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, 1997   COMMISSION FILE NUMBER 1-3924

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

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

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
            Title of each class                    exchange
            --------------------              on which registered
                                             --------------------
<S>                                          <C>
Common Stock, $.50 par value                  American, Pacific,
                                                 Philadelphia

</TABLE>

  Number of shares of common stock outstanding at March 2, 1998: 7,000,597
     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 2, 1998 American Stock Exchange closing price of
$53.125 per share, the aggregate market value of the Registrant's
outstanding voting stock held by non-affiliates was approximately $229.6
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

     Item 1.   Business                                                2
                    General                                            2
                    Aluminum Operations                                2
                    Forest Products Operations                        10
                    Real Estate and Other Operations                  19

     Item 2.   Properties                                             23

     Item 3.   Legal Proceedings                                      23

     Item 4.   Submission of Matters to a Vote of Security Holders    26

                                  PART II

     Item 5.   Market for Registrant's Common Equity and Related
                    Stockholder Matters                               27

     Item 6.   Selected Financial Data                                28

     Item 7.   Management's Discussion and Analysis of Financial
                    Condition and Results of Operations               28

     Item 8.   Financial Statements and Supplementary Data
                    Report of Independent Public Accountants          43
                    Consolidated Balance Sheet                        44
                    Consolidated Statement of Operations              45
                    Consolidated Statement of Cash Flows              46
                    Notes to Consolidated Financial Statements        47

     Item 9.   Changes in and Disagreements with Accountants
                    on Accounting and Financial Disclosure            72

                                  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                                       73



                                   PART I


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.  The Company's voting interest in Kaiser is
approximately 63%.  See "--Aluminum Operations."  In addition, the Company
is engaged in forest products operations through its wholly owned
subsidiary, 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 (a) real estate investment and development,
managed through MAXXAM Property Company, and (b) other commercial
operations through subsidiaries, including a Class 1 thoroughbred and
quarter horse racing facility located in the greater Houston metropolitan
area.  See "--Real Estate and Other Operations."  See Note 14 of the Notes
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" and "--Forest Products Operations--Regulatory and Environmental
Factors," Item 3. "Legal Proceedings" and Item 7.  "Management's Discussion
and Analysis of Financial Condition and Results of Operations").  Such
statements can be identified by the use of forward-looking terminology such
as "believes," "expects," "may," "estimates,""will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy.  Readers are
cautioned that any such forward-looking statements are not guarantees of
future performance and involve significant risks and uncertainties, and
that actual results may vary materially from those in the forward-looking
statements as a result of various factors.  These factors include the
effectiveness of management's strategies and decisions, general economic
and business conditions, developments in technology, new or modified
statutory or regulatory requirements and changing prices and market
conditions.  This Report identifies other factors that could cause such
differences.  No assurance can be given that these are all of the factors
that could cause actual results to vary materially from the forward-looking
statements.

ALUMINUM OPERATIONS

     GENERAL

          Kaiser operates in all 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 1997, Kaiser produced approximately 2,945,000
tons of alumina, of which approximately 66% was sold to third parties, and
produced approximately 493,000 tons of primary aluminum, of which
approximately 67% was sold to third parties.  Kaiser is also a major
domestic supplier of fabricated aluminum products.  In 1997, Kaiser shipped
approximately 400,000 tons of fabricated aluminum products to third
parties, which accounted for approximately 5% of the 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
which compete throughout the aluminum industry.  The following table sets
forth total shipments and intracompany transfers of Kaiser's alumina,
primary aluminum and fabricated aluminum operations:


<TABLE>
<CAPTION>

                                                 
                                                     Years Ended December 31,         
                                            ----------------------------------------
                                                 1997          1996          1995     
                                            ------------  ------------  ------------
                                                          (In thousands of tons)
<S>                                         <C>           <C>           <C>
Alumina:
          Shipments to Third Parties              1,929.8       2,073.7       2,040.1
          Intracompany Transfers                    968.0         912.4         800.6

Primary Aluminum:
          Shipments to Third Parties                327.9         355.6         271.7
          Intracompany Transfers                    164.2         128.3         217.4

Fabricated Aluminum Products:
          Shipments to Third Parties                400.0         327.1         368.2
</TABLE>

          The alumina business unit mines bauxite and obtains additional
bauxite tonnage under long-term contracts.  The primary aluminum products
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.  The products include heat-treated
products; body, lid, and tab stock for beverage containers; sheet and plate
products; screw machine stock; redraw rod; forging stock; truck wheels and
hubs; air bag canisters; engine manifolds; and other castings, forgings and
extruded products which are manufactured at plants located in principal
marketing areas of the United States and Canada.  The aluminum utilized in
Kaiser's fabricated products operations is comprised of primary aluminum,
obtained both internally and from third parties, and scrap metal purchased
from third parties.  

     PROFIT IMPROVEMENT PROGRAM

          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.

          In October 1996, Kaiser established a goal of achieving $120
million per year of pre-tax cost reductions and other profit improvements,
independent of metal price changes, with the full effect planned to be
realized in 1998 and beyond, measured against 1996 results.  This program
is being effected through reductions in production costs, decreases in
corporate general and administrative expenses, and enhancements to product
mix and volume throughput.  There can be no assurance that the initiative
will result in the desired cost reductions and other profit improvements.

     BUSINESS DEVELOPMENT IN STRATEGIC AREAS

          Kaiser's strategic objectives include both improving the
financial performance of its existing facilities and implementing
modifications to its existing portfolio of businesses and assets in an
effort to focus its business activities in areas which hold the best
potential for improving Kaiser's financial performance.  Kaiser is actively
pursuing opportunities to increase its participation in businesses and
assets in targeted areas of its portfolio consistent with its strategic
objectives, by internal investment and by acquisition, both domestically
and internationally, by using its technical expertise and capital to form 
joint ventures or to acquire equity in aluminum-related facilities.  Recent
examples of such activities include the formation with Accuride Corporation
of a joint venture to design, manufacture and market heavy duty aluminum
wheels for the commercial transportation industry, and the acquisition of
an aluminum extrusion plant in Richmond, Virginia, from Reynolds Metals
Company, in the second quarter of 1997.  See "--Fabricated Aluminum
Products Operations--Engineered Products."

     SENSITIVITY TO PRICES AND HEDGING PROGRAMS

          The Company'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 and on Kaiser's hedging strategies.  Primary aluminum prices have
historically been subject to significant cyclical fluctuations.  See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Aluminum Operations--Industry Overview." 
Alumina prices, as well as fabricated aluminum product prices (which vary
considerably among products), are significantly influenced by changes in
the price of primary aluminum and generally lag behind primary aluminum
prices for periods of up to three months.  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 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 lock-in or 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 Kaiser to realize
possible upside price movements.  See Notes 1 and 13 of the Notes to
Consolidated Financial Statements.

     ALUMINA OPERATIONS

          The following table lists Kaiser's bauxite mining and alumina
refining facilities as of December 31, 1997: 

<TABLE>
<CAPTION>

                                                                      Annual
                                                                    Production      Total
                                                                     Capacity       Annual
                                                       Company     Available to   Production
        Activity           Facility      Location     Ownership    the Company     Capacity   
----------------------  ------------  ------------  ------------  ------------- -------------
                                                                      (tons)        (tons)
<S>                     <C>           <C>           <C>           <C>           <C>

Bauxite Mining          KJBC(1)       Jamaica              49%        4,500,000     4,500,000
                        Alpart(2)     Jamaica              65%        2,275,000     3,500,000
                                                                  ------------- -------------
                                                                      6,775,000     8,000,000
                                                                  ============= =============

Alumina Refining        Gramercy      Louisiana           100%        1,050,000     1,050,000
                        Alpart        Jamaica              65%          942,500     1,450,000
                        QAL           Australia          28.3%          973,500     3,440,000
                                                                  ------------- -------------
                                                                      2,966,000     5,940,000
                                                                  ============= =============
<FN>
---------------
(1)  Although Kaiser owns 49% of Kaiser Jamaica Bauxite Company ("KJBC"),
     it has the right to receive all of KJBC's output.
(2)  Alumina Partners of Jamaica ("Alpart") bauxite is refined into alumina
     at the Alpart alumina refinery.
(3)  Queensland Alumina Limited ("QAL").
</TABLE>

          Bauxite mined in Jamaica by KJBC is refined into alumina at
Kaiser's plant at Gramercy, Louisiana, or is sold to third parties.  In
1979, the Government of Jamaica granted Kaiser a mining lease for the
mining of bauxite sufficient to supply Kaiser's then-existing Louisiana
alumina refineries at their annual capacities of 1,656,000 tons per year
until January 31, 2020. Alumina from the Gramercy plant is sold to third
parties.

          Alpart holds bauxite reserves and owns a 1,450,000 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
2,000,000 tons per year, through the year 2024.

          In June 1997, Alpart and JAMALCO, a joint venture between
affiliates of Aluminum Company of America and the government of Jamaica,
jointly announced that they had signed a non-binding letter of intent
agreeing to consolidate their bauxite mining operations in Jamaica, with
the objective of optimizing operating and capital costs.  The transaction
is subject to various conditions, including the negotiation of definitive
agreements, third party consents, and board approvals.  No assurance can be
given that the conditions will be satisfied or that the transaction will be
consummated.

          Kaiser owns a 28.3% interest in 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 stockholders under long-term tolling
contracts. The stockholders, including Kaiser, purchase bauxite from
another QAL stockholder under long-term supply contracts.  Kaiser has
contracted with QAL to take approximately 792,000 tons per year of capacity
or pay standby charges.  Kaiser is unconditionally obligated to pay amounts
calculated to service its share ($97.6 million at December 31, 1997) of
certain debt of QAL, as well as other QAL costs and expenses, including
bauxite shipping costs.

          Kaiser's principal customers for bauxite and alumina consist of
other aluminum producers that purchase bauxite and reduction-grade alumina,
trading intermediaries who resell raw materials to end-users, and users of
chemical-grade alumina.  All of Kaiser's third-party sales of bauxite in
1997 were made to two customers, the largest of which accounted for
approximately 91% of such sales.  Kaiser also sold alumina in 1997 to
twenty-nine customers, the largest and top five of which accounted for
approximately 24% and 85% of such sales, respectively.  See "--
Competition."  Kaiser believes that among alumina producers it is the
world's second largest seller of smelter grade alumina to third parties.
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
also "--Sensitivity to Prices and Hedging Programs."

     PRIMARY ALUMINUM PRODUCTS OPERATIONS

          The following table lists Kaiser's primary aluminum smelting
facilities as of December 31, 1997:

<TABLE>
<CAPTION>

                                                   Annual 
                                                    Rated          Total
                                                   Capacity       Annual          1997
                                     Company     Available to      Rated       Operating
      Location         Facility     Ownership    the Company     Capacity         Rate     
------------------  ------------  ------------  ------------  ------------   ------------
                                                     (tons)        (tons)
<S>                 <C>           <C>           <C>           <C>            <C>
Domestic
     Washington     Mead                100%        200,000        200,000         108%   
     Washington     Tacoma              100%         73,000         73,000         103%   
                                                -----------   ------------
          Subtotal                                  273,000        273,000  
                                                -----------   ------------
International                                                               
     Ghana          Valco                90%        180,000        200,000          76%   
     Wales, United
          Kingdom   Anglesey             49%         55,000        112,000         118%   
                                                -----------   ------------
          Subtotal                                  235,000        312,000  
                                                -----------   ------------
                
          Total                                     508,000        585,000  
                                                ===========   ============
</TABLE>

          The Mead facility uses pre-bake technology and produces primary
aluminum.  Approximately 64% of Mead's 1997 production was used at Kaiser's
Trentwood, Washington, rolling mill and the balance was sold to third
parties.  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.

          Kaiser is modernizing and expanding the carbon baking furnace at
its Mead smelter at an estimated cost of approximately $54.5 million.  The
project will improve the reliability of the carbon baking operations,
increase productivity, enhance safety and improve the environmental
performance of the facility.  The first stage of this project, the
construction of a new $40.0 million, 90,000 ton per year furnace, has been
completed and is in operation.  The remaining modernization work is
expected to be completed in late 1998, when an existing furnace will be
rebuilt.  A portion of this project was financed with the net proceeds
(approximately $18.6 million) of 7.6% Solid Waste Disposal Revenue Bonds
due 2027 issued in March 1997 by the Industrial Development Corporation of
Spokane County, Washington.

          Electric power represents an important production cost for Kaiser
at its aluminum smelters.  In 1995, Kaiser successfully restructured
electric power purchase agreements for its facilities in the Pacific
Northwest, which resulted in significantly lower electric power costs in
1996 for its Mead and Tacoma, Washington, smelters compared to 1995
electric power costs.  Kaiser continued to benefit from savings in electric
power costs at those facilities in 1997 and expects to continue to benefit
from such savings in future years.  

          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.  Power for the Valco smelter
is supplied under an agreement with the Volta River Authority (the "VRA")
which expires in 2017.  The agreement indexes two-thirds of the price of
the contract quantity of power to the market price of primary aluminum. 
The agreement also provides for a review and adjustment of the base power
rate and the price index every five years.  The most recent review was
completed in April 1994 for the 1994-1998 period.

