................         0.4        (4.6)          -          4.0
   Benefits paid.................................................       (92.3)      (85.7)      (48.8)       (45.9)
                                                                   -----------  ----------  ----------  -----------
      Benefit obligation at end of year                                 856.3       924.5       621.8        623.5
                                                                   -----------  ----------  ----------  -----------

Change in plan assets:
   Fair value of plan assets at beginning of year................       850.1       799.3           -            -
   Actual return on assets.......................................       142.1       112.5           -            -
   Settlements...................................................           -        (5.5)          -            -
   Employer contributions........................................        16.2        29.5        48.4         45.6
   Plan participants' contributions..............................           -           -         0.4          0.3
   Benefits paid.................................................       (92.3)      (85.7)      (48.8)       (45.9)
                                                                   -----------  ----------  ----------  -----------
   Fair value of plan assets at end of year......................       916.1       850.1           -            -
                                                                   -----------  ----------  ----------  -----------

   Benefit obligation in excess of (less than) plan assets.......       (59.8)       74.4       621.8        623.5
   Unrecognized actuarial gain...................................       152.5        31.7        60.9         59.2
   Unrecognized prior service costs..............................       (16.2)      (19.7)       57.8         70.0
   Adjustment required to recognize minimum liability............         1.2           -           -            -
   Intangible asset and other....................................         2.6         4.3           -            -
                                                                   -----------  ----------  ----------  -----------
      Accrued benefit liability..................................  $     80.3   $    90.7   $   740.5   $    752.7
                                                                   ===========  ==========  ==========  ===========

</TABLE>

      With respect to Kaiser's pension plans, the benefit obligation was $806.0
million and $872.5 million as of December 31, 1999 and 1998, respectively.
Kaiser's fair value of plan assets exceeded this obligation by $51.8 million as
of December 31, 1999. The benefit obligation exceeded Kaiser's fair value of
plan assets by $70.7 million as of December 31, 1998.

      The postretirement medical/life benefit obligation attributable to
Kaiser's plans was $615.4 million and $616.8 million as of December 31, 1999 and
1998, respectively. The postretirement medical/life benefit liability recognized
in the Company's Consolidated Balance Sheet attributable to Kaiser's plans was
$729.8 million and $742.5 million as of December 31, 1999 and 1998,
respectively.

<TABLE>
<CAPTION>


                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       1999       1998      1997       1999      1998       1997
                                                     ---------  --------  ---------  --------- ---------  ---------
<S>                                                  <C>        <C>       <C>        <C>       <C>        <C>
Components of net periodic benefit costs:
   Service cost....................................  $   17.5   $  16.8   $   15.8   $    5.6  $    4.6   $    6.5
   Interest cost...................................      63.5      63.1       64.6       42.0      37.9       45.3
   Expected return on assets.......................     (76.3)    (72.3)     (64.3)         -         -          -
   Amortization of prior service costs.............       3.4       3.3        3.4      (12.1)    (12.5)     (12.5)
   Recognized net actuarial (gain) loss............       0.7       1.4        2.6       (0.2)     (7.2)      (0.9)
                                                     ---------  --------  ---------  --------- ---------  ---------
   Net periodic benefit costs......................       8.8      12.3       22.1       35.3      22.8       38.4
   Curtailments and settlements....................       0.4       3.2        3.7          -         -          -
                                                     ---------  --------  ---------  --------- ---------  ---------
      Adjusted net periodic benefit costs..........  $    9.2   $  15.5   $   25.8   $   35.3  $   22.8   $   38.4
                                                     =========  ========  =========  ========= =========  =========

</TABLE>

      The net periodic pension costs attributable to Kaiser's plans was $5.4
million, $9.1 million and $19.2 million for the years ended December 31, 1999,
1998 and 1997, respectively.

      Included in the net periodic postretirement medical/life benefit cost is
$34.6 million, $22.2 million and $37.6 million for the years ended December 31,
1999, 1998 and 1997, respectively, attributable to Kaiser's plans.

      The aggregate fair value of plan assets and accumulated benefit obligation
for pension plans with plan assets in excess of accumulated benefit obligations
were $836.4 million and $729.3 million, respectively, as of December 31, 1999,
and $311.4 million and $298.3 million, respectively, as of December 31, 1998.

<TABLE>
<CAPTION>

                                                                    PENSION BENEFITS        MEDICAL/LIFE BENEFITS
                                                                ------------------------  -------------------------
                                                                             YEARS ENDED DECEMBER 31,
                                                                ---------------------------------------------------
                                                                 1999    1998     1997     1999     1998     1997
                                                                ------- -------  -------  -------  -------  -------
<S>                                                             <C>     <C>      <C>      <C>      <C>      <C>
Weighted-average assumptions:
   Discount rate..............................................     7.8%    7.0%     7.3%     7.8%    7.0%     7.3%
   Expected return on plan assets.............................     9.5%    9.5%     9.5%       -       -        -
   Rate of compensation increase..............................     4.0%    5.0%     5.0%     4.0%    4.0%     5.0%

</TABLE>

      In 1999, annual assumed rates of increase in the per capita cost of
covered benefits (i.e. health care cost trend rate) for non-HMO and HMO
participants are 6.5% and 7.5%, respectively, at all ages. The assumed rates of
increase are assumed to decline gradually to 5.0% in 2002 for non-HMO
participants and in 2004 for HMO participants and remain at that level
thereafter. 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, 1999 would have the
following effects (in millions):

<TABLE>
<CAPTION>

                                                                                  1-PERCENTAGE-     1-PERCENTAGE-
                                                                                  POINT INCREASE    POINT DECREASE
                                                                                 ----------------  ----------------
<S>                                                                              <C>               <C>
Effect on total of service and interest cost components......................... $      6.5        $    (4.7)
Effect on the postretirement benefit obligations................................       63.9            (44.9)

</TABLE>

      Savings and Incentive Plans
      The Company has various defined contribution savings plans designed to
enhance the existing retirement programs of participating employees. Kaiser has
an unfunded incentive compensation program which provides incentive compensation
based upon performance against annual plans and over rolling three-year periods.
Expenses incurred by the Company for all of these plans were $7.8 million, $9.3
million and $10.4 million for the years ended December 31, 1999, 1998 and 1997,
respectively.

11.   MINORITY INTERESTS

      Minority interests represent the following (in millions):

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               1999        1998
                                                                                            ----------  -----------
<S>                                                                                         <C>         <C>
Kaiser:
   Common stock, par $.01.................................................................  $    25.0   $     44.8
   Minority interests attributable to Kaiser's subsidiaries...............................      117.7        123.5
                                                                                            ----------  -----------
                                                                                            $   142.7   $    168.3
                                                                                            ==========  ===========
</TABLE>

      Conversion of PRIDES to Kaiser Common Stock
      During August 1997, the 8,673,850 outstanding shares of Kaiser's 8.255%
PRIDES, Convertible Preferred Stock ("PRIDES") were converted into 7,227,848
shares of Kaiser common stock pursuant to the terms of the PRIDES Certificate of
Designations. As a result of the equity attributable to the PRIDES being
converted into equity attributable to common stockholders, the Company recorded
a $64.8 million adjustment to stockholders' equity and a reduction in minority
interest of the same amount.

      KACC Redeemable Preference Stock
      In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and
its Cumulative (1985 Series B) Preference Stock (together, the "REDEEMABLE
PREFERENCE STOCK") each of which has a par value of $1 per share and a
liquidation and redemption value of $50 per share plus accrued dividends, if
any, and have a total redemption value of $19.5 million as of December 31, 1999.
No additional Redeemable Preference Stock is expected to be issued. Holders of
the Redeemable Preference Stock are entitled to an annual cash dividend of $5
per share, or an amount based on a formula tied to KACC's pre-tax income from
aluminum operations, when and as declared by KACC's board of directors.

      The carrying values of the Redeemable Preference Stock are increased each
year to recognize accretion between the fair value (at which the Redeemable
Preference Stock was originally issued) and the redemption value. Changes in
Redeemable Preference Stock are shown below.

<TABLE>
<CAPTION>

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   1999        1998        1997
                                                                                ----------  ----------  -----------
<S>                                                                             <C>         <C>         <C>
Shares:
   Outstanding at beginning of year...........................................    421,575     595,053      634,684
   Redeemed...................................................................    (31,322)   (173,478)     (39,631)
                                                                                ----------  ----------  -----------
   Outstanding at end of year.................................................    390,253     421,575      595,053
                                                                                ==========  ==========  ===========

</TABLE>

      Redemption fund agreements require KACC to make annual payments by March
31 of the subsequent year based on a formula tied to KACC's consolidated net
income until the redemption funds are sufficient to redeem all of the Redeemable
Preference Stock. On an annual basis, the minimum payment is $4.3 million and
the maximum payment is $7.3 million. At December 31, 1999, the balance in the
redemption fund was $12.5 million (included in long-term receivables and other
assets). KACC also has certain additional repurchase requirements which are
based, among other things, upon profitability tests.

      The Redeemable Preference Stock is entitled to the same voting rights as
KACC common stock and to certain additional voting rights under certain
circumstances, including the right to elect, along with other KACC preference
stockholders, two directors whenever accrued dividends have not been paid on two
annual dividend payment dates or when accrued dividends in an amount equivalent
to six full quarterly dividends are in arrears. The Redeemable Preference Stock
restricts the ability of KACC to redeem or pay dividends on its common stock if
KACC is in default on any dividends payable on Redeemable Preference Stock.

      Preference Stock
      KACC has four series of $100 par value Cumulative Convertible Preference
Stock ("$100 PREFERENCE STOCK") with annual dividend requirements of between
4 1/8 % and 4 3/4 %. KACC has the option to redeem the $100 Preference Stock at
par value plus accrued dividends. KACC does not intend to issue any additional
shares of the $100 Preference Stock.