          Effective January 1, 1998, the VRA reduced the allocation of
electric power to the Valco smelter.  Kaiser announced that, due to the
reduced power allocation, Valco expected to operate three potlines in 1998
compared to the four potlines which were operated throughout 1997.  During
February 1998, Valco and the VRA reached an agreement whereby Valco agreed
to receive compensation in lieu of the power necessary to operate one of
its three remaining operating potlines.  Compensation under the agreement
is expected to substantially offset the financial impact of the curtailment
of that potline.  See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--
Aluminum Operations--Recent Events and Developments" for further
information.

          Kaiser owns a 49% interest in the Anglesey Aluminium Limited
("Anglesey") aluminum smelter and port facility 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. 
Power for the Anglesey aluminum smelter is supplied under an agreement
which expires in 2001.

          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
and anodes and bus that conduct electricity through reduction cells,
improved feed systems that add alumina to the cells, and a computerized
process control and energy management system--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. Kaiser is actively engaged in efforts to license this technology
and sell technical and managerial assistance to other producers worldwide,
and may participate in joint ventures or similar business partnerships
which employ Kaiser's technical and managerial knowledge.  See "--Research
and Development."

          During October 1997, a joint decision was made by a Kaiser
subsidiary and its joint venture partner to terminate and dissolve the
Sino-foreign aluminum joint venture formed in 1995.  In January 1998, the
Kaiser subsidiary reached an agreement to sell its interests in the venture
to its partner.  The terms of the agreement are subject to certain
governmental approvals by officials of the People's Republic of China
("PRC").

          Kaiser's principal primary aluminum customers consist of large
trading intermediaries and metal brokers, who resell primary aluminum to
fabricated product manufacturers, and large and small international
aluminum fabricators.  In 1997, Kaiser sold its primary aluminum production
not utilized for internal purposes to approximately 50 customers, the
largest and top five of which accounted for approximately 13% and 47% of
such sales, respectively.  See "--Competition."  Marketing and sales
efforts are conducted by personnel located in Pleasanton, California;
Houston, Texas; and Tacoma and Spokane, Washington.  A majority of the
business unit's sales are based upon long-term relationships with metal
merchants and end-users.

     FABRICATED ALUMINUM PRODUCTS OPERATIONS

          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 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.  Kaiser's
fabricated products compete with those of numerous domestic and foreign
producers and with products made of steel, copper, glass, plastic and other
materials.  Product quality, price and availability are the principal
competitive factors in the market for fabricated aluminum products.  Kaiser
has focused its fabricated products operations on selected products in
which Kaiser has production expertise, high-quality capability and
geographic and other competitive advantages.

          Flat-Rolled Products
          The flat-rolled products business unit operates the Trentwood,
Washington, rolling mill and the Micromill(TM) facility, near Reno, Nevada. 
The Trentwood facility accounted for approximately 62% of Kaiser's 1997
fabricated aluminum products shipments.  The business unit supplies the
aerospace and general engineering markets (producing heat-treat 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.

          Kaiser continues to enhance the process and product mix of its
Trentwood rolling mill in an effort to maximize its profitability and
maintain full utilization of the facility.  Kaiser is implementing a plan
to expand its annual production capacity of heat-treated flat-rolled
products at the Trentwood facility by approximately one-third over 1996
levels, most of which was achieved in 1997.  Implementation of the plan
also will enable Kaiser to improve the reliability of its heat-treated
operations, enhance the quality of its heat-treat products, and improve
Trentwood's operating efficiency.  The project is estimated to cost
approximately $22.0 million and is expected to be completed in late 1998. 
Global sales of Kaiser's heat-treat products have increased significantly
over the last several years and are made primarily to the aerospace and
general engineering markets, which have been experiencing growth in demand. 
In 1997, the business unit shipped products to approximately 140 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 17% of the business unit's revenue.

          Kaiser's flat-rolled products are also sold to beverage container
manufacturers located in the western United States and in the Asian Pacific
Rim countries where the Trentwood plant's location provides Kaiser with a
transportation advantage.  Quality of products for the beverage container
industry, service, and timeliness of delivery are the primary bases on
which Kaiser competes.  In recent years Kaiser has made significant capital
expenditures at Trentwood in rolling technology and process control to
improve the metal integrity, shape and gauge control of its products. 
Kaiser believes that such improvements have enhanced the quality of
Kaiser's products for the beverage container industry and the capacity and
efficiency of Kaiser's manufacturing operations, and that Kaiser is one of
the highest quality producers of aluminum beverage can stock in the world. 
In 1997, the business unit had 37 domestic and foreign can stock customers. 
The largest and top five of such customers accounted for approximately 15%
and 27%, respectively, of the business unit's revenue.  See "--
Competition."  The marketing staff for the business unit is located at the
Trentwood facility and in Pleasanton, California.  Sales are made directly
to end-use customers and distributors from four sales offices in the United
States, from sales offices in England and Japan, and by independent sales
agents in Europe, Asia and Latin America.

          The first Micromill(TM) facility, constructed in 1996 as a
demonstration and production facility, was in a start-up mode during 1997.
Micromill(TM) technology is based on a proprietary thin-strip, high-speed,
continuous-belt casting technique linked directly to hot and cold rolling
mills.  Assuming the successful implementation and commercialization of the
Micromill(TM) technology, the capital and conversion costs of Micromill(TM)
facilities are expected to be significantly lower than conventional rolling
mills.  Kaiser is continuing its efforts to implement the Micromill(TM)
technology on a full-scale basis.  The facility is currently shipping
qualification quantities of product to various customers, and Kaiser
currently anticipates that commercial deliveries from the facility will
begin during the second quarter of 1998.  However, the Micromill(TM)
technology has not yet been fully implemented or commercialized, and there
can be no assurance that it will be successfully implemented and
commercialized for use at full-scale facilities.

          Engineered Products
          The engineered products business unit maintains its headquarters
and sales and engineering office in Southfield, Michigan, which works with
car makers and other customers, Kaiser's Center for Technology ("CFT," see
"--Research and Development"), and plant personnel to create new automotive
component designs and to improve existing products.  The business unit
operates soft-alloy and hard-alloy extrusion facilities and engineered
component (forging and casting) facilities in the United States and in
Canada.  Soft-alloy extrusion facilities are located in Los Angeles,
California; Santa Fe Springs, California; Sherman, Texas; Richmond,
Virginia; and London, Ontario, Canada.  Each of the soft-alloy extrusion
facilities has fabricating capabilities and provides finishing services. 
The Richmond, Virginia, facility, acquired in mid-1997 by Kaiser Bellwood
Corporation, a wholly owned subsidiary of Kaiser, increased Kaiser's
extruded products capacity and enhanced its existing extrusion business due
to that facility's ability to manufacture seamless tubing and large
circular extrusions and to serve the distribution and ground transportation
industries.  Hard-alloy rod and bar extrusion facilities are located in
Newark, Ohio, and Jackson, Tennessee, which produce screw machine stock,
redraw rod, forging stock, and billet.  A facility located in Richland,
Washington, produces seamless tubing in both hard and soft alloys for the
automotive, other transportation, export, recreation, agriculture, and
other industrial markets.  The business unit operates a cathodic protection
business located in Tulsa, Oklahoma, that extrudes both aluminum and
magnesium.  Major markets for extruded products are in the transportation
industry, to which the business unit provides extruded shapes for
automobiles, trucks, trailers, cabs and shipping containers, and in the
distribution, durable goods, defense, building and construction, ordnance
and electrical markets.

          The engineered products business unit operates forging facilities
at Oxnard, California; and Greenwood, South Carolina; a machine shop at
Greenwood, South Carolina; and a casting facility in Canton, Ohio and
participates in a joint venture with Accuride Corporation, located in Erie,
Pennsylvania, and Cuyahoga Falls, Ohio, that designs, manufactures and
markets aluminum wheels for the commercial transportation industry.  The
business unit is one of the largest producers of aluminum forgings in the
United States and is a major supplier of high-quality forged parts to
customers in the automotive, commercial vehicle and ordnance markets.  The
high strength-to-weight properties of forged and cast aluminum make it
particularly well-suited for automotive applications.  The business unit's
casting facility manufactures aluminum engine manifolds for the automobile,
truck and marine markets.

          In 1997, the engineered products business unit had approximately
640 customers, the largest and top five of which accounted for
approximately 8% and 18%, respectively, of the business unit's revenue. 
See "--Competition." Sales are made directly from plants, as well as
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"  for cautionary
information with respect to such forward-looking statements.

          Aluminum competes in many markets with steel, copper, glass,
plastic and other materials.  In recent years, plastic containers have
increased and glass containers have decreased their respective shares of
the soft drink sector of the beverage container market.  In the United
States, beverage container materials, including aluminum, face increased
competition from plastics as increased polyethylene terephthalate ("PET")
container capacity is brought on line by plastics manufacturers.  Within
the aluminum business, Kaiser competes with both domestic and foreign
producers of bauxite, alumina and primary aluminum, and with domestic and
foreign fabricators.  Many of Kaiser's competitors have greater financial
resources than Kaiser.  Kaiser's principal competitors in the sale of
alumina include Alcoa Alumina & Chemicals L.L.C., Billiton Marketing and
Trading BV, and Alcan Aluminum Limited.  Kaiser competes with most aluminum
producers in the sale of primary aluminum.

          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. 
Kaiser also competes with a wide range of domestic and international
fabricators in the sale of fabricated aluminum products.  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 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.

     RESEARCH AND DEVELOPMENT

          Kaiser conducts research and development activities principally
at two facilities--CFT in Pleasanton, California, and the Northwest
Engineering Center adjacent to the Mead smelter in Washington.  Net
expenditures for company-sponsored research and development activities were
$19.7 million in 1997, $20.5 million in 1996 and $18.5 million in 1995. 
Kaiser's research staff totaled approximately 130 at December 31, 1997. 
Kaiser estimates that research and development net expenditures will be
approximately $11.6 million in 1998.

          CFT performs research and development across a range of aluminum
process and product technologies to support Kaiser's business units and new
business opportunities.  It also selectively offers technical services to
third parties.  Significant efforts are directed at product and process
technology for the aircraft, automotive and can sheet markets, and aluminum
reduction cell models which are applied to improving cell designs and
operating conditions.  The Northwest Engineering Center maintains
specialized laboratories and a miniature carbon plant where experiments
with new anode and cathode technology are performed.  The Northwest
Engineering Center also supports Kaiser's primary aluminum smelters, and
concentrates on the development of cost-effective technical innovations
such as equipment and process improvements.

          CFT and the Reno, Nevada, facility are continuing their efforts
to implement the Micromill(TM) technology for the production of can sheet
and other sheet products.  See "--Fabricated Aluminum Products Operations--
Flat-Rolled Products."

     EMPLOYEES

          At December 31, 1997, Kaiser's work force was approximately
9,600, including a domestic work force of approximately 6,080, of whom
4,120 were paid at an hourly rate.  Most hourly paid domestic employees are
covered by collective bargaining agreements with various labor unions. 
Approximately 72% of such employees are covered by a master agreement (the
"Labor Contract") with the United Steelworkers of America which expires
September 30, 1998.  The Labor Contract covers Kaiser's plants in Spokane
(Trentwood and Mead) and Tacoma, Washington; Gramercy, Louisiana; and
Newark, Ohio.  The Company anticipates that the Labor Contract will be
renegotiated during 1998.

          The Labor Contract provides for base wages at all covered plants. 
In addition, workers covered by the Labor Contract may receive quarterly or
more frequent bonus payments based on various indices of profitability,
productivity, efficiency, and other aspects of specific plant or
departmental performance, as well as, in certain cases, the price of
alumina or primary aluminum.  Pursuant to the Labor Contract, base wage
rates were raised effective November 3, 1997, and an amount in respect of
the cost of living adjustment under the previous master agreement will be
phased into base wages.

     ENVIRONMENTAL MATTERS

          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 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").

          From time to time, Kaiser is subject, with respect to its current
and former operations, to fines or penalties assessed 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
currently 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").  
See "Legal Proceedings--Kaiser Litigation."  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.  The Washington State Department of
Ecology has advised Kaiser that there are several options for remediation
at the Mead facility that would be acceptable to the Department.  Kaiser
expects that one of these remedial options will be agreed upon and
incorporated into a consent decree.  In addition, in connection with
certain of its asset sales, Kaiser has agreed to indemnify the purchasers
with respect to certain liabilities (and associated expenses) resulting
from acts or omissions arising prior to such dispositions, including
environmental liabilities.

          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.  See Note 12 of the Notes to Consolidated Financial Statements. 
In addition to cash expenditures charged to environmental accruals,
environmental capital spending was $6.8 million in 1997, $18.4 million in
1996, and $9.2 million in 1995.  Annual operating costs for pollution
control, not including corporate overhead or depreciation, were
approximately $27.5 million in 1997, $30.1 million in 1996, and $26.0
million in 1995.  Legislative, regulatory and economic uncertainties make
it difficult to project future spending for these purposes.  However,
Kaiser currently anticipates that in the 1998-1999 period, environmental
capital spending will be within the range of approximately $5.0 million to
$7.0 million per year, and operating costs for pollution control will be
approximately $35.0 million per year.

          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
manufactured for at least 20 years.  See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Aluminum
Operations--Environmental Contingencies" and "--Asbestos Contingencies."