      The $100 Preference Stock can be exchanged for per share cash amounts
between $69 to $80. KACC records the $100 Preference Stock at their exchange
amounts for financial statement presentation, and Kaiser includes such amounts
in minority interests. At December 31, 1999 and 1998, outstanding shares of $100
Preference Stock were 19,538 and 19,963, respectively.

      Kaiser Common Stock Incentive Plans
      Kaiser has a total of 8,000,000 shares of Kaiser common stock reserved for
issuance under its incentive compensation programs. At December 31, 1999,
2,192,713 shares were available for issuance under these plans. Pursuant to
Kaiser's nonqualified stock program, stock options are granted at or above the
prevailing market price, generally vest at the rate of 20% to 33% per year and
have a five or ten year term. Information relating to nonqualified stock options
is shown below. The prices shown in the table below are the weighted average
price per share for the respective number of underlying shares.

<TABLE>
<CAPTION>

                                           1999                        1998                        1997
                                --------------------------  --------------------------- ---------------------------
                                   SHARES        PRICE         SHARES        PRICE         SHARES        PRICE
                                ------------  ------------  ------------  ------------- ------------- -------------
<S>                             <C>           <C>           <C>           <C>           <C>           <C>
Outstanding at beginning of
   year.......................    3,049,122   $      9.98       819,752   $      10.45       890,395  $      10.33
Granted.......................    1,218,068         11.15     2,263,170           9.79        15,092         10.06
Exercised.....................       (7,920)         7.25       (10,640)          7.25       (48,410)         8.33
Expired or forfeited..........      (20,060)        11.02       (23,160)          9.60       (37,325)        10.12
                                ------------                ------------                -------------
Outstanding at end of year....    4,239,210         10.24     3,049,122           9.98       819,752         10.45
                                ============                ============                =============

Exercisable at end of year....    1,763,852   $     10.17     1,261,262   $      10.09       601,115  $      10.53
                                ============                ============                =============

</TABLE>

12.   STOCKHOLDERS' EQUITY (DEFICIT)

      Preferred Stock
      The holders of the Company's Class A $0.05 Non-Cumulative Participating
Convertible Preferred Stock (the "CLASS A PREFERRED STOCK") are entitled to
receive, if and when declared, preferential cash dividends at the rate of $0.05
per share per annum and will participate thereafter on a share for share basis
with the holders of common stock in all cash dividends, other than cash
dividends on the common stock in any fiscal year to the extent not exceeding
$0.05 per share. Stock dividends declared on the common stock will result in the
holders of the Class A Preferred Stock receiving an identical stock dividend
payable in shares of Class A Preferred Stock. At the option of the holder, the
Class A Preferred Stock is convertible at any time into shares of common stock
at the rate of one share of common stock for each share of Class A Preferred
Stock. Each holder of Class A Preferred Stock is generally entitled to ten votes
per share on all matters presented to a vote of the Company's stockholders.

      Stock Option and Restricted Stock Plans
      In 1994, the Company adopted the MAXXAM 1994 Omnibus Employee Incentive
Plan (the "1994 OMNIBUS PLAN"). Up to 1,000,000 shares of common stock and
1,000,000 shares of Class A Preferred Stock were reserved for awards or for
payment of rights granted under the 1994 Omnibus Plan of which 421,792 and
910,000 shares, respectively, were available to be awarded at December 31, 1999.
The 1994 Omnibus Plan replaced the Company's 1984 Phantom Share Plan (the "1984
PLAN") which expired in June 1994, although previous grants thereunder remain
outstanding. The options (or rights, as applicable) granted in 1997, 1998 and
1999 generally vest at the rate of 20% per year commencing one year from the
date of grant. The Company paid $0.1 million, $1.2 million and $1.6 million in
respect of awards issued pursuant to the 1984 Plan for the years ended December
31, 1999, 1998 and 1997, respectively.  The following table summarizes the
options or rights outstanding and exercisable relating to the 1984 Plan and the
1994 Omnibus Plan. The prices shown are the weighted average price per share
for the respective number of underlying shares.

<TABLE>
<CAPTION>


                                           1999                        1998                        1997
                                --------------------------  --------------------------- ---------------------------
                                   SHARES         PRICE        SHARES         PRICE        SHARES         PRICE
                                ------------  ------------  ------------  ------------- ------------- -------------
<S>                             <C>           <C>           <C>           <C>           <C>           <C>
Outstanding at beginning of
   year.......................      302,000   $     41.88       296,800   $      38.47       250,100  $      34.75
Granted.......................      107,500         51.12        79,500          48.93        98,500         41.71
Exercised.....................       (6,600)        38.31       (53,200)         33.09       (50,300)        26.11
Expired or forfeited..........       (1,500)        56.00       (21,100)         42.03        (1,500)        45.15
                                ------------                ------------                -------------
Outstanding at end of year....      401,400         44.36       302,000          41.93       296,800         38.47
                                ============                ============                =============

Exercisable at end of year....       160,400  $     38.42       107,700   $      36.32       117,200  $      33.53
                                ============                ============                =============

</TABLE>

      In addition to the options reflected in the table above, the Company
granted 256,808 shares of restricted Common Stock in 1999 under the 1994 Omnibus
Plan. These shares were granted in connection with a bonus earned under an
executive bonus plan. The Company recorded an $11.7 million non-cash charge to
selling, general and administrative expenses for the year ended December 31,
1999 for the fair market value of these shares on the date of grant. The
restricted shares are subject to certain provisions that lapse in 2014.

      Concurrent with the adoption of the 1994 Omnibus Plan, the Company adopted
the MAXXAM 1994 Non- Employee Director Plan (the "1994 DIRECTOR PLAN"). Up to
35,000 shares of common stock are reserved for awards under the 1994 Director
Plan. Options to purchase 1,800 shares of common stock were granted to three
non-employee directors in each of the years 1999, 1998 and 1997. The weighted
average exercise prices of these options are $62.00, $60.94 and $43.19 per
share, respectively, based on the quoted market price at the date of grant. The
options vest at the rate of 25% per year commencing one year from the date of
grant. At December 31, 1999, options for 4,425 shares were exercisable.

      Shares Reserved for Issuance
      At December 31, 1999, the Company had 2,446,782 common shares and
1,000,000 Class A Preferred shares reserved for future issuances in connection
with various options, convertible securities and other rights as described in
this Note 12.

      Rights
      On December 15, 1999, the Board of Directors of the Company declared a
dividend to its stockholders consisting of (i) one Series A Preferred Stock
Purchase Right (the "SERIES A RIGHT") for each outstanding share of the
Company's Class A Preferred Stock and (ii) one Series B Preferred Stock Purchase
Right (the "SERIES B RIGHT") for each outstanding share of the Company's common
stock. The Series A Rights and the Series B Rights are collectively referred to
herein as the "RIGHTS". The Rights are exercisable only if a person or group of
affiliated or associated persons (an "ACQUIRING PERSON") acquires beneficial
ownership, or the right to acquire beneficial ownership, of 15% or more of the
Company's common stock, or announces a tender offer that would result in
beneficial ownership of 15% or more of the outstanding common stock. Any person
or group of affiliated or associated persons who, as of December 15, 1999, was
the beneficial owner of at least 15% of the outstanding common stock will not be
deemed to be an Acquiring Person unless such person or group acquires beneficial
ownership of additional shares of common stock (subject to certain exceptions).
Each Series A Right, when exercisable, entitles the registered holder to
purchase from the Company one share of Class A Preferred Stock at an exercise
price of $165.00. Each Series B Right, when exercisable, entitles the registered
holder to purchase from the Company one one-hundredth of a share of the
Company's new Class B Junior Participating Preferred Stock, with a par value of
$0.50 per share (the "JUNIOR PREFERRED STOCK"), at an exercise price of $165.00
per one-hundredth of a share. The Junior Preferred Stock has a variety of rights
and preferences, including a liquidation preference of $75.00 per share and
voting, dividend and distribution rights which make each one-hundredth of a
share of Junior Preferred Stock equivalent to one share of the Company's common
stock.

      Under certain circumstances, including if any person becomes an Acquiring
Person other than through certain offers for all outstanding shares of stock of
the Company, or if an Acquiring Person engages in certain "self-dealing"
transactions, each Series A Right would enable its holder to buy Class A
Preferred Stock (or, under certain circumstances, preferred stock of an
acquiring company) having a value equal to two times the exercise price of the
Series A Right, and each Series B Right shall enable its holder to buy common
stock of the Company (or, under certain circumstances, common stock of an
acquiring company) having a value equal to two times the exercise price of the
Series B Right. Under certain circumstances, Rights held by an Acquiring Person
will be null and void. In addition, under certain circumstances, the Board is
authorized to exchange all outstanding and exercisable Rights for stock, in the
ratio of one share of Class A Preferred Stock per Series A Right and one share
of common stock of the Company per Series B Right. The Rights, which do not have
voting privileges, expire on December 11, 2009 but may be redeemed by action of
the Board prior to that time for $0.01 per right, subject to certain
restrictions. Substantially similar rights had expired on December 11, 1999.

      Voting Control
      Federated Development Inc., a wholly owned subsidiary of Federated
Development Company ("FEDERATED"), and Mr. Charles E. Hurwitz beneficially own
(exclusive of securities acquirable upon exercise of stock options) an aggregate
99.2% of the Company's Class A Preferred Stock and 39.9% of the Company's common
stock (resulting in combined voting control of approximately 69.8% of the
Company). Mr. Hurwitz is the Chairman of the Board and Chief Executive Officer
of the Company and Chairman and Chief Executive Officer of Federated. Federated
is wholly owned by Mr. Hurwitz, members of his immediate family and trusts for
the benefit thereof.

13.   COMMITMENTS AND CONTINGENCIES

      Commitments
      Minimum rental commitments under operating leases at December 31, 1999 are
as follows: years ending December 31, 2000 - $43.7 million; 2001 - $38.5
million; 2002 - $33.2 million; 2003 - $29.2 million; 2004 - $26.5 million;
thereafter - $91.7 million. Rental expense for operating leases was $47.3
million, $39.6 million and 35.6 million for the years ended December 31, 1999,
1998 and 1997, respectively. The minimum future rentals receivable under
noncancellable subleases at December 31, 1999 were $82.3 million.