          See also Note 12 of the Notes to 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 in the "--Production Operations"
sections.  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 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 credit agreement entered into on
February 15, 1994, as amended (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(TM)).  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 7 of the Notes to Consolidated
Financial Statements in Item 8 to this Report.

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 subsidiaries, Scotia Pacific Holding Company ("Scotia Pacific")
and Salmon Creek Corporation ("Salmon Creek").  Pacific Lumber, which has
been in continuous operation for over 125 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

          Timberlands
          Pacific Lumber owns and manages approximately 202,000 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 three-quarters redwood and one-quarter Douglas-fir timber,
are located in close proximity to Pacific Lumber's four sawmills and
contain an extensive network of roads.  Approximately 179,000 acres of
Pacific Lumber's timberlands are owned by Scotia Pacific (the "Scotia
Pacific Timberlands"), a special purpose Delaware corporation and wholly
owned subsidiary of Pacific Lumber.  Pacific Lumber has the exclusive right
to harvest (the "Pacific Lumber Harvest Rights") approximately 8,000 acres
of the Scotia Pacific Timberlands consisting substantially of virgin old
growth redwood and virgin old growth Douglas-fir timber located on numerous
small parcels throughout the Scotia Pacific Timberlands.  The timber on the
Scotia Pacific Timberlands which is not subject to the Pacific Lumber
Harvest Rights is referred to herein as the "Scotia Pacific Timber."
Substantially all of Scotia Pacific's assets are pledged as security for
Scotia Pacific's 7.95% Timber Collateralized Notes due 2015 (the "Timber
Notes").  Pacific Lumber harvests and purchases from Scotia Pacific all of
the logs harvested from the Scotia Pacific Timber.  See "--Relationships
with Scotia Pacific and Britt" for a description of this and other
relationships among Pacific Lumber, Scotia Pacific and Britt.

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

          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. 
Pacific Lumber also actively engages in efforts to establish timberlands
from open areas such as pasture land.  Regeneration of redwood timber
generally is accomplished through the natural growth of new redwood sprouts
from the stump remaining after a redwood tree is harvested.  Such new
redwood sprouts grow quickly, thriving on existing mature root systems.  In
addition, Pacific Lumber supplements natural redwood regeneration by
planting redwood seedlings.  Douglas-fir timber grown on Pacific Lumber's
timberlands is regenerated almost entirely by planting seedlings.  During
1997, Pacific Lumber planted an estimated 659,000 redwood and Douglas-fir
seedlings.

          Harvesting Practices
          The ability of Pacific Lumber to sell logs or lumber products
will depend, in part, upon its ability to obtain regulatory approval of
timber harvesting plans ("THPs").  THPs are required to be developed by
registered professional foresters and must be filed with, and approved by,
the California Department of Forestry ("CDF") prior to the harvesting of
timber.  Each THP is designed to comply with applicable laws and
regulations.  The CDF's evaluation of proposed THPs incorporates review and
analysis of such THPs by several California and federal agencies and public
comments received with respect to such THPs.  An approved THP is applicable
to specific acreage and specifies the harvesting method and other
conditions relating to the harvesting of the timber covered by such THP. 
See "--Regulatory and Environmental Factors and Headwaters Agreement"
for information regarding Pacific Lumber's obligation to develop a plan
establishing a long-term sustained yield level for its timberlands.  That
section also contains information regarding threatened and endangered
species listings, a critical habitat designation and similar matters
concerning Pacific Lumber and its operations.  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 a variety of
factors, including the timing of agency review.

          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.  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.

          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
          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.  Over the past three years, Pacific
Lumber's annual lumber production has averaged approximately 297 million
board feet, with approximately 309, 291 and 290 million board feet produced
in 1997, 1996 and 1995, respectively.  The Fortuna sawmill produces
primarily common grade lumber.  During 1997, the Fortuna mill produced
approximately 101 million board feet of lumber.  The Carlotta sawmill
produces both common and upper grade redwood lumber.  During 1997, the
Carlotta mill produced approximately 76 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 1997, Sawmills "A" and "B" produced 91 million and 41 million
board feet of lumber, respectively.

          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
the redwood lumber industry's largest 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 its state-of-the-art end and edge glue plants.  The result
is a standard sized upper grade product which can be sold at a premium over
common grade products.  Pacific Lumber has also installed a lumber
remanufacturing facility at its mill in Fortuna which processes low grade
redwood common lumber into value-added, higher grade redwood fence and
related products.

          Pacific Lumber dries the majority of its upper grade lumber
before it is sold.  Upper grades of redwood lumber are generally air-dried
for three to twelve months and then kiln-dried for seven to twenty-four
days to produce a dimensionally stable and high quality product which
generally commands higher prices than "green" lumber (which is lumber sold
before it has been dried).  Upper grade Douglas-fir lumber is generally
kiln-dried immediately after it is cut.  Pacific Lumber owns and operates
34 kilns, having an annual capacity of approximately 95 million board feet,
to dry its upper grades of lumber efficiently in order to produce a
quality, premium product.  Pacific Lumber also maintains several large
enclosed storage sheds which 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 1997, 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, 1997              Year Ended December 31, 1996
                       ----------------------------------------- -----------------------------------------
                         % 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%           34%           29%           13%           33%           28%
Common grade redwood
     lumber                      55%           42%           35%           53%           42%           35%
                       ------------- ------------- ------------- ------------- ------------- -------------
     Total redwood
          lumber                 67%           76%           64%           66%           75%           63%
                       ------------- ------------- ------------- ------------- ------------- -------------
Upper grade Douglas-
     fir lumber                   4%            6%            5%            3%            6%            5%
Common grade Douglas-
     fir lumber                  25%           16%           13%           27%           16%           13%
                       ------------- ------------- ------------- ------------- ------------- -------------
     Total Douglas-
          fir lumber             29%           22%           18%           30%           22%           18%
                       ------------- ------------- ------------- ------------- ------------- -------------
Other grades of
     lumber                       4%            2%            2%            4%            3%            2%
                       ------------- ------------- ------------- ------------- ------------- -------------
     Total lumber               100%          100%           84%          100%          100%           83%
                       ============= ============= ============= ============= ============= =============
Logs                                                          7%                                        9%
                                                   =============                             =============

Hardwood chips                                                3%                                        2%
Softwood chips                                                4%                                        4%
                                                   -------------                             -------------
     Total wood chips                                         7%                                        6%
                                                   =============                             =============
</TABLE>


          Lumber.    In 1997, Pacific Lumber sold approximately 312 million
board feet of lumber, which accounted for approximately 84% of Pacific
Lumber's total revenues.  Lumber products vary greatly by the species and
quality of the timber from which it is produced.  Lumber is sold not only
by grade (such as "upper" grade versus "common" grade), but also by board
size and the drying process associated with the lumber.

          Redwood lumber is 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, and Pacific Lumber's supply of upper grade lumber has
decreased in some premium product categories.  See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Forest Products Operations."  Common grade redwood lumber, 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 currently sells certain logs that, due to
their size or quality, cannot be efficiently processed by its mills into
lumber.  The majority of these logs are purchased by Britt.  The balance
are purchased by surrounding mills which do not own sufficient timberlands
to support their mill operations.  See "--Relationships with Scotia Pacific
and Britt" below.  Except for the agreement with Britt described below,
Pacific Lumber does not have any significant contractual relationships with
third parties relating to the purchase of logs.  Pacific Lumber has
historically not purchased significant quantities of logs from third
parties; however, Pacific Lumber may from time to time purchase logs from
third parties for processing in its mills or for resale to third parties
if, in the opinion of management, economic factors are advantageous to
Pacific Lumber.

          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, 1997 and
1996 was approximately $26.4 and approximately $21.3 million, respectively,
the substantial portion of which was delivered in the first quarter of the
next fiscal year.  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.

          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 66% of these sales in
1997.  Common grades of Douglas-fir lumber are sold primarily in
California.  In 1997, the Company had three customers which accounted for
approximately 10%, 5% and 5%, respectively, of Pacific Lumber's total
revenues.  Exports of lumber accounted for approximately 6% of Pacific
Lumber's total revenues in 1997.  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, large inventory, 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.  Pacific Lumber currently enjoys a competitive advantage in the
upper grade redwood lumber market due to the quality of its timber holdings
and relatively low cost production operations.  Competition in the common
grade redwood and Douglas-fir lumber market is more intense, and Pacific
Lumber competes with numerous large and small lumber producers.

          Employees
          As of March 1, 1998, Pacific Lumber had approximately 1,550
employees, none of whom are covered by a collective bargaining agreement.

          Relationships with Scotia Pacific and Britt
          In March 1993, Pacific Lumber consummated its offering of $235
million of 10-1/2% Senior Notes due 2003 (the "Pacific Lumber Senior
Notes") and Scotia Pacific consummated its offering of $385 million of
Timber Notes.  Upon the closing of such offerings, Pacific Lumber, Scotia
Pacific and Britt entered into a variety of agreements.  Pacific Lumber and
Scotia Pacific entered into a Services Agreement (the "Services Agreement")
and an Additional Services Agreement (the "Additional Services Agreement"). 
Pursuant to the Services Agreement, Pacific Lumber provides operational,
management and related services with respect to the Scotia Pacific Timber
not performed by Scotia Pacific's own employees.  Such services include the
furnishing of all equipment, personnel and expertise not within Scotia
Pacific's possession and reasonably necessary for the operation and
maintenance of the Scotia Pacific Timber.  In particular, Pacific Lumber is
required to regenerate Scotia Pacific Timber, prevent and control loss of
Scotia Pacific Timber by fires, maintain a system of roads throughout the
Scotia Pacific Timberlands, take measures to control the spread of disease
and insect infestation affecting Scotia Pacific Timber and comply with
environmental laws and regulations.  Pacific Lumber is also required (to
the extent necessary) to assist Scotia Pacific personnel in updating the
GIS and to prepare and file, on Scotia Pacific's behalf, all pleadings and
motions and otherwise diligently pursue appeals of any denial of any THP
and related matters.  As compensation for these and the other services to
be provided by Pacific Lumber, Scotia Pacific pays a fee which is adjusted
on January 1 of each year based on a specified government index relating to
wood products.  The fee was approximately $115,400 per month in 1997 and is
expected to be approximately $117,300 per month in 1998.

          Pursuant to the Additional Services Agreement, Scotia Pacific
provides Pacific Lumber with a variety of services, including (a) assisting
Pacific Lumber to operate, maintain and harvest its own timber properties,
(b) updating and providing access to the GIS with respect to information
concerning Pacific Lumber's own timber properties, and (c) assisting
Pacific Lumber with its statutory and regulatory compliance.  Pacific
Lumber pays Scotia Pacific a fee for such services equal to the actual cost
of providing such services, as determined in accordance with generally
accepted accounting principles.

          Pacific Lumber and Scotia Pacific also entered into a Master
Purchase Agreement (the "Master Purchase Agreement").  The Master Purchase
Agreement governs all purchases of logs by Pacific Lumber from Scotia
Pacific.  Each purchase of logs by Pacific Lumber from Scotia Pacific is
made pursuant to a separate log purchase agreement (which incorporates the
terms of the Master Purchase Agreement) for the Scotia Pacific Timber
covered by an approved THP.  Such log purchase agreement provides for the
sale to Pacific Lumber of the logs harvested from the Scotia Pacific Timber
covered by such THP and generally constitutes an exclusive agreement with
respect to the timber covered thereby, subject to certain limited
exceptions.  The Master Purchase Agreement generally contemplates that all
sales of logs by Scotia Pacific to Pacific Lumber will be at a price which
equals or exceeds the applicable stumpage price for such species and
category, as set forth in the most recent Harvest Value Schedule published
by the California State Board of Equalization (the "SBE Price").  The
Harvest Value Schedule is published by the California State Board of
Equalization at six month intervals for the purpose of computing yield
taxes imposed on the harvesting of timber.  SBE Prices are based on average
actual log prices between unrelated parties over a recent twenty-four month
period.   As Pacific Lumber purchases logs from Scotia Pacific pursuant to
the Master Purchase Agreement, Pacific Lumber is responsible, at its own
expense, for harvesting and removing the standing Scotia Pacific Timber
covered by approved THPs, and the purchase price is therefore based upon
"stumpage prices."  Substantially all of Scotia Pacific's revenues are
derived from the sale of logs to Pacific Lumber under the Master Purchase
Agreement.

          Pacific Lumber, Scotia Pacific and Salmon Creek also entered into
a Reciprocal Rights Agreement granting to each other certain reciprocal
rights of egress and ingress through their respective properties in
connection with the operation and maintenance of such properties and their
respective businesses.  In addition, Pacific Lumber entered into an
Environmental Indemnification Agreement with Scotia Pacific pursuant to
which Pacific Lumber agreed to indemnify Scotia Pacific from and against
certain present and future liabilities arising with respect to hazardous
materials, hazardous materials contamination or disposal sites, or under
environmental laws with respect to the Scotia Pacific Timberlands.  In
particular, Pacific Lumber is liable with respect to any contamination
which occurred on the Scotia Pacific Timberlands prior to the date of the
agreement.

          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 twelve months or less.  See "--Pacific Lumber Operations--
Relationships with Scotia Pacific and Britt" for a description of Britt's
log purchases from Pacific Lumber.