   Aluminum Operations

      Environmental Contingencies
      Kaiser is subject to a number of environmental laws and regulations, to
fines or penalties assessed for alleged breaches of the environmental laws and
regulations, and to claims and litigation based upon such laws. Kaiser is
subject to a number of lawsuits under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (as amended by the Superfund Amendments
Reauthorization Act of 1986, "CERCLA"), and, along with certain other entities,
has been named as a potentially responsible party for remedial costs at certain
third-party sites listed on the National Priorities List under CERCLA.

      Based on Kaiser's evaluation of these and other environmental matters,
Kaiser has established environmental accruals primarily related to potential
solid waste disposal and soil and groundwater remediation matters. The following
table presents the changes in such accruals, which are primarily included in
other noncurrent liabilities (in millions):

<TABLE>
<CAPTION>

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   1999        1998        1997
                                                                                ----------  ----------  -----------
<S>                                                                             <C>         <C>         <C>
Balance at beginning of year..................................................  $    50.7   $    29.7   $     33.3
Additional accruals...........................................................        1.6        24.5          2.0
Less expenditures.............................................................       (3.4)       (3.5)        (5.6)
                                                                                ----------  ----------  -----------
Balance at end of year........................................................  $    48.9   $    50.7   $     29.7
                                                                                ==========  ==========  ===========

</TABLE>

      These environmental accruals represent Kaiser's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology and Kaiser's
assessment of the likely remediation action to be taken. Kaiser expects that
these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $3.0 million to $9.0 million for the years 2000 through
2004 and an aggregate of approximately $23.0 million thereafter.

      As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. Kaiser
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $30.0 million. As the resolution of these
matters is subject to further regulatory review and approval, no specific
assurances can be given as to when the factors upon which a substantial portion
of this estimate is based can be expected to be resolved. However, Kaiser is
working to resolve certain of these matters. Kaiser believes that it has
insurance coverage available to recover certain incurred and future
environmental costs and is pursuing claims in this regard. During December 1998,
Kaiser received recoveries totaling approximately $35.0 million from certain of
its insurers related to current and future claims. Based on Kaiser's analysis, a
total of $12.0 million of such recoveries was allocable to previously accrued
(expensed) items and, therefore, was reflected in earnings during 1998. The
remaining recoveries were offset against increases in the total amount of
environmental reserves. No assurances can be given that Kaiser will be
successful in other attempts to recover incurred or future costs from other
insurers or that the amount of recoveries received will ultimately be adequate
to cover costs incurred. While uncertainties are inherent in the final outcome
of these environmental matters, and it is impossible to determine the actual
costs that ultimately may be incurred, management believes that the resolution
of such uncertainties should not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.

      Asbestos Contingencies
      Kaiser is a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with Kaiser or exposure to products
containing asbestos produced or sold by Kaiser. The lawsuits generally relate to
products Kaiser has not sold for at least 20 years.

      The following table presents the changes in number of such claims pending
for the years ended December 31, 1999, 1998, and 1997.

<TABLE>
<CAPTION>


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   1999        1998        1997
                                                                                ----------  ----------  -----------
<S>                                                                             <C>         <C>         <C>
Number of claims at beginning of period.......................................     86,400      77,400       71,100
Claims received...............................................................     29,300      22,900       15,600
Claims settled or dismissed...................................................    (15,700)    (13,900)      (9,300)
                                                                                ----------  ----------  -----------
Number of claims at end of period.............................................    100,000      86,400       77,400
                                                                                ==========  ==========  ===========

</TABLE>

      The foregoing claims and settlement figures as of December 31, 1999, do
not reflect the fact that Kaiser has reached agreements under which it expects
to settle approximately 31,900 of the pending asbestos-related claims over an
extended period.

      Kaiser maintains a liability for estimated asbestos-related costs for
claims filed to date and an estimate of claims to be filed over a 10 year period
(i.e., through 2009). Kaiser's estimate is based on its view, at each balance
sheet date, of the current and anticipated number of asbestos-related claims,
the timing and amounts of asbestos-related payments, the status of ongoing
litigation and settlement initiatives, and the advice of Wharton Levin
Ehrmantraut Klein & Nash, P.A., with respect to the current state of the law
related to asbestos claims. However, there are inherent uncertainties involved
in estimating asbestos-related costs and Kaiser's actual costs could exceed its
estimates due to changes in facts and circumstances after the date of each
estimate. Further, while Kaiser does not presently believe there is a reasonable
basis for estimating asbestos-related costs beyond 2009 and, accordingly, no
accrual has been recorded for any costs which may be incurred beyond 2009,
Kaiser expects that such costs may continue beyond 2009, and that such costs
could be substantial. As of December 31, 1999, an estimated asbestos-related
cost accrual of $387.8 million, before consideration of insurance recoveries,
has been reflected in the accompanying financial statements primarily in other
noncurrent liabilities. Kaiser estimates that annual future cash payments for
asbestos-related costs will range from approximately $75.0 million to $85.0
million in the years 2000 to 2002, approximately $35.0 million to $55.0 million
for each of the years 2003 and 2004, and an aggregate of approximately $58.0
million thereafter.

      Kaiser believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Although Kaiser has settled
asbestos-related coverage matters with certain of its insurance carriers, other
carriers have not yet agreed to settlements. Kaiser has reached preliminary
agreements with certain insurance carriers under which it expects to collect a
substantial portion of its 2000 asbestos-related payments. The timing and amount
of future recoveries from these and other insurance carriers will depend on the
pace of claims review and processing by such carriers and on the resolution of
any disputes regarding coverage under such policies. Kaiser believes that
substantial recoveries from the insurance carriers are probable. Kaiser reached
this conclusion after considering its prior insurance-related recoveries in
respect of asbestos-related claims, existing insurance policies, and the advice
of Heller Ehrman White & McAuliffe LLP, with respect to applicable insurance
coverage law relating to the terms and conditions of those policies.
Accordingly, an estimated aggregate insurance recovery of $315.5 million,
determined on the same basis as the asbestos-related cost accrual, is recorded
primarily in long-term receivables and other assets at December 31, 1999.
However, no assurances can be given that Kaiser will be able to project similar
recovery percentages for future asbestos-related claims or that the amounts
related to future asbestos-related claims will not exceed Kaiser's aggregate
insurance coverage.

      Kaiser continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from
Kaiser's underlying assumptions. This process resulted in Kaiser reflecting
charges of $53.2 million, $12.7 million, and $8.8 million (included in
investment, interest and other income (expense), net) in the years ended
December 31, 1999, 1998, and 1997, respectively, for asbestos-related claims,
net of expected insurance recoveries, based on recent cost and other trends
experienced by Kaiser and other companies. While uncertainties are inherent in
the final outcome of these asbestos matters and it is presently impossible to
determine the actual costs that ultimately may be incurred and insurance
recoveries that will be received, management believes that, based on the factors
discussed in the preceding paragraphs, the resolution of asbestos-related
uncertainties and the incurrence of asbestos-related costs net of related
insurance recoveries should not have a material adverse effect on the Company's
consolidated financial position or liquidity. However, as Kaiser's estimates are
periodically re-evaluated, additional charges may be necessary and such charges
could be material to the results of the period in which they are recorded.

      Labor Matters
      In connection with the USWA strike and subsequent lock-out by Kaiser,
certain allegations of unfair labor practices were filed with the National Labor
Relations Board ("NLRB") by the USWA. Kaiser responded to all such allegations
and believed that they were without merit. In July 1999, the Oakland,
California, regional office of the NLRB dismissed all material charges filed
against Kaiser. In September 1999, the union filed an appeal of this ruling with
the NLRB general counsel's office in Washington, D.C. If the original decision
were to be reversed, the matter would be referred to an administrative law judge
for a hearing whose outcome would be subject to an additional appeal either by
the USWA or Kaiser. This process could take months or years. If these
proceedings eventually resulted in a definitive ruling against Kaiser, it could
be obligated to provide back pay to USWA members at the five plants and such
amount could be significant. However, while uncertainties are inherent in the
final outcome of such matters, the Company believes that the resolution of the
alleged unfair labor practices should not result in a material adverse effect on
the Company's consolidated financial position, results of operations, or
liquidity.

      Forest Products Operations
      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 (defined below) and
Pacific Lumber's 2000 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 3 "Significant Acquisitions
and Dispositions," on March 1, 1999, Pacific Lumber, including its subsidiaries
and affiliates, and the Company consummated the Headwaters Agreement with the
United States and California. In addition to the transfer of the Headwaters
Timberlands described in Note 3, a sustained yield plan (the "SYP") and a
multiple-species habitat conservation plan (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 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 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 certain water courses that flow within the Company's
timberlands. The final TMDL requirements applicable to the Company's timberlands
may require aquatic measures that are different from or in addition to the
prescriptions to be developed pursuant to the watershed analysis process
provided for in the 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, two
lawsuits were filed against the Company, certain of its subsidiaries and others:
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") and 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"). These actions allege,
among other things, that the defendants' logging practices have damaged the
plaintiffs' properties and property values by contributing to landslides
(Rollins lawsuit) and the destruction of certain watersheds (Wrigley lawsuit).
The Company believes that it has strong factual and legal defenses with respect
to these matters; however, there can be no assurance that they will not have a
material adverse effect on its 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. (the
"EPIC-SYP/PERMITS LAWSUIT") was filed alleging various violations of the CESA
and the California Environmental Quality Act ("CEQA"), 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 state and federal
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. 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.