          Marketing
          In 1997, Britt sold approximately 90 million board feet of lumber
products to approximately 84 different customers.  Over one-half of its
1997 lumber sales were in California.  The remainder of its 1997 sales were
in ten other western states.  In 1997, Britt had four customers which
accounted for 29%, 18%, 10% and 8%, 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, 1997 and 1996 was
approximately $5.4 million and $4.2 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, 10 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,
1998, Britt employed approximately 125 people, none of whom are covered by
a collective bargaining agreement.

          Competition
          Management estimates that Britt accounted for approximately one-
third of the total redwood fence market in 1997.  Britt competes primarily
with the northern California mills of Louisiana Pacific, Georgia Pacific,
Eel River and Redwood Empire.

     REGULATORY AND ENVIRONMENTAL FACTORS AND HEADWATERS AGREEMENT

          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 "Status of the
Multi-Species HCP, the SYP and the Headwaters Agreement" in this section
for cautionary information with respect to such forward-looking statements.

          General
          Pacific Lumber's business is subject to 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 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 (timber harvesting plans) containing
information with respect to areas proposed to be harvested (see "--
Harvesting Practices" above).  As described further below, California law has
also required large timber companies submitting THPs to demonstrate that their
proposed timber operations will not decrease the sustainable productivity of
their timberlands.  A timber company may comply with this requirement by
submitting for review and approval by the CDF a long-term sustained yield
plan ("SYP") establishing a long-term sustained yield harvest level for their
timberlands.  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.  The operations of Pacific Lumber
are also subject to the California Environmental Quality Act ("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.  

          While compliance with such laws, regulations and judicial and
administrative interpretations, together with the cost of litigation
incurred in connection with certain timber harvesting operations, have
increased the costs of Pacific Lumber, they have not had a significant
adverse effect on its financial position, results of operations or
liquidity.  However, these laws and related administrative actions and
legal challenges have severely restricted the ability of Pacific Lumber to
harvest virgin old growth timber on its timberlands, and to a lesser
extent, residual old growth timber.  As a result, Pacific Lumber, Scotia
Pacific and Salmon Creek in April 1996 filed two actions (the "Takings
Litigation") alleging that certain portions of their timberlands had been
"taken" by California and the United States and seeking just compensation. 
See Item 3.  "Legal Proceedings--Takings Litigation."   

          Headwaters Agreement
          On September 28, 1996, Pacific Lumber (on behalf of itself, its
subsidiaries and affiliates) and MAXXAM (collectively, the "Pacific Lumber
Parties") entered into an agreement with the United States and California
("Headwaters Agreement") which provides the framework for the acquisition
by the United States and California of approximately 5,600 acres of Pacific
Lumber's timberlands.  These timberlands are commonly referred to as the
Headwaters Forest and the Elk Head Springs Forest (collectively, the
"Headwaters Timberlands").  A substantial portion of the Headwaters
Timberlands consists of virgin old growth timberlands.  Approximately 4,900
of these acres are owned by Salmon Creek, with the remaining acreage being
owned by Scotia Pacific (Pacific Lumber having harvesting rights on
approximately 300 of such acres).  The Headwaters Timberlands would be
transferred in exchange for (a) property and other consideration from the
United States and California having an aggregate fair market value of $300
million, and (b) approximately 7,755 acres of adjacent timberlands (the
"Elk River Timberlands") to be acquired from a third party.  As part of the
Headwaters Agreement, the Pacific Lumber Parties agreed to not enter the
Headwaters Forest or the Elk Head Springs Forest to conduct any logging or
salvage operations.

          Closing of the Headwaters Agreement is subject to various
conditions, including (a) the United States and California furnishing the
requisite consideration, (b) approval of an SYP for Pacific Lumber's
timberlands, in form and substance satisfactory to Pacific Lumber, (c)
approval of a habitat conservation plan covering multiple species ("Multi-
Species HCP") and issuance of a related incidental take permit (the
"Permit") covering Pacific Lumber's timberlands, each in form and substance
satisfactory to Pacific Lumber, (d) the issuance by the Internal Revenue
Service and the California Franchise Tax Board of tax closing agreements in
form and substance sought by and satisfactory to the Pacific Lumber
Parties, (e) acquisition of the Elk River Timberlands, (f) the absence of a
judicial decision in any litigation brought by third parties that any party
reasonably believes will significantly delay or impair the transactions
described in the Headwaters Agreement, and (g) the dismissal of the Takings
Litigation.

          In November 1997, President Clinton signed an appropriations bill
which contains authorization for the expenditure of $250 million of federal
funds toward consummation of the Headwaters Agreement (the "Interior
Appropriations Bill").  The federal funding is to remain available until
March 1, 1999 and is subject to, among other things, contribution by the
State of California of its $130 million portion of funding for the
Headwaters Agreement.  Although California has not enacted legislation
providing funds for its portion of the acquisition contemplated by the
Headwaters Agreement, representatives of the State of California continue
to indicate that they are considering various methods of furnishing the
required consideration.  In August 1997, Pacific Lumber submitted drafts of
the Multi-Species HCP and the SYP to the appropriate government agencies for
review.  On February 27, 1998, Pacific Lumber, MAXXAM and various government
agencies entered into a Pre-Permit Application Agreement in Principle (the
"HCP/SYP Agreement") regarding certain understandings that they had reached
regarding the Multi-Species HCP, the Permit and the SYP.  The parties have
been discussing the tax closing agreements but, to date, have not been able
to reach agreement.  The parties to the Headwaters Agreement are working
diligently to satisfy the other closing conditions.

          Terms of the HCP/SYP Agreement
          Pacific Lumber believes that execution of the HCP/SYP Agreement
mentioned above is an important milestone toward completion of the
Headwaters Agreement.  The HCP/SYP Agreement provides that the Permit and
Multi-Species HCP would have a term of 50 years.  Subject to certain rights
of Pacific Lumber to seek an amendment to the Permit and Multi-Species HCP,
the HCP/SYP Agreement provides that for the term of the Permit, only
management activities designed to enhance habitat could be conducted by
Pacific Lumber in twelve forest groves not being sold to the United States
and California.   These groves aggregate approximately 8,000 acres and
consist of substantial quantities of virgin and residual old growth redwood
and Douglas-fir timber.  These limitations are designed primarily to
protect habitat for the marbled murrelet, a coastal seabird which has been
listed as endangered under the CESA and threatened under the ESA.  The
HCP/SYP Agreement also requires Pacific Lumber to initiate a specified
watershed assessment process, which Pacific Lumber has begun.  This process
is intended to result in appropriate protective zones for fish and other
wildlife being established adjacent to the streams on Pacific Lumber's
timberlands.  Until the watershed assessment process is complete, Pacific
Lumber must incorporate certain interim stream protective measures into its
THPs, including amending its pending (but not yet approved) THPs.  These
interim stream protection measures are more stringent than the measures
currently required by existing state regulations.

          Effect of the HCP/SYP Agreement
          In addition to being an important milestone toward completion of
the Headwaters Agreement, Pacific Lumber also believes that the HCP/SYP
Agreement would be a positive development in respect of the environmental
challenges that it has faced over the last several years.  For instance,
various groups and individuals have filed objections with the CDF and the
BOF regarding these agencies' and the BOF's actions and rulings with
respect to certain of Pacific Lumber's THPs.  In addition, lawsuits are
pending or threatened which seek to prevent Pacific Lumber from
implementing certain of its approved THPs. While challenges with respect to
Pacific Lumber's young growth timber have historically been limited, a
lawsuit was recently filed under the ESA which relates to a significant
number of THPs covering young growth timber of Pacific Lumber.  See Item 3.
"Legal Proceedings--Timber Harvesting Litigation."  While Pacific Lumber
expects these environmentally focused objections and lawsuits to continue,
it believes that the HCP/SYP Agreement will enhance its position in
connection with these challenges.  Pacific Lumber also believes that the
Multi-Species HCP would expedite the preparation and facilitate approval of
its THPs.

          A related environmental challenge which Pacific Lumber has faced
is the listing of threatened or endangered species which are found on
Pacific Lumber's timberlands.  Several species, including the northern
spotted owl, the marbled murrelet and the coho salmon, have been listed as
endangered or threatened under the ESA and/or the CESA.  Other species such
as the steelhead trout could be listed in the future.   Pacific Lumber has
developed federal and state northern spotted owl management plans which
permit harvesting activities to be conducted so long as Pacific Lumber
adheres to certain measures designed to protect the northern spotted owl.

          The potential impact of the listings of the marbled murrelet and
the coho salmon is more uncertain.  The marbled murrelet has been listed as
endangered under the CESA and as threatened under the ESA.  Approximately
33,000 acres of Pacific Lumber's timberlands have been designated as
critical habitat for the marbled murrelet.  Pacific Lumber incorporates
mitigation measures into its THPs as necessary to protect and maintain
habitat for the marbled murrelet on its timberlands and conducts certain
pre-harvest marbled murrelet surveys.  These surveys delay the review and
approval process with respect to certain of the THPs filed by Pacific
Lumber.  They have also indicated that Pacific Lumber has certain
timberlands which are occupied murrelet habitat.  As discussed in "--Terms
of the HCP/SYP Agreement" above, the HCP/SYP Agreement contains provisions
regarding protection of the marbled murrelet.

          The coho salmon was listed in April 1997 as threatened under the
ESA in northern California, including Pacific Lumber's timberlands.  The
State of California and other persons, including Pacific Lumber, are
working with NMFS and other government agencies to determine what
mitigation measures will be instituted to protect the coho salmon.  As
discussed above, the HCP/SYP Agreement contains provisions regarding
establishment of protective measures for the coho salmon and other fish and
wildlife species.  Pacific Lumber is also attempting to include in the
Multi-Species HCP a resolution of the potential effect of limits by the
Environmental Protection Agency ("EPA") on sedimentation, temperature and
other factors (i.e. non-point source total maximum daily loadings; "TMDL"). 
The EPA is in the process of establishing limits on TMDL under the Federal
Clean Water Act for seventeen northern California rivers and certain of
their tributaries, including rivers within Pacific Lumber's timberlands. 
The TMDL limits will be aimed at protecting water quality.

          As a result of the HCP/SYP Agreement, Pacific Lumber will revise
and resubmit the Multi-Species HCP.  If the Multi-Species HCP is approved,
Pacific Lumber would be issued the Permit, which would allow limited
incidental "take" of listed species so long as there was no "jeopardy" to
the species.  The Multi-Species HCP would also identify measures to be
instituted in order to minimize and mitigate the anticipated level of take
to the greatest extent possible.  The Multi-Species HCP will be designed to
protect habitat for and accommodate species currently listed under the ESA
and CESA such as the marbled murrelet and coho salmon, as well as to
consider candidate and future-listed species and their potential habitat
needs.  This forward-looking feature of the Multi-Species HCP is designed
to both protect future-listed species and their habitat, and to provide
more certainty and protection to Pacific Lumber against further
restrictions on harvesting as a result of future listings or unforeseen
circumstances.  This additional protection and certainty against future
listings and unforeseen circumstances is referred to as the "no surprises"
policy of the United States Fish and Wildlife Service ("USFWS"), which must
review and approve the Multi-Species HCP.

          The HCP/SYP Agreement also contains certain provisions relating
to the SYP.  Pacific Lumber will submit a revised SYP, which will assume
that the transactions contemplated by the Headwaters Agreement (including
acquisition of the Elk River Timberlands) will be consummated and that the
Multi-Species HCP will be approved.  Subject to further study, Pacific Lumber
expects to propose a long-term sustained yield harvest level
("LTSY") which is somewhat less than Pacific Lumber's recent harvest
levels.  In order to mitigate the anticipated impact of the SYP, Pacific
Lumber has acquired approximately 11,000 acres of timberlands since January
1, 1996 and expects to continue to acquire such additional timberlands as
will enable it to maintain recent harvest levels.  However, there can be no
assurance that Pacific Lumber would be able to continue such acquisitions,
which  would be limited by Pacific Lumber's financial resources and the
availability of acceptable properties.   If the SYP is approved, Pacific
Lumber will have complied with certain BOF regulations requiring that
timber companies project timber growth and harvest on their timberlands
over a 100-year planning period and establish an LTSY harvest level. 
The SYP must demonstrate that the average annual harvest over any rolling
ten-year period will not exceed the LTSY harvest level and that Pacific
Lumber's projected timber inventory is capable of sustaining the LTSY
harvest level in the last decade of the 100-year planning period. The
HCP/SYP Agreement provides that upon submission of certain timber growth
estimates by Pacific Lumber, CDF will find the SYP sufficient for public
review. An approved  SYP is expected to be valid for ten years, although
it would be subject to review after five years.  Thereafter, revised SYPs
will  be prepared every decade that address the LTSY harvest level based
upon reassessment of changes in the resource base and other factors. 

          Status of the Multi-Species HCP, the SYP and the Headwaters
          Agreement
          The final terms of the SYP, the Multi-Species HCP and the Permit
are subject to additional negotiation and agreement among the parties.  At
such time as the parties reach agreement on the form of the Multi-Species
HCP and the Permit, these documents, along with federal and state
environmental impact statements, will be made available for public review
and comment.  After the government agencies complete the public review
process and approve a final environmental impact statement, the agencies
will decide whether to approve a Multi-Species HCP and a Permit.  A similar
process will occur with respect to the SYP.  While Pacific Lumber believes
that the HCP/SYP Agreement represents an important milestone toward
completion of the Headwaters Agreement and the parties are working
diligently to complete the Multi-Species HCP and the SYP as well as the
other closing conditions contained in the Headwaters Agreement, there can
be no assurance that the Headwaters Agreement will be consummated or that
an SYP, Multi-Species HCP or Permit acceptable to Pacific Lumber will be
approved.

          In the event that a Multi-Species HCP is not approved, Pacific
Lumber will not enjoy the benefits of expedited preparation and facilitated
review of its THPs.  Furthermore, if a Multi-Species HCP acceptable to
Pacific Lumber is not approved, it is impossible for Pacific Lumber to
determine the potential adverse effect of the listings of the marbled
murrelet and coho salmon or the TMDL limits on Pacific Lumber's financial
position, results of operations or liquidity until such time as the various
regulatory and legal issues are resolved; however, if Pacific Lumber is
unable to harvest, or is severely limited in harvesting, on significant
amounts of its timberlands, such effect could be materially adverse to Pacific
Lumber.  With respect to the SYP, it is impossible for Pacific Lumber to
assess its impact until such time as it is approved by the CDF.  If the
Headwaters Agreement is not consummated and Pacific Lumber is unable to
harvest or is severely limited in harvesting on various of its timberlands,
it intends to continue and/or expand its Takings Litigation seeking just
compensation from the appropriate governmental agencies on the grounds that
such restrictions constitute an uncompensated governmental taking of
private property for public use.

          Potential Future Developments
          Laws, regulations and related judicial decisions and
administrative interpretations dealing with Pacific Lumber's operations are
subject to change and new laws and regulations are frequently introduced
concerning the California timber industry.  From time to time, bills are
introduced in the California legislature and the U.S. Congress which relate
to the business of Pacific Lumber, including the protection and acquisition
of old growth and other timberlands, endangered species, environmental
protection, air and water quality and the restriction, regulation and
administration of timber harvesting practices.  It is impossible to predict
the content of any such bills, the likelihood of any of the bills passing
or the impact of any of these bills on the future liquidity, financial
position or operating results of Pacific Lumber.  Furthermore, any bills which
are passed are subject to executive veto and court challenge.  In addition
to existing and possible new or modified statutory enactments, regulatory
requirements and administrative and legal actions, the California timber
industry remains subject to potential California or local ballot
initiatives and evolving federal and California case law which could affect
timber harvesting practices.  It is impossible, however, to assess the
effect of such matters on Pacific Lumber's financial position, operating
results or liquidity.

REAL ESTATE AND OTHER OPERATIONS

     REAL ESTATE AND RESORT OPERATIONS

          General
          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 Arizona, California, Texas and
Puerto Rico. At December 31, 1997, the Company had approximately $17.1
million of 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.  As of December 31, 1997, these receivables had
a weighted average interest rate of approximately 10%, a weighted average
maturity of less than three years and average borrower equity of
approximately 50%.  As of December 31, 1997, the Company also held $6.5
million of other receivables as a portion of the RTC Portfolio (as defined
below).

          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,
1997, Palmas included approximately 1,900 acres of undeveloped land. 
Palmas del Mar Properties, Inc. ("PDMPI"), the subsidiary through which the
Company primarily conducts operations at Palmas, is planning development
and sale of certain of this remaining acreage.   PDMPI or its affiliates
also own a 23-room luxury hotel known as the Palmas Inn, a casino, a Gary
Player-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 1,045 remain to be sold).  A 102-room hotel and adjacent
executive convention center, known as the Candelero Hotel, a marina, and
certain restaurant facilities within Palmas, are owned and operated by
third parties.  Approximately 1,300 private residences are also presently
located within Palmas.

          In 1997, PDMPI sold approximately five acres to be developed as a
residential project consisting of 63 villas and casitas, 366 time-share
intervals and 573 time-share conversions for an aggregate of $7.9 million,
before deferred income of $2.2 million.  During 1996, PDMPI sold 20
condominiums, 219 time-share intervals, one residential lot and 727
time-share conversions for an aggregate of $9.6 million.  In addition, on
December 20, 1996, PDMPI completed the sale of the Candelero Hotel and
certain other assets of Palmas for a purchase price of $7.5 million.  PDMPI
is entitled to royalty payments from the purchaser, for a period of 49
years, equal to 3% of the gross revenues from the Candelero Hotel and a
percentage of gross revenues from certain other assets.  The Candelero
Hotel and certain other current or former assets of Palmas are being
managed for the purchaser and PDMPI by an affiliate of Wyndham Hotels.

          Palmas Country Club, Inc. ("PCCI"), a subsidiary of PDMPI, owns
the Palmas Country Club which consists of the golf course at Palmas, a
clubhouse, tennis courts and other facilities.  PCCI is in the process of
constructing an additional golf course, as well as a new clubhouse and
related facilities to replace existing 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, 1997, Fountain Hills had approximately 3,446 acres of
undeveloped residential land, 68 developed commercial and industrial lots,
147 acres of undeveloped commercial and industrial land and 106 developed
residential lots available for sale.  The year-round population of Fountain
Hills is approximately 16,500. The Company is planning the development of
certain of the remaining acreage at Fountain Hills.  Future sales are
expected to consist mainly of undeveloped acreage, semi-developed parcels
and fully-developed lots.  During 1997, 63 residential lots, 20 commercial
parcels, and 193 acres were sold for an aggregate of $19.1 million, before
deferred income of $4.4 million.  During 1996, 67 residential lots, 20
commercial parcels and 2 acres were sold for an aggregate of $7.5 million. 
These sales figures do not include those arising from the SunRidge Canyon
development described in the following paragraph.

          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 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 841 single family lots.  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 five homebuilders actively involved in the construction and
sale of new homes within SunRidge Canyon.  During 1997, 43 custom lots and
172 production lots were sold for an aggregate of $13.8 million.  During
1996, 39 custom lots and 70 production lots were sold for an aggregate of
$8.9 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 October 1997, the Fountain Hills Sanitary District (the
"Sanitary District") adopted a moratorium on the approval of new
subdivision development, until the Sanitary District can determine the
means of disposing of treated effluent flows expected in future years.  The
Company is engaged in negotiations with the Sanitary District regarding
short term disposal options, which may allow development of one or more
additional subdivisions within Fountain Hills.  The Company anticipates
that it will be unable to develop and sell other material portions of its
undeveloped inventory during the pendency of this moratorium.  It is
unclear when the Sanitary district will end the moratorium.  The Company
otherwise intends to continue development of its remaining acreage at
Fountain Hills in a manner that will allow it to maintain recent sales
levels, although there can be no assurance that it will be able to do so. 

          Texas.  In June 1991, a wholly owned subsidiary of the Company
purchased from the Resolution Trust Corporation at an auction, for
approximately $122.3 million, a portfolio of 27 parcels of income producing
real property and 28 loans secured by real property (the "RTC Portfolio"). 
Substantially all of the real property was located in Texas, with the
largest concentration in the vicinities of San Antonio, Houston, Austin and
Dallas.  From 1992 to December 31, 1997, an aggregate of approximately
$41.7 million in loans (which represented thirteen loans) were sold or paid
off and 41 properties (including fifteen acquired via foreclosure) were
sold for aggregate consideration of approximately $207.6 million.  These
transactions resulted in aggregate gains of  $107.8 million.  As of
December 31, 1997, two loans resulting from property sales and one
property, having an aggregate net book value of $8.1 million, remained in
the RTC Portfolio.  One loan for $6.4 million has subsequently been paid
off.  The remaining property is currently subject to a sales contract
providing for a purchase price of $3.5 million.

          Lake Havasu City.  In 1963, a subsidiary of the Company purchased
and began developing approximately 16,700 acres of real property at Lake
Havasu City, Arizona, which were offered for sale in the form of subdivided
single and multiple family residential, commercial and industrial sites.
The Company has sold substantially all of its lot inventory in Lake Havasu
City and is currently planning the marketing of the remaining 137 acres.

          Rancho Mirage.  In 1991, a subsidiary of the Company acquired
Mirada, a 195-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 five 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 three remaining parcels encompass approximately 130
acres, which, under a development agreement with the City of Rancho Mirage,
may be developed with a variety of residential uses.   In 1997, the term of
the development agreement with the City of Rancho Mirage, respecting
entitlements for the Mirada development, was extended from 2000 to 2011.
During 1997, six lots were sold for an aggregate of $3.1 million before
deferred income of $0.1 million.  The Company is currently marketing the
project's 11 fully-developed lots and an off-site commercial property, and
engages in limited construction and direct sale of residential units.  The
Company is also attempting to obtain environmental approvals for development
of all three of its remaining parcels within Mirada, and final regulatory
approvals for development of one of these.  There can be no assurance that
the Company can satisfy the requirements of such environmental approvals or
any additional conditions of such final approvals.

          Other.  The Company through its subsidiaries, owns a number of
other properties in Arizona, New Mexico, Texas and Colorado. 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.  It also expects to sell certain of its commercial real
estate assets.  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.

          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 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, 1998, the Company's real estate operations had
approximately 145 employees.

     SAM HOUSTON RACE PARK

          General
          In July 1993, MAXXAM, through subsidiaries, acquired various
interests in Sam Houston Race Park, Ltd. ("SHRP, Ltd."), a Texas limited
partnership which owns and operates Sam Houston Race Park (the "Race
Park"), a Texas Class 1 horse racing facility located within the greater
Houston metropolitan area. In April 1995, SHRP, Ltd. and two affiliated
entities filed for Chapter 11 bankruptcy reorganization.  The debtors' plan
of reorganization (the "Plan") was subsequently confirmed and completed
pursuant to which a wholly owned subsidiary of MAXXAM contributed cash of
$5.8 million and an adjoining 87-acre tract of land (having a fair market
value of $2.3 million).  A wholly owned subsidiary of MAXXAM is the new
managing general partner of SHRP, Ltd.  As a result of those transactions,
and certain subsequent purchases of the 11-3/4% Senior Secured Extendible
Notes of SHRP, Ltd. and the corresponding shares of common stock of SHRP
Equity, Inc. (a Delaware corporation and an additional general partner of
the reorganized SHRP, Ltd.), wholly owned subsidiaries of MAXXAM hold,
directly or indirectly, approximately 90.5% of the equity in the
reorganized SHRP, Ltd.

          See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities--Real Estate and Other Operations--Investing" for
information regarding the financial condition of SHRP, Ltd.

          Racing Operations and Race Park Facilities
          The Race Park offers pari-mutuel wagering on live thoroughbred or
quarter horse racing or simulcast racing generally 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 Race Park's
principal sources of revenue are its statutory and contractual share of
total wagering on live and simulcast racing.  The Race Park also derives
revenues from admission fees, food services, club memberships, luxury
suites, advertising sales and other sources.

          Regulation of Racing Operations
          The ownership and operation of horse 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,
horsemen's 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 at the Race Park
each year, as well as all simulcast agreements.  Class 1 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 Race Park believes that the majority of the patrons for the
Race Park reside within a 50-mile radius of the Race Park, which includes
the greater Houston metropolitan area, and that a secondary market of
occasional patrons can be developed outside the 50-mile radius but within a
100-mile radius of the Race Park.  The Race Park uses a number of marketing
strategies in an attempt to reach these people and make them more frequent
visitors to the Race Park.  The 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 Race Park and
a wide range of sporting events and other entertainment activities in the
Houston area.  The 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 Race Park believes that the location
of the Race Park is a competitive advantage over the other more distant
gaming ventures mentioned above, the most significant challenge for the
Race Park is to develop and educate new racing fans in a market where
pari-mutuel wagering has been absent since the 1930's.  Other competitive
factors faced by the Race Park include the allocation of sufficient live
race days by the Racing  Commission and attraction of sufficient race
horses to run at the Race Park.  The Race Park had 143 days of live racing
during 1997.  The Race Park currently has 118 days of live racing scheduled
for 1998.

EMPLOYEES

          At March 1, 1998, MAXXAM and its subsidiaries employed
approximately 2,000 persons, exclusive of those 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 alleges, 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 New York
business trust 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 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, among other things, seeks unspecified damages of
approximately $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 respondents engaging in, the banking industry.  The
hearing on the merits of this matter commenced on September 22, 1997,
adjourned on December 19, 1997, and is scheduled to recommence on June 16,
1998.  It is impossible to predict the ultimate outcome of the foregoing
matter or its potential impact on the Company's consolidated financial
position, results of operations or liquidity.  See also the description of
the FDIC action and the Martel action below.

          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.  It is
impossible to predict the ultimate outcome of the foregoing matter or its
potential impact on the Company's consolidated financial position, results
of operations or liquidity.

          In January 1995, an action entitled U.S., ex rel., Martel v.
Hurwitz, et al. (the "Martel action") was filed in the U.S. District Court
for the Northern District of California (No. C950322), which named as
defendants the Company, Mr. Hurwitz, MGI, Federated, UFG and a former
director of the Company. This action is purportedly brought by plaintiff on
behalf of the U.S. government; however, the U.S. government has declined to
participate in the suit. The suit alleges that defendants made false
statements and claims in violation of the Federal False Claims Act in
connection with USAT.  Plaintiff alleges, among other things, that
defendants used the federally insured assets of USAT to acquire junk bonds
from Michael Milken and Drexel and that, in exchange, Mr. Milken and Drexel
arranged financing for defendants' various business ventures, including the
acquisition of Pacific Lumber.  Plaintiff alleges that as a result of
USAT's insolvency the defendants should be required to pay $1.6 billion
(subject to trebling) to cover USAT's losses.  The Company's alleged
portion of such damages has not been specified.  Plaintiff seeks, among
other things, that the Court impose a constructive trust upon the fruits of
the alleged improper use of USAT funds.  In August 1996, the Court
transferred this matter (No. 96-CV-1164) to the court handling the FDIC
action.  On February 6, 1998, defendants' motion to dismiss was taken under
submission by the Court.