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

      Post hearing briefing concluded on January 31, 2000. In its post-hearing
brief, the OTS claims, among other things, that the remaining Respondents, Mr.
Hurwitz, the Company and Federated, are jointly and severally liable to pay
either $821.3 million in restitution or reimbursement of $362.6 million for
alleged unjust enrichment. The OTS also claims that each remaining Respondent
should be required to pay $4.6 million in civil money penalties, and that Mr.
Hurwitz should be prohibited from engaging in the banking industry. The
Respondents' brief claims that none of them has any liability in this matter. A
recommended decision by the Administrative Law Judge is not expected any sooner
than early to mid-2000. A final agency decision would be issued by the OTS
Director thereafter. Such decision would then be subject to appeal by any of the
parties to the federal appellate court.

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

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

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

14.   DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

      At December 31, 1999, the net unrealized loss on Kaiser's position in
aluminum forward sales and option contracts (excluding the impact of those
contracts discussed below which have been marked to market), energy forward
purchase and option contracts, and forward foreign exchange contracts, was
approximately $73.9 million (based on comparisons to applicable year-end
published market prices). As Kaiser's hedging activities are generally designed
to lock-in a specified price or range of prices, gains or losses on the
derivative contracts utilized in these hedging activities will be offset by
losses or gains, respectively, on the transactions being hedged.

      Alumina and Aluminum
      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 price
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 but generally lag behind primary aluminum price
changes by up to three months. Since 1993, the average Midwest United States
transaction price for primary aluminum has ranged from approximately $0.50 to
$1.00 per pound.

      From time to time in the ordinary course of business, Kaiser enters into
hedging transactions to provide price risk management in respect of its net
exposure of earnings and cash flows resulting from (i) anticipated sales of
alumina, primary aluminum and fabricated aluminum products, less (ii) expected
purchases of certain items, such as aluminum scrap, rolling ingot and bauxite,
whose prices fluctuate with the price of primary aluminum. Forward sales
contracts are used by Kaiser to effectively fix the price that Kaiser will
receive for its shipments. Kaiser also uses option contracts (i) to establish a
minimum price for its product shipments, (ii) to establish a "collar" or range
of prices for its anticipated sales and/or (iii) to permit it to realize
possible upside price movements. As of December 31, 1999, Kaiser had entered
into option contracts that established a price range for an additional 341,000
and 317,000 tons of primary aluminum with respect to 2000 and 2001,
respectively.

      Additionally, through December 31, 1999, Kaiser had also entered a series
of transactions with a counterparty that will provide it with a premium over the
forward market prices at the date of transaction for 2,000 tons of primary
aluminum per month during the period from January 2000 through June 2001. Kaiser
also contracted with the counterparty to receive certain fixed prices (also
above the forward market prices at the date of the transaction) on 4,000 tons of
primary aluminum per month over a three year period commencing October 2001
unless market prices during certain periods decline below a stipulated "floor"
price, in which case the fixed price sales portion of the transactions
terminates. The price at which October 2001 and after transactions terminate is
well below current market prices. While Kaiser believes that the October 2001
and after transactions are consistent with its stated hedging objectives, these
positions do not qualify for treatment as a "hedge" under current accounting
guidelines. Accordingly these positions will be "marked to market" each period.
For the year ended December 31, 1999, Kaiser recorded mark to market pre-tax
charges of $32.8 million in investment, interest and other income (expense), net
associated with the transactions described in this paragraph.

      As of December 31, 1999, Kaiser had sold forward virtually all of the
alumina available to it in excess of its projected internal smelting
requirements for 2000 and 2001 at prices indexed to future prices of primary
aluminum.

      Energy
      Kaiser's operations are exposed to energy price risk from fluctuating
prices for fuel oil and diesel oil consumed in the production process. Kaiser
from time to time in the ordinary course of business enters into hedging
transactions with major suppliers of energy and energy related financial
instruments. As of December 31, 1999, Kaiser held a combination of fixed price
purchase and option contracts for an average of 232,000 barrels per month of
fuel oil for 2000.

      Foreign Currency
      Kaiser enters into forward exchange contracts to hedge material cash
commitments to foreign subsidiaries or affiliates. At December 31, 1999, Kaiser
had net forward foreign exchange contracts totaling approximately $88.5 million
for the purchase of 133.0 million Australian dollars from January 2000 through
May 2001, in respect of its Australian dollar denominated commitments from
January 2000 through May 2001. In addition, Kaiser has entered into an option
contract to purchase 42.0 million Australian dollars for the period from January
2000 through June 2001.

15.   SEGMENT INFORMATION

      Reportable Segments
      The Company is a holding company; its operations are organized and managed
as distinct business units which offer different products and services and are
managed separately through the Company's subsidiaries. The Company has four
reportable segments: aluminum, forest products, real estate and racing
operations. The aluminum segment is an integrated aluminum producer which uses
portions of its bauxite, alumina and primary aluminum production for additional
processing at its downstream facilities. The forest products segment harvests
its timber and produces lumber and logs. The real estate segment invests in and
develops residential and commercial real estate. The racing segment operates a
pari-mutuel horse racing facility.

      The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates segment performance based on profit or loss from
operations before income taxes and minority interests.

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

<TABLE>
<CAPTION>


                                                      FOREST       REAL       RACING                  CONSOLIDATED
                          DECEMBER 31,   ALUMINUM    PRODUCTS     ESTATE    OPERATIONS    CORPORATE       TOTAL
                          -----------  ------------ -----------  --------  ------------ ------------ --------------
<S>                       <C>          <C>          <C>          <C>       <C>          <C>          <C>
Net sales to unaffiliated
   customers                 1999      $   2,044.3  $    187.8   $  52.0   $      27.3  $         -  $     2,311.4
                             1998          2,256.4       233.6      58.6          24.1            -        2,572.7
                             1997          2,373.2       287.2      48.7          20.0            -        2,729.1

Operating income (loss)      1999            (23.0)       (4.1)     (5.2)          3.8        (23.0)         (51.5)
                             1998             96.5        40.9         -           1.8        (13.6)         125.6
                             1997            174.0        84.9      (3.4)         (1.6)       (17.5)         236.4

Investment, interest and
   other income (expense)    1999            (35.9)       26.9      21.1          (0.2)         6.4           18.3
                             1998              3.5         9.7      15.8           0.7          6.6           36.3
                             1997              3.0        14.8      17.6           0.1         14.2           49.7

Interest expense and
   amortization of deferred
   financing costs           1999            110.1        66.5       2.2           0.5         17.8          197.1
                             1998            110.0        75.3       1.5           3.4         18.3          208.5
                             1997            110.7        78.7       1.4           3.1         17.7          211.6

Depreciation, depletion
   and amortization          1999             83.6        17.0       6.2           1.1          0.5          108.4
                             1998             93.2        22.5       3.2           1.0          0.5          120.4
                             1997             96.5        26.1       3.3           0.9          0.6          127.4

Income (loss) before
   income taxes and
   minority interests        1999            (84.0)      196.1      13.7           3.1        (34.4)          94.5
                             1998            (10.0)      (24.7)     14.4          (1.0)       (25.3)         (46.6)
                             1997             66.3        20.9      12.8          (4.4)       (21.1)          74.5

Capital expenditures         1999             68.4        23.1       3.1           0.6          0.6           95.8
                             1998             77.6        22.0      22.2           1.0          0.1          122.9
                             1997            128.5        22.9      22.0           0.3          0.3          174.0

Investments in and advances
   to unconsolidated
   affiliates                1999             96.9           -      15.7             -            -          112.6
                             1998            128.3           -      18.2             -            -          146.5

Total assets                 1999          3,142.7       843.8     190.4          38.0        178.2        4,393.1
                             1998          2,928.7       682.6     194.6          36.3        233.0        4,075.2

</TABLE>

      The amounts in the column entitled Corporate represent corporate general
and administrative expenses, investment, interest and other income (expense),
net, and interest expense not directly attributable to the reportable segments.
This column also serves to reconcile the total of the reportable segments'
amounts to totals in the Company's consolidated financial statements. The
reconciling amounts for total assets for 1999 and 1998 are primarily related to
deferred tax assets.

      Product Sales
      The following table presents segment sales by primary products (in
millions).

<TABLE>
<CAPTION>


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   1999        1998        1997
                                                                                ----------  ----------  -----------
<S>                                                                             <C>         <C>         <C>
Aluminum:
   Bauxite and alumina........................................................  $   526.9   $   608.5   $    613.4
   Primary aluminum...........................................................      679.7       643.3        817.2
   Flat-rolled products.......................................................      576.2       714.6        743.3
   Engineered products........................................................      542.6       581.3        581.0
   Minority interests and eliminations........................................     (281.1)     (291.3)      (381.7)
                                                                                ----------  ----------  -----------
      Total aluminum sales....................................................  $ 2,044.3   $ 2,256.4   $  2,373.2
                                                                                ==========  ==========  ===========

Forest products:
   Lumber.....................................................................  $   165.3   $   211.6   $    256.1
   Other forest products......................................................       22.5        22.0         31.1
                                                                                ----------  ----------  -----------
      Total forest product sales..............................................  $   187.8   $   233.6   $    287.2
                                                                                ==========  ==========  ===========

Real estate:
   Real estate and development................................................  $    34.2   $    41.2   $     25.5
   Resort and other commercial operations.....................................       17.8        17.4         23.2
                                                                                ----------  ----------  -----------
      Total real estate sales.................................................  $    52.0   $    58.6   $     48.7
                                                                                ==========  ==========  ===========

</TABLE>

      Geographical Information
      The Company's operations are located in many foreign countries, including
Australia, Canada, Ghana, Jamaica, and the United Kingdom. Foreign operations in
general may be more vulnerable than domestic operations due to a variety of
political and other risks. Sales and transfers among geographic areas are made
on a basis intended to reflect the market value of products. Long-lived assets
include property, plant and equipment-net, timber and timberlands-net, real
estate held for development and sale, and investments in and advances to
unconsolidated affiliates. Geographical information for net sales, based on
countries of origin, and long-lived assets follows (in millions):

<TABLE>
<CAPTION>

                                                       UNITED                                  OTHER
                                     DECEMBER 31,      STATES       JAMAICA       GHANA       FOREIGN      TOTAL
                                    ---------------  ----------- ------------- -----------  ----------  -----------
<S>                                 <C>              <C>         <C>           <C>          <C>         <C>
Net sales to unaffiliated customers      1999        $  1,668.9  $      233.1  $    153.2   $   256.2   $  2,311.4
                                         1998           2,014.3         237.0        89.8       231.6      2,572.7
                                         1997           2,076.2         204.6       234.2       214.1      2,729.1

Long-lived assets                        1999           1,174.8         288.2        84.1        90.2      1,637.3
                                         1998           1,297.8         289.2        90.2        99.7      1,776.9

</TABLE>

      Major Customers and Export Sales
      For the years ended December 31, 1999, 1998 and 1997, sales to any one
customer did not exceed 10% of consolidated revenues. Export sales were less
than 10% of total revenues in 1999, 1998 and 1997.