     ZERO COUPON NOTE LITIGATION

          In April 1989, an action was filed against MAXXAM, MGI, MAXXAM
Properties Inc. ("MPI"), a wholly owned subsidiary of MGI, and certain of
the Company's directors in the Court of Chancery of the State of Delaware,
entitled Progressive United Corporation v. MAXXAM Inc., et al. (No. 10785).
Plaintiff purports to bring this action as a stockholder of the Company
derivatively on behalf of the Company and MPI.  In May 1989, a second
action containing substantially similar allegations was filed in the Court
of Chancery of the State of Delaware, entitled Wolf v. Hurwitz, et al. and
the two cases were consolidated (under case No. 10785; collectively, the
"Zero Coupon Note actions"). The Zero Coupon Note actions relate to a Put
and Call Agreement entered into between MPI and Mr. Hurwitz, as well as a
predecessor agreement (the "Prior Agreement"). Among other things, the Put
and Call Agreement provided that Mr. Hurwitz had the option (the "Call") to
purchase from MPI certain notes (or the Company's common stock into which
they were converted) for $10.3 million. In July 1989, Mr. Hurwitz exercised
the Call and acquired 990,400 shares of the Company's common stock. The
Zero Coupon Note actions generally allege that in entering into the Prior
Agreement Mr. Hurwitz usurped a corporate opportunity belonging to the
Company, that the Put and Call Agreement constituted a waste of corporate
assets of the Company and MPI, and that the defendant directors breached
their fiduciary duties in connection with these matters. Plaintiffs seek to
have the Put and Call Agreement declared null and void, among other
remedies.  On February 3, 1998, the Court dismissed this action.

     RANCHO MIRAGE LITIGATION

          See "Rancho Mirage Litigation Settlement" in Note 12 of the Notes
to Consolidated Financial Statements for a description of the settlement of
this litigation which was approved by the Court in December 1997 and
completed in January 1998.

KAISER LITIGATION

     UNITED STATES OF AMERICA V. KAISER ALUMINUM & CHEMICAL CORPORATION

          In February 1989, a civil action was filed by the DOJ at the
request of the EPA against KACC in the United States District Court for the
Eastern District of Washington, Case No. C-89-106-CLQ.  The complaint
alleged that emissions from certain stacks at KACC's Trentwood facility in
Spokane, Washington, intermittently violated the opacity standard contained
in the Washington State Implementation Plan ("SIP"), approved by the EPA
under the federal Clean Air Act.  KACC and the EPA, without adjudication of
any issue of fact or law, and without any admission of the violations
alleged in the underlying complaint, have entered into a consent decree,
which was approved by a consent order entered by the United States District
Court for the Eastern District of Washington in January 1996.  As approved,
the consent decree settles the underlying disputes and requires KACC to (i)
pay a $.5 million civil penalty (which penalty has been paid), (ii)
complete a program of plant improvements and operational changes that began
in 1990 at its Trentwood facility, including the installation of an
emission control system to capture particulate emissions from certain
furnaces, and (iii) achieve and maintain furnace compliance with the
opacity standard in the Washington SIP.  KACC has completed the
installation of the emission control system.  If the relevant furnaces
continue to show compliance through July 15, 1998, KACC intends to request
termination of the consent decree.

     ASBESTOS-RELATED LITIGATION

          KACC is a defendant in a number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with
KACC or exposure to products containing asbestos produced or sold by KACC. 
The lawsuits generally relate to products KACC has not manufactured for at
least 20 years.  Subsequent to December 31, 1997, KACC reached agreements
settling approximately 25,000 of the pending asbestos-related claims.  Also
subsequent to year-end 1997, KACC reached agreements on asbestos-related
coverage matters with two insurance carriers under which KACC collected a
total of approximately $17.5 million.  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--Environmental Contingencies" and "--
Asbestos Contingencies" and Note 12 of the Notes to Consolidated Financial
Statements under the headings "Environmental Contingencies" and "Asbestos
Contingencies" in Item 8 of this Report.

     HAMMONS V. ALCAN ALUMINUM CORP. ET AL

          On March 5, 1996, a class action complaint was filed against the
Kaiser, Alcan Aluminum Corp., Aluminum Company of America, Alumax, Inc,
Reynolds Metal Company, and the Aluminum Association in the Superior Court
of California for the County of Los Angeles, Case No. BC145612.  The
complaint claims that the defendants conspired, in violation of the
California Cartwright Act, in conjunction with a Memorandum of
Understanding ("MOU") entered into in 1994 by representatives of Australia,
Canada, the European Union, Norway, the Russian Federation and the United
States to restrict the production of primary aluminum resulting in price
increases for primary aluminum and aluminum products.  The complaint seeks
certification of a class consisting of persons who at any time between
January 1, 1994, and the date of the complaint purchased aluminum or
aluminum products manufactured by one or more of the defendants and
estimates damages sustained by the class to be $4.4 billion during the year
1994, before trebling.  Plaintiff's counsel has estimated damages to be
$4.4 billion per year for each of the two years the MOU was active, which
when trebled equals $26.4 billion.  On April 2, 1996, the case was removed
to the United States District Court for the Central District of California. 
On July 11, 1996, the Court granted summary judgment in favor of Kaiser and
other defendants and dismissed the complaint as to all defendants.  On July
18, 1996, the plaintiff filed a notice of appeal to the United States Court
of Appeals for the Ninth Circuit.  On December 11, 1997, the United States
Court of Appeals for the Ninth Circuit affirmed the decision of the
District Court.  On December 23, 1997, the plaintiff filed a petition for
rehearing en banc.

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

PACIFIC LUMBER LITIGATION

          On January 26, 1998, an action entitled Coho Salmon, et al. v.
Pacific Lumber, et al. (No. 98-0283) (the "Coho lawsuit") was filed against
Pacific Lumber, Scotia Pacific and Salmon Creek in the United States
District Court for the Northern District of California.  This action
alleges, among other things, violations of the ESA and claims that
defendants' logging operations in five watersheds have contributed to the
"take" of the coho salmon.  This action relates to a significant number of
Pacific Lumber's approved or pending THPs. Plaintiffs seek, among other
things, to enjoin timber harvesting on the THPs and acreage identified. 
The THPs which are the subject of the Coho lawsuit are at various stages of
the THP cycle.  Approximately one-third of the THPs have been submitted to
the CDF, but have not yet been approved and will have to be amended
pursuant to the HCP/SYP Agreement discussed above under Item 1.  "Business-
-Forest Products Operations--Regulatory and Environmental Factors." 
Pacific Lumber estimates that as of February 15, 1998, approximately 28
million board feet of standing timber remained to be harvested under the
approved THPs.   While the Company believes that completion of the HCP/SYP
Agreement is a positive development in respect of the Coho lawsuit, the
Company is unable to predict the outcome of this case or its ultimate
impact on Pacific Lumber.

          On April 22, 1996, Salmon Creek filed a lawsuit entitled Salmon
Creek Corporation v. California State Board of Forestry, et al. (No.
96CS01057) in the Superior Court of Sacramento County.  This action seeks
to overturn the BOF's decision denying approval of a THP relating to
approximately 8 acres of virgin old growth timber in the Headwaters Forest. 
Salmon Creek seeks a court order requiring approval of the THP so that it
may harvest timber in order to construct a road in accordance with the THP. 
Salmon Creek also seeks constitutional "just compensation" damages to the
extent that its old growth timber within and surrounding the THP has been
"taken" without compensation by reason of this regulatory denial and
previous actions of governmental authorities.  In addition, on May 7, 1996,
Pacific Lumber, Scotia Pacific and Salmon Creek filed a lawsuit entitled
The Pacific Lumber Company, et al. v. The United States of America (No. 96-
257L) in the United States Court of Federal Claims.  The suit alleges that
the federal government has "taken" without compensation over 3,800 acres of
Pacific Lumber's old growth timberlands through its application of the ESA. 
Pacific Lumber and Salmon Creek seek constitutional "just compensation"
damages for the taking of these timberlands by the federal government's
actions.  The court in each of these actions has granted the parties'
agreed motions to stay the actions pursuant to the Headwaters Agreement. 
These actions would be dismissed if the Headwaters Agreement is
consummated.  See  Item 1.  "Business--Forest Products Operations--
Regulatory and Environmental Factors and Headwaters Agreement" for a
description of the Headwaters Agreement.

OTHER MATTERS

          Groundwater contamination has been found on property sold to a
subsidiary of the Company by a subsidiary of Rockwell International
Corporation ("Rockwell").  The sales agreement contained indemnity
provisions which Rockwell is alleging require the Company to indemnify
Rockwell for all environmental liabilities.  In March 1992, an enforcement
action was filed against Rockwell and the current property owners by the
Nevada Division of Environmental Protection seeking an order that would
require defendants to investigate and report on the nature and extent of
the pollution and contamination on the property.  This action has been
stayed pending continued environmental investigation and remediation by
Rockwell.  The Company was named as a defendant in three related damage
actions filed by certain persons.  Two of these cases have settled to date
and in each case the Company's share of the settlement was 21%. In
September 1996, Rockwell submitted a global settlement package to the
Company.  An Environmental Cleanup Liability report, which accompanied
Rockwell's settlement package and which was prepared by Rockwell's experts,
estimates total costs to be $26.1 million (which the Company is disputing). 
The Company has proposed and Rockwell has agreed in principle to non-
binding mediation.  Rockwell has also agreed to provide an update to its
Environmental Cleanup Liability report. 

          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, 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>

                                                   1997                        1996
                                       --------------------------- ---------------------------
                                            High          Low           High          Low
                                       ------------- ------------- ------------- -------------
<S>                                    <C>           <C>           <C>           <C>
     First quarter                         53-3/4        45-1/4       48-7/8        35-3/8  
     Second quarter                        48-3/4        41-7/8       50-7/8        39-1/4  
     Third quarter                         62-3/8        46-5/8       45            35-3/4  
     Fourth quarter                        56-1/2        41           47-3/4        37-1/8  


</TABLE>

          The following table sets forth the number of record holders of
each class of publicly-owned securities of the Company at March 15, 1998:


<TABLE>
<CAPTION>

                                                           Number of
                                                             Record
                     Title of Class                         Holders
-------------------------------------------------------- -------------
<S>                                                      <C>
Common Stock                                                     4,537
Class A $.05 Non-cumulative Participating Convertible
     Preferred Stock                                                32
</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, 1997 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 elsewhere herein.

<TABLE>
<CAPTION>

                                                     Years Ended December 31,
                              ---------------------------------------------------------------------
                                   1997           1996          1995          1994          1993
                              -------------  ------------  ------------  ------------  ------------
                                          (In millions of dollars, except share amounts)
<S>                           <C>            <C>           <C>           <C>           <C>
CONSOLIDATED STATEMENT OF
     OPERATIONS:
     Net sales                $     2,729.1  $    2,543.3  $    2,565.2  $    2,115.7  $    2,031.1 
     Operating income (loss)          236.4         131.3         257.6           7.3         (96.1)
     Income (loss) before
          extraordinary item
          and cumulative
          effect of changes in
          accounting
          principles                   65.2          22.9          57.5        (116.7)       (131.9)
     Extraordinary item, net              -             -             -          (5.4)        (50.6)
     Cumulative effect of
          changes in
          accounting
          principles, net                 -             -             -             -        (417.7)
     Net income (loss)                 65.2          22.9          57.5        (122.1)       (600.2)

CONSOLIDATED BALANCE SHEET AT                             
     END OF PERIOD:
     Total assets                   4,114.2       4,115.7       3,832.3       3,690.8       3,572.0 
     Long-term debt, less
          current maturities        1,888.0       1,881.9       1,585.1       1,582.5       1,567.9 
     Stockholders' deficit (1)         (2.9)        (50.8)        (83.8)       (275.3)       (167.9)

PER SHARE INFORMATION:
     Basic:
          Income (loss) before
               extraordinary
               item and
               cumulative
               effect of
               changes in
               accounting
               principles              7.81          2.63          6.60        (13.43)       (15.16)
          Net income (loss)(2)         7.81          2.63          6.60        (14.04)       (69.01)
     Diluted:
          Income (loss) before
               extraordinary
               item and
               cumulative
               effect of
               changes in
               accounting
               principles              7.14          2.42          6.08        (13.43)       (15.16)
          Net income (loss)(2)         7.14          2.42          6.08        (14.04)       (69.01)

<FN>
---------------

(1)  MAXXAM Inc. has not declared or paid any cash dividends during the
     five year period ended December 31, 1997.
(2)  Included in 1994 and 1993 are extraordinary items of: $(.61) and
     $(5.81), respectively.  Included in 1993 is $(48.03) attributable to
     the cumulative effect of changes in accounting principles.
</TABLE>


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

          This section 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 "Results of Operations--Aluminum Operations," "Results of
Operations--Forest Products Operations," "Financial Condition and Investing
and Financing Activities" and "Trends").  See Item 1. "Business--General"
for cautionary information with respect to such forward-looking statements.
The following should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto which are contained elsewhere
herein.

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 two business segments: bauxite and alumina,
and aluminum processing.  As an integrated aluminum producer, Kaiser uses a
portion of its bauxite, alumina and primary aluminum production for
additional processing at certain of its facilities.  Information concerning
net sales, operating income (loss) and assets attributable to certain
industry segments and geographic areas is set forth in Note 14 to the
Consolidated Financial Statements.

          Industry Overview
          Kaiser's operating results are sensitive to changes in 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 and on
hedging strategies.  Primary aluminum prices have historically been subject
to significant cyclical price fluctuations (see Notes 1 and 13 to the
Consolidated Financial Statements for a discussion of Kaiser's hedging
activities).

          During the first eleven months of 1997, the Average Midwest
United States transaction price ("AMT Price") for primary aluminum remained
relatively stable generally in the $.75 to $.80 per pound range.  During
December of 1997, the AMT Price fell to the $.70 to $.75 per pound range. 
For the week ended February 20, 1998, the AMT Price was $.70 per pound. 
However, 1997 prices overall compared favorably to 1996 when the AMT Price
remained fairly stable generally in the $.70 to $.75 range through June and
then declined during the second half of the year, reaching a low of
approximately $.65 per pound for October 1996, before recovering late in
the year.  The AMT Price for 1995 was generally in the $.80 to $.90 per
pound range.

          Summary
          The following table presents selected operational and financial
information for the years ended December 31, 1997, 1996 and 1995 for the
Company's aluminum operations.

<TABLE>
<CAPTION>

                                                    Years Ended December 31,
                                           -----------------------------------------
                                                1997          1996          1995
                                           ------------- ------------- -------------
                                                    (In millions of dollars,
                                                  except shipments and prices)
<S>                                        <C>           <C>           <C>
Shipments: (1)
     Alumina                                     1,929.8       2,073.7       2,040.1
     Aluminum products:
          Primary aluminum                         327.9         355.6         271.7
          Fabricated aluminum products             400.0         327.1         368.2
                                           ------------- ------------- -------------
               Total aluminum products             727.9         682.7         639.9
                                           ============= ============= =============
Average realized sales price:
     Alumina (per ton)                     $         198 $         195 $         208
     Primary aluminum (per pound)                    .75           .69           .81

Net sales:
     Bauxite and alumina:
          Alumina                          $       382.1 $       404.1 $       424.8
          Other (2) (3)                            106.5         103.9          89.4
                                           ------------- ------------- -------------
               Total bauxite and alumina           488.6         508.0         514.2
                                           ------------- ------------- -------------
     Aluminum processing:
          Primary aluminum                         543.4         538.3         488.0
          Fabricated aluminum products           1,324.3       1,130.4       1,218.6
          Other (3)                                 16.9          13.8          17.0
                                           ------------- ------------- -------------
               Total aluminum processing         1,884.6       1,682.5       1,723.6
                                           ------------- ------------- -------------
     Total net sales                       $     2,373.2 $     2,190.5 $     2,237.8
                                           ============= ============= =============
Operating income                           $       174.0 $       103.7 $       216.5
                                           ============= ============= =============
Income before income taxes and minority
     interests                             $        66.3 $         7.6 $       108.7
                                           ============= ============= =============
Capital expenditures and investments in
     unconsolidated affiliates (4)         $       128.5 $       161.5 $        88.4
                                           ============= ============= =============

<FN>
---------------
(1)  Shipments are expressed in thousands of metric tons.  A metric ton is
     equivalent to 2,204.6 pounds.
(2)  Includes net sales of bauxite.
(3)  Includes the portion of net sales attributable to minority interests
     in consolidated subsidiaries.
(4)  Includes $6.6 million, $7.4 million and $8.3 million funded by
     Kaiser's minority partners in certain foreign joint ventures in 1997,
     1996 and 1995, respectively.

</TABLE>

          Results for 1997 includes the effect of certain nonrecurring
items including a pre-tax charge of $19.7 million related to restructuring
of operations in connection with Kaiser's performance improvement program,
a non-cash tax benefit of approximately $12.5 million and a $5.8 million
pre-tax charge related to certain legal matters.

          Results for 1996 include an after tax benefit of approximately
$17.0 million resulting from settlements of certain tax matters in December
1996.  Excluding the impact of these non-recurring items, Kaiser would have
reported a net loss  for the year ended December 31, 1996.  Results for the
year ended December 31, 1996 reflect the substantial reduction in market
prices for primary aluminum more fully discussed below.  Alumina prices,
which are significantly influenced by changes in primary aluminum prices,
also declined from period to period.  The decrease in product prices more
than offset the positive impact of increases in shipments in several
segments of Kaiser's business, as more fully discussed below.  Results for
1996 also include approximately $20.5 million in research and development
expenses and other costs related to Kaiser's new micromill as well as
additional expenses related to other strategic initiatives.

          Results for 1995 included approximately $17.0 million of first
quarter 1995 pre-tax expenses associated with an eight-day strike at five
major U.S. locations, a six-day strike at Kaiser's 65% owned Alpart bauxite
mining and alumina refinery in Jamaica, and a four-day disruption of
alumina production at Alpart caused by a boiler failure.

          Kaiser's corporate general and administrative expenses of $74.6
million, $59.8 million and $82.3 million in 1997, 1996 and 1995,
respectively, were allocated by the Company to the bauxite and alumina and
aluminum processing segments based upon those segments' ratio of sales to
unaffiliated customers.

          Recent Events and Developments
          Kaiser has previously disclosed that it set a goal of achieving
$120.0 million of pre-tax cost reductions and other profit improvements,
with the full effect planned to be realized in 1998 and beyond, measured
against 1996 results.  In addition to working to improve the performance of
Kaiser's existing assets, Kaiser has expended significant efforts on
analyzing its current asset portfolio with the intent of focusing its
efforts and capital in sectors of the industry that are considered most
attractive.  The initial steps of this process resulted in Kaiser recording
a $19.7 million pre-tax restructuring charge during June 1997 related to
the closing and rationalization of certain businesses and facilities. 
Additionally, this process led to Kaiser's acquisition of an aluminum
extrusion plant in Richmond, Virginia.  See Notes 2 and 3 of Notes to
Consolidated Financial Statements for a further description of the
acquisition of the Bellwood extrusion facility and Kaiser's June 1997
restructuring activities, respectively.

          Subsequent to December 31, 1997, KACC reached agreements settling
approximately 25,000 of the 77,400 pending asbestos-related claims.  Also,
subsequent to year-end 1997, KACC reached agreements on asbestos related
coverage matters with two insurance carriers under which the Company will
collect a total of approximately $17.5 million during the first quarter of
1998.  As the amounts related to the claim settlements and insurance
recoveries were consistent with Kaiser's year-end 1997 accrual assumptions,
these events are not expected to have a material impact on Kaiser's
financial position, results of operations or liquidity.

          Kaiser has previously disclosed that the VRA would partially
reduce its electric power allocation to Kaiser's 90%-owned Valco smelter
facility in Ghana in January 1998 and that Valco expected to operate
approximately three potlines at the facility in 1998 as compared to the
four potlines operated throughout 1997.  During February 1998, Valco agreed
to the shutdown of an additional potline effective February 26, 1998.  In
return, Valco will receive compensation under the agreement which is
expected to substantially offset the financial impact of the settlement. 
As previously disclosed, Valco has notified the VRA that it believes it has
contractual rights to sufficient energy to run four and one-half potlines
in 1998, and Valco continues to seek compensation from the VRA with respect
to the January 1998 reduction of its power allocation.  Valco and the VRA
also are in continuing discussions concerning other matters, including
steps that might be taken to reduce the likelihood of such power
curtailments beyond 1998.  No assurances can be given, however, as to the
success of these discussions or as to the operating level of Valco for the
remainder of 1998 or beyond.  Valco intends to pursue its legal rights in
respect of reduced power allocation and compensation in light of such
reductions.

          Net Sales
          Bauxite and alumina.  Net sales of alumina decreased by 5% in
1997 as a 7% decline in alumina shipments more than offset a 2% increase in
average realized alumina prices.  Shipment volumes were down as compared to
1996 as a result of the timing of shipments and a slight increase in
internal transfers.  Net sales to third parties for 1996 were basically
unchanged from 1995 as a nominal decline in the average realized price of
alumina was offset by a modest increase in alumina shipments.  The
reduction in realized prices reflects the substantial decline in primary
aluminum prices experienced in 1996 discussed below.  The remainder of the
segment's sales revenues was from sales of bauxite and the portion of sales
of alumina attributable to the minority interest in Alpart.

          Aluminum processing.  Net sales of primary aluminum in 1997
approximated 1996 net sales figures as a 10% increase in average realized
prices offset an 8% decrease in primary aluminum shipments.  The increase
in primary aluminum shipments in 1996 of 31% more than offset a 15% decline
in the average realized price for primary aluminum from period to period. 
The increase in shipments in 1996 was the result of increased shipments of
primary aluminum to third parties as a result of a decline in intracompany
transfers.

          Net sales of fabricated aluminum products for 1997 were up 17% as
compared to 1996 as a 22% increase in shipments more than offset a 4%
decrease in average realized prices.  The increase in fabricated aluminum
product shipments over 1996 was primarily the result of Kaiser's June 1997
acquisition of an extrusion facility in Richmond, Virginia, and to a lesser
extent the result of increased international sales of can sheet and
increased shipments of heat-treated products.  Net sales of fabricated
aluminum products were down 7% for the year ended December 31, 1996 as
compared to the prior year as a result of a decrease in shipments
(primarily related to can sheet activities) resulting from reduced growth
in demand and the reduction of customer inventories.  The impact of reduced
product shipments was to a limited degree offset by an increase in the
average realized price from the sale of fabricated aluminum products,
resulting primarily from a shift in product mix to higher value added
products.

          Operating Income (Loss)

          Bauxite and alumina.  The bauxite and alumina segment had a
operating income of $6.8 million in 1997, compared to an operating loss of
$10.7 million in 1996 and income of $37.2 million in 1995.  Operating
income improved substantially in 1997 from 1996 despite the reduced level
of shipments and certain increased costs due in part to a slowdown at
Kaiser's 49% - owned Kaiser Jamaican Bauxite Company prior to the signing
of a new labor contract in December 1997.  This increase was primarily due
to lower overall operating costs.  Operating income for 1996 for this
segment of Kaiser's business declined significantly from the prior year due
to reduced gross margins from alumina sales resulting from the previously
discussed price declines and increased natural gas costs at Kaiser's
Gramercy, Louisiana alumina refinery.  Operating income for the year ended
December 31, 1996 was also unfavorably impacted by high operating costs
associated with disruptions in the power supply at the Alpart alumina
refinery,  higher manufacturing costs resulting from higher market prices
for fuel and caustic soda, and a temporary raw material quality problem
experienced at the Gramercy facility. 

          Aluminum processing.  Operating income for the aluminum
processing segment was $167.2 million in 1997 compared to $114.4 million in
1996 and $179.3 million in 1995.  Operating income improved substantially
in 1997 as a result of the increases in average realized prices for primary
aluminum and higher shipments of fabricated aluminum products cited above. 
Additionally, reduced power, raw material and supply costs and improved
operating efficiencies also contributed.  Included in the segment's
operating income for 1997, was approximately $10.3 million of operating
income realized from the settlement of certain energy service contract
issues.  Operating income for 1997 also included a $15.1 million pre-tax
charge resulting from the restructuring of operations.  Operating income
for the aluminum processing segment for 1996 was impacted by approximately
$5.6 million of scheduled non-recurring maintenance costs at Kaiser's
Trentwood, Washington rolling mill facility, offset by $11.5 million ($7.2
million on an after-tax basis) of reduced operating costs resulting from
the non-cash settlement in December 1996 of certain tax matters.

          Income Before Income Taxes and Minority Interests
          Income before income taxes and minority interests improved for
1997 as compared to 1996 as a result of higher operating income as
described above.  Income before income taxes and minority interests for
1996 declined as compared to 1995 as a result of lower operating income as
previously described and expenses associated with Kaiser's new micromill
facility.

          As described in Note 1 to the Consolidated Financial Statements,
Kaiser's cumulative losses in 1993, principally due to the implementation
of the new accounting standard for postretirement benefits other than
pensions, eliminated Kaiser's equity with respect to its common stock;
accordingly, from 1993 until August 1997, the Company has recorded 100% of
Kaiser's earnings and losses, without regard to the minority interests
represented by Kaiser's other common stockholders (as described in Note 10
to the Consolidated Financial Statements).  With the conversion of Kaiser's
8.255% Preferred Redeemable Increased Dividend Equity Securities (the
"PRIDES") into Kaiser's common stock, par value $.01 ("Kaiser Common
Stock") in August 1997, the cumulative losses recorded by the Company with
respect to Kaiser's minority common stockholders were recovered, and the
Company began reflecting a minority interest in Kaiser's results in its
financial statements.


     FOREST PRODUCTS OPERATIONS

          Industry Overview
          The Company's forest products operations are conducted by MGI,
through Pacific Lumber and Britt.  MGI's business is seasonal in that the
forest products business generally experiences lower first quarter sales
due largely to the general decline in construction-related activity during
the winter months.  The following should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto.