16.    SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   1999        1998        1997
                                                                                ----------  ----------  -----------
                                                                                     (In millions of dollars)
<S>                                                                             <C>         <C>         <C>
Supplemental information on non-cash investing and financing activities:
   Contribution of property and inventory in exchange for joint
      venture interest........................................................  $       -   $     8.7   $     10.6
   Acquisition of assets subject to other liabilities.........................          -         0.8          9.4
   Reduction of stockholders' deficit due to redemption of Kaiser preferred
      stock...................................................................          -           -         64.8
   Borrowing (repayment) of short-term debt issued to repurchase
      treasury stock..........................................................          -       (35.1)        35.1

Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized interest.................................  $   189.9   $   186.6   $    178.3
   Income taxes paid, net.....................................................       27.0        16.7         25.4


</TABLE>

17.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

      Summary quarterly financial information for the years ended December 31,
1999 and 1998 is as follows (in millions, except share information):

<TABLE>
<CAPTION>

                                                                           THREE MONTHS ENDED
                                                     --------------------------------------------------------------
                                                        MARCH 31         JUNE 30      SEPTEMBER 30     DECEMBER 31
                                                     --------------  --------------  --------------  --------------
<S>                                                  <C>             <C>             <C>             <C>
1999:
   Net sales.......................................  $       544.8   $       588.8   $       585.3   $       592.5
   Operating income (loss).........................          (35.2)           (2.6)          (19.1)            5.4
   Net income (loss)...............................          112.1           (18.1)          (37.4)           17.0
   Earnings (loss) per share:
      Basic........................................          16.02           (2.59)          (5.35)           2.41
      Diluted......................................          14.35           (2.59)          (5.35)           2.19

1998:
   Net sales.......................................  $       664.0   $       699.6   $       628.8   $       580.3
   Operating income (loss).........................           51.3            71.0            40.4           (37.1)
   Income (loss) before extraordinary item.........            1.9            12.4            (2.0)          (27.0)
   Extraordinary item, net.........................              -               -           (42.5)              -
   Net income (loss)...............................            1.9            12.4           (44.5)          (27.0)
   Basic earnings per common share:
      Income (loss) before extraordinary item......  $        0.28   $        1.76   $       (0.28)  $       (3.86)
      Extraordinary item, net......................              -               -           (6.07)              -
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        0.28   $        1.76   $       (6.35)  $       (3.86)
                                                     ==============  ==============  ==============  ==============
   Diluted earnings per common and common
      equivalent share:
      Income (loss) before extraordinary item......  $        0.25   $        1.57   $       (0.28)  $       (3.86)
      Extraordinary item...........................              -               -           (6.07)              -
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        0.25   $        1.57   $       (6.35)  $       (3.86)
                                                     ==============  ==============  ==============  ==============

</TABLE>

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

      None.


                                    PART III

      Information required under Part III (Items 10, 11, 12 and 13) has been
omitted from this Report since the Company intends to file with the Securities
and Exchange Commission, not later than 120 days after the close of its fiscal
year, a definitive proxy statement pursuant to Regulation 14A which involves the
election of directors.


                                     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, 1999 and 1998
           Consolidated Statement of Operations for the Years Ended
                December 31, 1999, 1998 and 1997
           Consolidated Statement of Cash Flows for the Years Ended
                December 31, 1999, 1998 and 1997
           Consolidated Statement of Stockholders' Equity (Deficit)
           Notes to Consolidated Financial Statements

      2.   FINANCIAL STATEMENT SCHEDULES:

           Schedule I - Condensed Financial Information of Registrant at
                December 31, 1999 and 1998 and for the Years Ended
                December 31, 1999, 1998 and 1997

           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 November 19, 1999, the Company filed a current report on Form 8-K
      (under Item 5) dated November 19, 1999, concerning the release from escrow
      of funds from the sale of the Headwaters Timberlands and the establishment
      of the SAR Account.

           On January 14, 2000, the Company filed a current report on Form 8-K
      (under Item 5) dated December 15, 1999, concerning a dividend of stock
      purchase rights to its stockholders.


(C)   EXHIBITS

      Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 91), which index is incorporated herein by
reference.


           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                   MAXXAM INC.

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

<TABLE>
<CAPTION>

                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               1999        1998
                                                                                            ----------  -----------
                                          ASSETS
<S>                                                                                         <C>         <C>
Current assets:
   Cash and cash equivalents..............................................................  $    30.1   $     34.4
   Marketable securities..................................................................       14.5          7.7
   Other current assets...................................................................       18.8         18.9
                                                                                            ----------  -----------
      Total current assets................................................................       63.4         61.0
Deferred income taxes.....................................................................       73.6         71.5
Investment in subsidiaries................................................................      164.1         77.6
Other assets..............................................................................        2.0          4.1
                                                                                            ----------  -----------
                                                                                            $   303.1   $    214.2
                                                                                            ==========  ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
   Accounts payable and other accrued liabilities.........................................  $    11.1   $     17.8
   Short-term borrowings..................................................................       18.5         18.5
                                                                                            ----------  -----------
      Total current liabilities...........................................................       29.6         36.3
Notes payable to subsidiaries, net of notes receivable and advances.......................      191.8        178.4
Other noncurrent liabilities..............................................................       53.9         56.3
                                                                                            ----------  -----------
      Total liabilities...................................................................      275.3        271.0
                                                                                            ----------  -----------

Stockholders' equity (deficit):
   Preferred stock, $0.50 par value; 12,500,000 shares authorized; Class A $0.05
      Non-Cumulative Participating Convertible Preferred Stock; 669,355 and
      669,435 shares issued, respectively.................................................        0.3          0.3
   Common stock, $0.50 par value; 28,000,000 shares authorized;
      10,063,359 shares issued............................................................        5.0          5.0
   Additional capital.....................................................................      225.3        222.8
   Accumulated deficit....................................................................     (102.1)      (175.7)
   Accumulated other comprehensive loss - additional minimum pension liability............       (0.7)           -
   Treasury stock, at cost (shares held: preferred - 845; common: 2,805,608 and
       3,062,496, respectively)...........................................................     (100.0)      (109.2)
                                                                                            ----------  -----------
      Total stockholders' equity (deficit)................................................       27.8        (56.8)
                                                                                            ----------  -----------
                                                                                            $   303.1   $    214.2
                                                                                            ==========  ===========

<FN>

See notes to consolidated financial statements and accompanying notes.
</FN>
</TABLE>

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                                   MAXXAM INC.

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

<TABLE>
<CAPTION>

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   1999        1998        1997
                                                                                ----------  ----------  -----------
<S>                                                                             <C>         <C>         <C>
Investment, interest and other income.........................................  $     4.5   $     6.7   $     13.4
Intercompany interest income (expense), net...................................      (18.2)      (16.8)       (16.6)
Interest expense..............................................................       (1.6)       (1.9)        (1.3)
General and administrative expenses...........................................      (22.6)      (12.8)       (16.3)
Equity in earnings (loss) of subsidiaries.....................................      101.7       (47.3)        54.1
                                                                                ----------  ----------  -----------
Income (loss) before income taxes.............................................       63.8       (72.1)        33.3
Credit for income taxes.......................................................        9.8        14.9         31.9
                                                                                ----------  ----------  -----------
Net income (loss).............................................................  $    73.6   $   (57.2)  $     65.2
                                                                                ==========  ==========  ===========

<FN>

See notes to consolidated financial statements and accompanying notes.

</FN>
</TABLE>


     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                                   MAXXAM INC.

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

<TABLE>
<CAPTION>

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   1999        1998        1997
                                                                                ----------  ----------  -----------
<S>                                                                             <C>         <C>         <C>
Cash flows from operating activities:
   Net income (loss)..........................................................  $    73.6   $   (57.2)  $     65.2
   Adjustments to reconcile net income (loss) to net cash provided
      by (used for) operating activities:
      Equity in (earnings) loss of subsidiaries...............................     (101.7)       47.3        (54.1)
      Restricted common stock grant - compensation expense....................       11.7           -            -
      Net sales (purchases) of marketable securities..........................       (0.1)       31.2         (5.8)
      Net gains on marketable securities......................................       (6.6)       (5.6)        (8.5)
      (Increase) decrease in receivables, prepaids and other assets...........        0.7        (5.6)        (0.1)
      Increase in accrued and deferred income taxes...........................        3.3        12.0         12.2
      Decrease in accounts payable and other liabilities......................      (10.5)      (16.0)       (40.4)
      Other...................................................................        0.7        (3.6)         6.5
                                                                                ----------  ----------  -----------
        Net cash provided by (used for) operating activities..................      (28.9)        2.5        (25.0)
                                                                                ----------  ----------  -----------
Cash flows from investing activities:
   Dividends received from subsidiaries.......................................       10.0        10.0            -
   Investments in and net advances from (to) subsidiaries.....................       15.2        (6.7)        (3.6)
   Capital expenditures.......................................................       (0.6)       (0.2)        (0.3)
                                                                                ----------  ----------  -----------
        Net cash provided by (used for) investing activities..................       24.6         3.1         (3.9)
                                                                                ----------  ----------  -----------
Cash flows from financing activities:
   Short-term borrowings......................................................          -        16.0          2.5
   Redemption, repurchase of and principal payments on long-term debt.........          -           -        (42.5)
   Treasury stock repurchases.................................................          -       (35.1)       (52.8)
                                                                                ----------  ----------  -----------
        Net cash used for financing activities................................          -       (19.1)       (92.8)
                                                                                ----------  ----------  -----------

Net decrease in cash and cash equivalents.....................................       (4.3)      (13.5)      (121.7)
Cash and cash equivalents at beginning of year................................       34.4        47.9        169.6
                                                                                ----------  ----------  -----------
Cash and cash equivalents at end of year......................................  $    30.1   $    34.4   $     47.9
                                                                                ==========  ==========  ===========

Supplementary schedule of non-cash investing and financing activities:
   Reduction of stockholders' deficit due to redemption of Kaiser preferred
      stock...................................................................  $       -   $       -   $     64.8
   Borrowing (repayment) of short-term debt issued to
      repurchase treasury stock...............................................          -       (35.1)        35.1
   Deferral of interest payment on intercompany note payable..................       15.0         7.8            -
   Distribution of intercompany payable received from a subsidiary............          -         4.1         19.8
Supplemental disclosure of cash flow information:
   Interest paid..............................................................  $     1.4   $     1.8   $      1.6
   Income taxes paid (refunded), net..........................................        2.8        (0.3)         0.6

<FN>

See notes to consolidated financial statements and accompanying notes.

</FN>
</TABLE>

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                                   MAXXAM INC.

                          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, for the Company and members of its consolidated
federal income tax return group, and then reducing such consolidated amounts by
the amounts recorded by the Company's subsidiaries pursuant to their respective
tax allocation agreements with the Company. The Company's net deferred income
tax assets relate primarily to loss and credit carryforwards, net of valuation
allowances. The Company 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, the Company
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.    SHORT-TERM BORROWINGS

      During 1999 and 1998, the Company had average short-term borrowings
outstanding of $18.5 million and $18.6 million, respectively, under certain debt
instruments. The weighted average interest rate during 1999 and 1998 was 7.2%,
and 9.1%, respectively. See "MAXXAM Loan Agreement," "Demand Note" and "Notes to
NL and CMRT" in Note 6 to the Consolidated Financial Statements for a
description of the related debt instruments.

3.    NOTES PAYABLE TO SUBSIDIARIES, NET OF NOTES RECEIVABLE AND ADVANCES

      The Company's indebtedness to its subsidiaries, which includes accrued
interest, consists of the following (in millions):


<TABLE>
<CAPTION>

                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               1999        1998
                                                                                            ----------  -----------
<S>                                                                                         <C>         <C>
Note payable to MGHI, interest at 11%.....................................................  $   147.8   $    132.8
Unsecured note payable to MCO Properties Inc., interest at 6%.............................       23.1         21.8
Unsecured notes payable to MAXXAM Property Company, interest at 7%........................       13.0         12.2
Net advances..............................................................................        7.9         11.6
                                                                                            ----------  -----------
                                                                                            $   191.8   $    178.4
                                                                                            ==========  ===========

</TABLE>

      In January 2000, the Company elected to defer all of the $8.1 million
interest payment due on the note payable to MGHI on February 1, 2000. The
deferred amount effectively increases the note payable balance to $155.9
million.


                                   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 INC.


Date:   March 10, 2000      By:   /S/ PAUL N. SCHWARTZ
                               -------------------------------------------------
                                    Paul N. Schwartz
                                       President

      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 10, 2000      By:   /S/ CHARLES E. HURWITZ
                               -------------------------------------------------
                                      Charles E. Hurwitz
                               Chairman of the Board, Chief Executive
                                      Officer and Director


Date:   March 10, 2000      By:   /S/ ROBERT J. CRUIKSHANK
                               -------------------------------------------------
                                    Robert J. Cruikshank
                                          Director


Date:   March 10, 2000      By:   /S/ EZRA G. LEVIN
                               -------------------------------------------------
                                        Ezra G. Levin
                                           Director


Date:   March 10, 2000      By:   /S/ STANLEY D. ROSENBERG
                               -------------------------------------------------
                                    Stanley D. Rosenberg
                                          Director

Date:   March 10, 2000      By:   /S/ PAUL N. SCHWARTZ
                               -------------------------------------------------
                                        Paul N. Schwartz
                                President, Chief Financial Officer
                                          and Director
                                  (Principal Financial Officer)


Date:   March 10, 2000      By:   /S/ ELIZABETH D. BRUMLEY
                               -------------------------------------------------
                                     Elizabeth D. Brumley
                                          Controller
                                 (Principal Accounting Officer)


                                INDEX OF EXHIBITS

<TABLE>
<CAPTION>

      EXHIBIT
      NUMBER                                                     DESCRIPTION
------------------  ----------------------------------------------------------------------------------------------------------
<S>                 <C>
3.1                 Restated Certificate of Incorporation of MAXXAM Inc. (the "Company" or "MAXXAM") dated
                    April 10, 1989 (incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on
                    Form 10-K for the year ended December 31, 1989)

3.2                 Certificate of Powers, Designations, Preferences and Relative, Participating, Optional and Other
                    Rights of the Company's Class B Junior Participating Preferred Stock (incorporated herein by reference to
                    Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989)

*3.3                Certificate of Designations of Class A $.05 Non-Cumulative Participating Convertible Preferred Stock
                    of the Company, dated as of December 15, 1999

3.4                 Amended and Restated By-laws of the Company dated as of May 17, 1999 (incorporated herein by reference to
                    Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q dated June 30, 1999)

4.1                 Non-Negotiable Intercompany Note, dated as of December 23, 1996, executed by the Company in favor
                    of MAXXAM Group Holdings Inc. (incorporated herein by reference to Exhibit 10.8 to the Registration
                    Statement on Form S-4 of MAXXAM Group Holdings Inc. ("MGHI"); Registration No. 333-18723)

4.2                 Secured Demand Promissory Note, dated as of November 26, 1997, by the Company in favor of Salomon Smith
                    Barney (incorporated herein by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K for
                    the year ended December 31, 1997; the "Company 1997 Form 10-K")

4.3                 Loan and Pledge Agreement, dated as of October 21, 1997, between the Company and Custodial Trust
                    Company (incorporated herein by reference to Exhibit 4.1 to the Company's Quarterly Report on Form
                    10-Q for the quarter ended September 30, 1997)

4.4                 Amendment No. 1, dated as of August 19, 1999, to the Loan and Pledge Agreement between the
                    Company and Custodial Trust Company dated October 21, 1997 (incorporated herein by reference to
                    Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q dated September 30, 1999)

4.5                 Rights Agreement dated as of December 15, 1999, by and between the Company and American Stock
                    Transfer & Trust Company (incorporated herein by reference to Exhibit 4.1 to the Company's Form 8-K
                    dated December 15, 1999)

4.6                 Indenture, dated as of December 23, 1996, among MGHI, as Issuer, the Company, as Guarantor, and First
                    Bank National Association, as Trustee, regarding the 12% Senior Secured Notes due 2003 of MGHI ("MGHI
                    Indenture") (incorporated herein by reference to Exhibit 4.1 to MGHI's Registration Statement on Form S-4;
                    Registration No. 333-18723)

4.7                 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 MGHI for the quarter ended June
                    30, 1998; File No. 333-18723; the "MGHI June 1998 Form 10-Q/A")

4.8                 Second Supplemental Indenture, dated as of July 29, 1998, to the MGHI Indenture (incorporated herein
                    by reference to Exhibit 4.5 to the MGHI June 1998 Form 10-Q/A)

4.9                 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 Notes Indenture") (incorporated herein by reference
                    to Exhibit 4.1 to Scotia LLC's Registration Statement on Form S-4; Registration No. 333-63825; the
                    "Scotia LLC Registration Statement")

4.10                First Supplemental Indenture, dated as of July 16, 1999, to the Timber Notes Indenture (incorporated
                    herein by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of Scotia LLC dated June 30,
                    1999; File No. 333-63825; the "Scotia LLC June 1999 Form 10-Q")

4.11                Second Supplemental Indenture, dated as of November 18, 1999, to the Timber Notes 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)

4.12                Deed of Trust, Security Agreement, Financing Statement, Fixture Filing and Assignment of Proceeds, dated as
                    of July 20, 1998, among the Company, Fidelity National Title Insurance Company, as trustee, and State Street
                    Bank and Trust Company, as collateral agent (incorporated herein by reference to Exhibit 4.2 to the Company's
                    Quarterly Report on Form 10-Q/A for the quarter ended June 30, 1998; the "Company June 1998 Form 10-Q/A")

4.13                Indenture, dated as of December 23, 1996, among Kaiser Aluminum & Chemical Corporation ("KACC"), as
                    Issuer and certain of its subsidiaries (as guarantors) and First Trust National Association, as Trustee,
                    regarding KACC's 10 7/8% Series D Senior Notes due 2006 (the "10 7/8% Series D Notes Indenture") (incorporated
                    herein by reference to Exhibit 4.4 to KACC's Registration Statement on Form S-4; Registration No. 333-19143)

4.14                First Supplemental Indenture, dated as of July 15, 1997, to the 10 7/8% Series D Notes Indenture
                    (incorporated herein by reference to Exhibit 4.4 to the Quarterly Report on Form 10-Q of Kaiser
                    Aluminum Corporation ("Kaiser") for the quarter ended June 30, 1997; File No. 1-9447)

4.15                Second Supplemental Indenture, dated as of March 31, 1999, to the 10 7/8% Series D Notes Indenture
                    (incorporated herein by reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter
                    ended March 31, 1999; File No. 1-9447; the "Kaiser March 1999 Form 10-Q")

4.16                Indenture, dated as of October 23, 1996, among KACC, as Issuer, and certain of its subsidiaries (as
                    guarantors) and First Trust National Association, as Trustee, regarding KACC's 10 7/8% Series B Senior Notes
                    due 2006 (the 10 7/8% Series B Notes Indenture") (incorporated by reference to Exhibit 4.2 to Kaiser's
                    Quarterly Report on Form 10-Q for the quarter ended September 30, 1996; File No. 1-9447)

4.17                First Supplemental Indenture, dated as of July 15, 1997, to the 10 7/8% Series B Notes Indenture
                    (incorporated herein by reference to Exhibit 4.3 to Kaiser's Quarterly Report on Form 10-Q for the
                    quarter ended June 30, 1997; File No. 1-9447)

4.18                Second Supplemental Indenture, dated as of March 31, 1999, to the 10 7/8% Series B Notes Indenture (incorporated
                    herein by reference to Exhibit 4.3 to the Kaiser March 1999 Form 10-Q)

4.19                Indenture, dated as of February 1, 1993, among KACC, as Issuer, and certain of its subsidiaries (as guarantors)
                    and State Street (as successor trustee to The First National Bank of Boston), regarding KACC's 12 3/4% Senior
                    Subordinated Notes due 2003 (the "KACC Senior Subordinated Note Indenture") ( incorporated herein by
                    reference to Exhibit 4.1 to KACC's Annual Report on Form 10-K for the year ended December 31, 1992; File
                    No. 1-3605)

4.20                First Supplemental Indenture, dated as of May 1, 1993, to the KACC Senior Subordinated Note
                    Indenture (incorporated herein by reference to Exhibit 4.2 to KACC's Quarterly Report on Form 10-Q
                    for the quarter ended June 30, 1993; File No. 1-3605)

4.21                Second Supplemental Indenture, dated as of February 1, 1996, to the KACC Senior Subordinated Note
                    Indenture (incorporated herein by reference to Exhibit 4.3 to Kaiser's Annual Report on Form 10-K for
                    the year ended December 31, 1995; File No. 1-9447)

4.22                Third Supplemental Indenture, dated as of July 15, 1997, to the KACC Senior Subordinated Note
                    Indenture (incorporated herein by reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q
                    for the quarter ended June 30, 1997; File No. 1-9447)

4.23                Fourth Supplemental Indenture, dated as of March 31, 1999, to the KACC Senior Subordinated Note Indenture
                    (incorporated herein by reference to Exhibit 4.4 to the Kaiser March 1999 Form 10-Q)

4.24                Indenture, dated as of February 17, 1994, among KACC, as Issuer, and certain of its subsidiaries (as
                    guarantors), and First Trust National Association, Trustee, regarding Kaiser's 9 7/8% Senior Notes due 2002
                    (the "9 7/8% Notes Indenture") (incorporated herein by reference to Exhibit 4.3 to KACC's Annual Report on
                    Form 10-K for the year ended December 31, 1993; File No. 1-9447; the "Kaiser 1993 Form 10-K")

4.25                First Supplemental Indenture, dated as of February 1, 1996, to the 9 7/8% Notes Indenture (incorporated
                    herein by reference to Exhibit 4.5 to Kaiser's Annual Report on Form 10-K for the year ended
                    December 31, 1995; File No. 1-9447)

4.26                Second Supplemental Indenture, dated as of July 15, 1997, to the 9 7/8% Notes Indenture (incorporated
                    herein by reference to Exhibit 4.2 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended June
                    30, 1997; File No. 1-9447)

4.27                Third Supplemental Indenture, dated as of March 31, 1999, to the 9 7/8% Note Indenture (incorporated
                    herein by reference to Exhibit 4.2 to the Kaiser March 1999 Form 10-Q)

4.28                Credit Agreement, dated as of February 15, 1994 (the "Kaiser Credit Agreement"), among Kaiser, KACC, certain
                    financial institutions and BankAmerica Business Credit, Inc., as Agent (incorporated herein by reference to
                    Exhibit 4.4 to the Kaiser 1993 Form 10-K)

4.29                First Amendment, dated as of July 21, 1994, to the Kaiser Credit Agreement (incorporated herein by
                    reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30,
                    1994; File No. 1-9447)

4.30                Second Amendment, dated as of March 10, 1995, to the Kaiser Credit Agreement (incorporated herein
                    by reference to Exhibit 4.6 to Kaiser's Annual Report on Form 10-K for the year ended December 31,
                    1994; File No. 1-9447)

4.31                Third Amendment, dated as of July 20, 1995, to the Kaiser Credit Agreement (incorporated herein by
                    reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30,
                    1995; File No. 1-9447)

4.32                Fourth Amendment, dated as of October 17, 1995, to the Kaiser Credit Agreement (incorporated herein
                    by reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended
                    September 30, 1995; File No. 1-9447)

4.33                Fifth Amendment, dated as of December 11, 1995, to the Kaiser Credit Agreement (incorporated herein
                    by reference to Exhibit 4.11 to Kaiser's Annual Report on Form 10-K for the year ended December 31,
                    1995; File No. 1-9447)

4.34                Sixth Amendment, dated as of October 1, 1996, to the Kaiser Credit Agreement (incorporated herein
                    by reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended
                    September 30, 1996; File No. 1-9447)

4.35                Seventh Amendment, dated as of December 17, 1996, to the Kaiser Credit Agreement (incorporated
                    herein by reference to Exhibit 4.18 to KACC's Registration Statement on Form S-4 dated January 2,
                    1997; Registration No. 333-19143)

4.36                Eighth Amendment, dated as of February 24, 1997, to the Kaiser Credit Agreement (incorporated herein by
                    reference to Kaiser's Annual Report on Form 10-K for the year ended December 31, 1996; File No. 1-9447)

4.37                Ninth Amendment, dated as of April 21, 1997, to the Kaiser Credit Agreement (incorporated herein by
                    reference to Exhibit 4.5 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997;
                    File No. 1-9447).

4.38                Tenth Amendment, dated as of June 25, 1997, to the Kaiser Credit Agreement (incorporated herein by
                    reference to Exhibit 4.6 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30,
                    1997; File No. 1-9447)

4.39                Eleventh Amendment, dated as of October 20, 1997, to the Kaiser Credit Agreement (incorporated
                    herein by reference to Exhibit 4.7 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended
                    September 30, 1997; File No. 1-9447)

4.40                Twelfth Amendment to Kaiser Credit Agreement, dated as of January 13, 1998, (incorporated herein
                    by reference to Exhibit 4.24 to Kaiser's Annual Report on Form 10-K for the year ended December 31,
                    1997; File No. 1-9447)

4.41                Thirteenth Amendment to Kaiser Credit Agreement, dated as of July 20, 1998 (incorporated by
                    reference to Exhibit 4 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998;
                    File No. 1-9447).

4.42                Fourteenth Amendment to Kaiser Credit Agreement, dated as of December 11, 1998 (incorporated
                    herein by reference to Exhibit 4.26 to Kaiser's Annual Report on Form 10-K for the year ended
                    December 31, 1998; File No. 1-9447; the "Kaiser 1998 Form 10-K").

4.43                Fifteenth Amendment to Kaiser Credit Agreement dated as of February 23, 1999 (incorporated herein
                    by reference to Exhibit 4.27 to the Kaiser 1998 Form 10-K).

4.44                Sixteenth Amendment to Kaiser Credit Agreement dated as of March 25, 1999 (incorporated herein by
                    reference to Exhibit 4.28 to the Kaiser 1998 Form 10-K).

4.45                Seventeenth Amendment to Kaiser Credit Agreement dated as of September 24, 1999 (incorporated herein
                    by reference to Exhibit 4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended
                    September 30, 1999; File No. 1-9447)

4.46                Eighteenth Amendment to Kaiser Credit Agreement dated as of February 11, 2000 (incorporated herein
                    by reference to Exhibit 4.34 to Kaiser's Annual Report on Form 10-K for the year ended December 31,
                    1999; File No. 1-9447)

4.47                Amended and Restated Credit Agreement between The Pacific Lumber Company ("Pacific Lumber") and Bank of
                    America National Trust and Savings Association, dated as of December 18, 1998 (the "Pacific Lumber
                    Credit Agreement") (incorporated herein by reference to Exhibit 4.7 to MGHI's Annual Report on Form 10-K for
                    the year ended December 31, 1998; File No. 333-18723)

4.48                Amendment, dated as of January 31, 2000, to the Pacific Lumber Credit Agreement (incorporated by
                    reference to Exhibit 4.11 to MGHI's Annual Report on Form 10-K for the year ended December 31,
                    1999; File No. 333-18723)

4.49                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 (the "Scotia LLC Credit Agreement")
                    (incorporated herein by reference to Exhibit 4.3 to the Company June 1998 Form 10-Q/A)

4.50                First Amendment, dated as of July 16, 1999, to the Scotia LLC Credit Agreement (incorporated herein by
                    reference to Exhibit 4.2 to the Scotia LLC June 1999 Form 10-Q)

4.51                Amended and Restated Indenture, dated as of October 6, 1995, by and among Sam Houston Race Park,
                    Ltd. ("SHRP"), New SHRP Capital Corp., SHRP General Partner, Inc. and First Bank National
                    Association, Trustee (incorporated herein by reference to Exhibit 4.1 to the Quarterly Report on Form
                    10-Q of SHRP for the quarter ended June 30, 1995; File No. 33-67738)

                    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

4.52                Loan Agreement, effective as of October 30, 1998, by and among MCO Properties Inc., MCO
                    Properties L.P., Horizon Corporation, Horizon Properties Corporation, Westcliff Development
                    Corporation and Southwest Bank of Texas, N.A. (incorporated herein by reference to Exhibit 4.39 to
                    the Company's Annual Report on Form 10-K for the year ended December 31, 1998)

4.53                Amendment to Loan Agreement, dated as of  February 26, 1999, by and among MCO Properties Inc.,
                    MCO Properties L.P., Horizon Corporation, Horizon Properties Corporation, Westcliff Development
                    Corporation and Southwest Bank of Texas, N.A. (incorporated herein by reference to Exhibit 4.40 to
                    the Company's Annual Report on Form 10-K for the year ended December 31, 1998)

10.1                Tax Allocation Agreement, dated as of December 23, 1996, between the Company and MGHI
                    (incorporated herein by reference to Exhibit 10.1 to MGHI's Registration Statement on Form S-4;
                    Registration No. 333-18723)

10.2                Tax Allocation Agreement, dated as of December 21, 1989, between the Company and KACC
                    (incorporated herein by reference to Exhibit 10.21 to Amendment No. 6 to the Registration Statement
                    of KACC on Form S-1; Registration No. 33-30645)

10.3                Tax Allocation Agreement, dated as of February 26, 1991, between Kaiser and the Company
                    (incorporated herein by reference to Exhibit 10.23 to Amendment No. 2 to the Registration Statement
                    of Kaiser on Form S-1; Registration No. 33-37895)

10.4                Tax Allocation Agreement, dated as of August 4, 1993, between the Company and MAXXAM Group
                    Inc. ("MGI") (incorporated herein by reference to Exhibit 10.6 to Amendment No. 2 to the Form S-2
                    Registration Statement of MGI; Registration No. 33-56332)

10.5                Tax Allocation Agreement, dated as of May 21, 1988, among the Company, 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 year ended December 31, 1988; File No. 1-9204)

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

10.7                Tax Allocation Agreement, dated as of July 3, 1990, between the Company and Britt Lumber Co., Inc.
                    (incorporated herein by reference to Exhibit 10.4 to MGI's Annual Report on Form 10-K for the year
                    ended December 31, 1993; File No. 1-8857)

10.8                Senior Subordinated Intercompany Note, dated as of February 15, 1994, executed by KACC in favor of Kaiser
                    (incorporated herein by reference to Exhibit 4.22 to the Kaiser 1993 Form 10-K)

10.9                Senior Subordinated Intercompany Note, dated as of March 17, 1994, executed by KACC in favor of
                    Kaiser (incorporated herein by reference to Exhibit 4.23 to the Kaiser 1993 Form 10-K)

10.10               Intercompany Note, dated as of December 21, 1989, executed by Kaiser in favor of KACC (the "Kaiser
                    Intercompany Note," incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on
                    Form 10-K for the year ended December 31, 1996; the "Company's 1996 Form 10-K")

10.11               Confirmation of Amendment to the Kaiser Intercompany Note, dated as of October 6, 1993 (incorporated
                    herein by reference to Exhibit 10.11 to the Company's 1996 Form 10-K)

10.12               Third Amended and Restated Limited Partnership Agreement of SHRP, dated as of October 6, 1995
                    (incorporated herein by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q of SHRP for the
                    quarter ended June 30, 1995; File No. 33-67738)

10.13               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 MGHI for the
                    quarter ended June 30, 1998; File No. 333-18723; the "MGHI June 1998 Form 10-Q")

10.14               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 MGHI June 1998 Form 10-Q)

10.15               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 MGHI June 1998 Form 10-Q)

10.16               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 MGHI June 1998
                    Form 10-Q)

10.17               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 MGHI June 1998 Form 10-Q)

10.18               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")

10.19               Agreement Relating to Enforcement of AB 1986 dated as of February 25, 1999 by and among The
                    California Resources Agency, CDF&G, The California Department of Forestry, The California Wildlife
                    Conservation Board (the "CWCB"), 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)

10.20               Habitat Conservation Plan dated 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)

10.21               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 acting by and through the
                    CWCB Board (incorporated herein by reference to Exhibit 99.6 of the Scotia LLC March 19, 1999 Form 8-K)

10.22               Agreement for Transfer of Owl Creek and Escrow Instructions and Option Agreement dated February
                    26, 1999 by and between the Company and the State of California acting by and through the CWCB
                    (incorporated herein by reference to Exhibit 99.7 of the Scotia LLC March 19, 1999 Form 8-K)

10.23               Letter dated February 25, 1999 from the CDF to Pacific Lumber (incorporated herein by reference to
                    Exhibit 99.8 to the Scotia LLC March 19, 1999 Form 8-K)

10.24               Letter dated March 1, 1999 from the CDF to Pacific Lumber (incorporated herein by reference to
                    Exhibit 99.9 to the Scotia LLC March 19, 1999 Form 8-K)

10.25               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 the Scotia LLC
                    March 19, 1999 Form 8-K)

10.26               Escrow Agreement dated as of March 1, 1999 ("Escrow Agreement") among Pacific Lumber, Salmon
                    Creek and Citibank, N.A. (incorporated herein by reference to Exhibit 10.15 to Scotia LLC's Annual
                    Report on Form 10-K for the fiscal year ended December 31, 1998; File No. 333-63825; the "Scotia
                    LLC 1999 Form 10-K")

10.27               Amendment to Escrow Agreement dated as of March 26, 1999 (incorporated herein by reference to
                    Exhibit 10.16 to the Scotia LLC 1999 Form 10-K)

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

                                                Executive Compensation Plans and Arrangements

10.29               MAXXAM 1994 Omnibus Employee Incentive Plan (incorporated herein by reference to Exhibit 99 to the
                    Company's Proxy Statement dated April 29, 1994; the "Company 1994 Proxy Statement")

10.30               Form of Stock Option Agreement under the MAXXAM 1994 Omnibus Employee Incentive Plan
                    (incorporated herein by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for
                    the year ended December 31, 1994)

10.31               MAXXAM 1994 Non-Employee Director Stock Plan (incorporated herein by reference to Exhibit 99
                    to the Company 1994 Proxy Statement)

10.32               Amendment No. 1 to the MAXXAM 1994 Non-Employee Director Stock Plan (incorporated herein by
                    reference to Exhibit 10.22 to the Company 's Annual Report on Form 10-K for the fiscal year ended
                    December 31, 1997)

10.33               Form of Stock Option Agreement under the MAXXAM 1994 Non-Employee Director Plan
                    (incorporated herein by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for
                    the year ended December 31, 1994)

10.34               Form of Deferred Fee Agreement under the MAXXAM 1994 Non-Employee Director Plan
                    (incorporated herein by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for
                    the fiscal year ended December 31, 1996)

10.35               MAXXAM 1994 Executive Bonus Plan (incorporated herein by reference to Exhibit 99 to the Company
                    1994 Proxy Statement)

10.36               MAXXAM Revised Capital Accumulation Plan of 1988, as amended December 12, 1988 (incorporated
                    herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
                    ended June 30, 1995)

10.37               The Company's 1984 Phantom Share Plan, as amended (the "Company Phantom Share Plan")
                    (incorporated herein by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for
                    the year ended December 31, 1990; the "Company 1990 Form 10-K")

10.38               Amendment, dated as of March 8, 1990, relating to the Company Phantom Share Plan (incorporated
                    herein by reference to Exhibit 10.7 to the Company 1990 Form 10-K)

10.39               Form of Phantom Share Agreement relating to the Company Phantom Share Plan (incorporated herein
                    by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended
                    December 31, 1988)

10.40               MAXXAM Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10(ii)
                    to MGI's Registration Statement on Form S-4 on Form S-2; Registration No. 33-42300)

10.41               Form of Company Deferred Compensation Agreement (incorporated herein by reference to Exhibit 10.35
                    to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)

10.42               Kaiser 1993 Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to
                    KACC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993; File No. 1-3605)

10.43               Form of Stock Option Agreement under the Kaiser 1993 Omnibus Stock Incentive Plan (incorporated
                    herein by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K for the year ended
                    December 31, 1994)

10.44               KACC's Bonus Plan (incorporated herein by reference to Exhibit 10.25 to Amendment No. 6 to the
                    Registration Statement of KACC on Form S-1; Registration No. 33-30645)

10.45               Kaiser 1995 Employee Incentive Compensation Program (incorporated herein by reference to Exhibit
                    10.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995; File No. 1-
                    9447)

10.46               Kaiser 1995 Executive Incentive Compensation Program (incorporated herein by reference to Exhibit
                    99 to Kaiser's Proxy Statement dated April 26, 1995)

10.47               Kaiser 1997 Omnibus Stock Incentive Plan (incorporated by reference to Appendix A to the Proxy
                    Statement, dated April 29, 1997, filed by Kaiser; File No. 1-9447)

10.48               Form of Deferred Fee Agreement between Kaiser, KACC, and directors of Kaiser and KACC
                    (incorporated herein by reference to Exhibit 10 to Kaiser's Quarterly Report on Form 10-Q for the
                    quarter ended March 31, 1998; File No. 1-9447)

10.49               Employment Agreement between KACC and John T. La Duc made effective for the period from January 1, 1998
                    to December 31, 2002 (incorporated herein by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q
                    of Kaiser for the quarter ended September 30, 1998; File No. 1-9447; the "Kaiser September 1998 Form
                    10-Q")

10.50               Time-Based Stock Option Grant pursuant to the Kaiser 1997 Omnibus Stock Incentive Plan to John T.
                    La Duc effective July 10, 1998 (incorporated herein by reference to Exhibit 10.6 to the Kaiser
                    September 1998 Form 10-Q)

10.51               Description of Kaiser Severance Protection and Change of Control Benefits Program (incorporated
                    herein by reference to Exhibit 10.22 to Kaiser's Annual Report in Form 10-K for the fiscal year ended
                    December 31, 1998; File No. 1-9447)

*10.52              Executive Employment Agreement between the Company and J. Kent Friedman dated as of November
                    29, 1999

*10.53              Restricted Stock Agreement between the Company and Charles E. Hurwitz effective as of December
                    13, 1999

  *21               List of the Company's Subsidiaries

  *23               Consent of Arthur Andersen LLP

  *27               Financial Data Schedule

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* Included with this filing

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