          Old growth trees constitute Pacific Lumber's principal source of
upper grade redwood lumber, Pacific Lumber's most valuable product.  Due to
restrictions on Pacific Lumber's ability to harvest old growth timber on
its property, Pacific Lumber's supply of upper grade lumber has decreased
in some premium product categories.  Furthermore, logging costs have
increased in part due to the harvest of smaller diameter logs and
compliance with environmental regulations relating to the harvesting of
timber and litigation costs incurred in connection with certain THPs filed
by Pacific Lumber.  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 expansion of its manufactured lumber facilities and
other improvements in lumber recovery and installation of a lumber
remanufacturing facility at its Fortuna lumber mill.  However, unless
Pacific Lumber is able to sustain the harvest level of old growth trees, it
expects that its production of premium upper grade lumber products will
decline and that its manufactured lumber products will constitute a higher
percentage of its shipments of upper grade lumber products.  See also "--
Trends -- Forest Products Operations."

          The following table presents selected operational and financial
information for the years ended December 31, 1997, 1996 and 1995 for the
Company's forest products operations.


<TABLE>
<CAPTION>

                                                     Years Ended December 31,
                                            -----------------------------------------
                                                 1997          1996          1995
                                            ------------- ------------- -------------
                                                     (In millions of dollars,
                                                   except shipments and prices)
<S>                                         <C>           <C>           <C>
Shipments:
     Lumber: (1)                                                                     
          Redwood upper grades                       52.4          49.7          46.5
          Redwood common grades                     244.2         229.6         216.7
          Douglas-fir upper grades                   11.5          10.6           7.4
          Douglas-fir common grades                  75.3          74.9          64.6
          Other                                      14.5          17.2          11.4
                                            ------------- ------------- -------------
          Total lumber                              397.9         382.0         346.6
                                            ============= ============= =============
     Logs (2)                                        11.9          20.1          12.6
                                            ============= ============= =============
     Wood chips (3)                                 237.8         208.9         214.0
                                            ============= ============= =============
Average sales price:
     Lumber: (4)
          Redwood upper grades              $       1,443 $       1,380 $       1,495
          Redwood common grades                       531           511           477
          Douglas-fir upper grades                  1,203         1,154         1,301
          Douglas-fir common grades                   455           439           392
     Logs (4)                                         414           477           440
     Wood chips (5)                                    73            76           102
Net sales:
     Lumber, net of discount                $       256.1 $       234.1 $       211.3
     Logs                                             4.9           9.6           5.6
     Wood chips                                      17.4          15.8          21.7
     Cogeneration power                               4.5           3.3           2.5
     Other                                            4.3           1.8           1.5
                                            ------------- ------------- -------------
          Total net sales                   $       287.2 $       264.6 $       242.6
                                            ============= ============= =============
Operating income                            $        84.9 $        73.0 $        74.3
                                            ============= ============= =============
Operating cash flow (6)                     $       111.0 $       100.2 $        99.6
                                            ============= ============= =============
Income before income taxes                  $        21.0 $         6.3 $         6.4
                                            ============= ============= =============
Capital expenditures                        $        22.9 $        15.2 $        10.5
                                            ============= ============= =============


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

</TABLE>

          Net Sales
          Net sales for 1997 increased over 1996 due to higher average
realized prices and shipments for most categories of redwood and Douglas-
fir lumber.  Net sales for 1996 increased compared to 1995 principally due
to higher lumber shipments in all categories and higher average realized
prices for common grade lumber.  Partially offsetting these improvements
were lower average realized prices for upper grade redwood lumber and wood
chips.  Shipments of fencing and other value-added common lumber products
from the Company's new remanufacturing facility were a contributing factor
in the improved redwood common lumber realizations.

          Operating Income
          Operating income for 1997 increased over 1996 principally due to
the increase in net sales discussed above.  Operating income, after
excluding from 1995 the benefit from a $1.5 million insurance settlement,
increased in 1996 due to the increase in net sales discussed above. 
Increases in costs of goods sold reflect both the impact of additional
manufacturing costs attributable to the increased shipments of manufactured
lumber products, higher shipments of lower margin lumber and the increasing
cost of regulatory compliance for the Company's timber harvesting
operations.

          Income (Loss) Before Income Taxes
          Income before income taxes for 1997 increased over 1996
principally due to higher operating income discussed above and due to an
increase in net gains on marketable securities in 1997.  Income before
income taxes for 1996 was basically flat as compared to 1995.

     REAL ESTATE AND OTHER OPERATIONS

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


<TABLE>
<CAPTION>

                                                     Years Ended December 31,
                                            ----------------------------------------
                                                 1997          1996          1995
                                            ------------  ------------  ------------
                                                     (In millions of dollars)
<S>                                         <C>           <C>           <C>
Net sales:
     Real estate                            $       48.7  $       67.5  $       79.6 
     SHRP, Ltd.                                     20.0          20.7           5.2 
                                            ------------  ------------  ------------
          Total net sales                   $       68.7  $       88.2  $       84.8 
                                            ============  ============  ============
Operating loss:                                                                      
     Real estate                            $       (3.4) $      (10.1) $      (13.0)
     SHRP, Ltd.                                     (1.6)         (1.9)          (.6)
                                            ------------  ------------  ------------
          Total operating loss              $       (5.0) $      (12.0) $      (13.6)
                                            ============  ============  ============
Income (loss) before income taxes and                                                
     minority interests
     Real estate                            $       12.8  $       18.9  $         .5 
     SHRP, Ltd.                                     (4.6)         (5.7)         (1.3)
                                            ------------  ------------  ------------
          Total income (loss) before
               income taxes and minority
               interests                    $        8.2  $       13.2  $        (.8)
                                            ============  ============  ============



</TABLE>

          Net Sales
          Net sales 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, (iii) rental revenues
associated with the RTC Portfolio, and (iv) beginning in the fourth quarter
of 1995, revenues from SHRP, Ltd.  Net sales do not include any amounts
from the sale of income producing properties, such as the hotel and other
resort-related assets formerly owned by Palmas del Mar, and the RTC
Portfolio properties and loans, which are recorded net of costs as
investment, interest and other income.  As of December 31, 1997
substantially all of the RTC Portfolio assets had been sold with two loans
resulting from property sales and one property remaining, having an
aggregate net book value of $8.1 million.

          Net sales decreased in 1997 from 1996 primarily due to lower
revenues from resort and commercial operations, reflecting the disposition
by Palmas of the hotel and other resort-related assets and the disposition
of certain RTC Portfolio assets during 1996 and early 1997.  Net sales for
1996 include revenues attributable to a full year of the operations of
SHRP, Ltd.  which more than offset lower real estate revenues as compared
to 1995.  The Company began consolidating SHRP, Ltd.'s results in  October
1995.  Net sales attributable to 1996 real estate operations decreased from
1995 due to lower 1996 sales of real property in the Fountain Hills,
Arizona development and lower RTC Portfolio revenues due to the sale of a
substantial number of these properties during 1996 and prior periods.

          Operating Loss
          Operating losses for 1997 decreased from 1996 primarily due to
higher earnings from the sales of real property.  Included in the operating
loss for 1997 is profit from two bulk land sales at the Fountain Hills,
Arizona development.  The operating loss for 1996 decreased as compared to
1995, principally due to lower selling, general and administrative expenses
offset in part by lower margins on sales of real property and $1.9 million
of operating losses in 1996 attributable to SHRP, Ltd.

          Income (Loss) Before Income Taxes and  Minority Interests
          The decrease in income before income taxes and minority interests
for 1997 is primarily due to lower 1997 gains of $10.5 million from the
sale of RTC Portfolio assets as compared to gains of $19.9 million in 1996. 
This decline was partially offset by the reduction in operating losses
discussed above.

          Income before income taxes and minority interests for 1996
improved compared to 1995 primarily due to 1996 gains of $19.9 million from
the sale of RTC Portfolio assets and $4.8 million from the sale of a hotel
and other resort-related assets at Palmas del Mar.  Net proceeds from these
sales were $36.0 million and $7.5 million, respectively.  Additionally,
investment income for 1996 includes income derived from lot sales and
operations at SunRidge Canyon, the Company's 50%-owned joint venture in
Arizona.  Interest expense for 1997 and 1996 includes interest on SHRP
Ltd.'s Senior Secured Extendible Notes (see Note 4 to the Consolidated
Financial Statements).

     OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS


<TABLE>
<CAPTION>

                                                    Years Ended December 31,
                                            ---------------------------------------
                                                1997          1996          1995
                                            -----------   -----------   -----------
                                                    (In millions of dollars)
<S>                                         <C>           <C>           <C>
Operating loss                              $     (17.5)  $     (33.4)  $     (19.6)
Loss before income taxes and minority             (21.0)        (39.2)        (19.8)
interests


</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 1997, 1996 and 1995 is
principally due to accruals for certain legal contingencies, which were
$5.6 million, $23.1 million and $6.1 million in 1997, 1996 and 1995,
respectively (see Note 12 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 1997
decreased from 1996 principally due to lower operating losses described
above and higher earnings from marketable securities.  The loss for 1996
increased compared to 1995 primarily due to the increased operating loss.

          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 1997,
1996 and 1995 reflect benefits of $32.1 million, $40.8 million and $20.0
million, respectively,  for such reversals of reserves.

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

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

     PARENT COMPANY AND MGHI

          Financing Activities and Liquidity
          The Company conducts its operations primarily through its
subsidiaries.  Creditors of and holders of minority interests in
subsidiaries of the Company 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, 1997, the indebtedness of the subsidiaries and
the minority interests reflected on the Company's Consolidated Balance
Sheet were $1,919.4 million and $170.6 million, respectively.  Certain of
the Company's subsidiaries, principally Kaiser and MGHI (and in turn MGHI's
subsidiaries), are restricted by their various debt agreements as to the
amount of funds that can be paid in the form of dividends or loaned to the
Company.  As of December 31, 1997, the Company's other subsidiaries
(principally real estate) had an aggregate of cash and unused borrowing
availability of approximately $11.9 million which could have been paid 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.  27,938,250
shares of Kaiser common stock (the "Pledged Kaiser Shares") owned by MGHI
serve as security for the 11-1/4% Senior Secured Notes due 2003 and 12-1/4% 
Senior Secured Discount Notes due 2003 (collectively, the "MGI Notes") of
its subsidiary, MGI.  Furthermore, MGHI has agreed to pledge up to
16,055,000 of such Pledged Kaiser Shares as security for the MGHI Notes
should they be released from the pledge for the MGI Notes due to their
early retirement (except by reason of a refinancing).  Net proceeds of
$125.0 million received from the offering of the MGHI Notes have been
loaned to the Company pursuant to an intercompany note (the "Intercompany
Note").  Because the indenture governing the public indebtedness of MGI
(the "MGI Indenture") restricts the payment of dividends to MGHI, the
Company expects that the MGHI Notes will be serviced primarily through cash
interest payments by the Company on the Intercompany Note.

          The indenture governing the MGHI Notes contains various covenants
which, among other things, limit the payment of dividends and restrict
transactions between MGHI and its affiliates.  Except for a portion of
possible proceeds from the Headwaters Agreement (see "--Trends--Forest
Products Operations" below), the indenture would permit only a limited
amount of dividends from MGHI during the next several years.

          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.  In 1997, the
Company purchased 1,662,650 shares of its common stock for $87.9 million. 
On October 17, 1997, 1,277,250 of these shares were acquired for $35.1
million in cash and $35.1 million in one-year notes bearing interest at 10%
per annum.  These notes are secured by the common stock which was
repurchased.  During 1996, the Company purchased 44,600 shares of its
common stock for $1.8 million.

          On October 21, 1997, the Company renewed an agreement with the
Custodial Trust Company providing for up to $25.0 million in borrowings
("the Custodial Trust Agreement").  Any amounts drawn would likely be secured
by Kaiser common stock owned directly by the Company and having an initial
market value equal to three times the amount borrowed.  The Custodial Trust
Agreement provides for a revolving credit arrangement during the first year
of the agreement.  Any borrowings outstanding on October 21, 1998 would
convert into a term loan maturing on October 21, 1999.  No borrowings were
outstanding as of December 31, 1997.

          On November 26, 1997, the Company entered into a credit facility
with Salomon Smith Barney 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, 1997,
$2.5 million of borrowings were outstanding under this facility.

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

          During the three years ended December 31, 1997, the Company's
corporate general and administrative expenses, net of cost reimbursements
from its subsidiaries, have ranged between $17.0 million and $33.0 million
per year.  The Company's corporate general and administrative expenses for
1997 and 1996 included a $5.6 million and $23.1 million charge,
respectively for certain legal contingencies, of which a substantial
portion related to legal fees and expenses that the Company either has or
estimates it will incur in connection with the OTS and FDIC matters
described in Note 12 to the Consolidated Financial Statements.  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 million to $12 million for the next year. 
Although the Company cannot predict when or whether the expenses
represented by the accrual for legal contingencies will be incurred, 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 the past several years from the sale of properties which are part of
the RTC Portfolio.  From 1995 to 1997, these transactions resulted in
aggregate proceeds of $75.6 million and gains of $40.9 million.  As of
December 31, 1997, two loans resulting from property sales totaling $6.5
million and one property having an aggregate net book value of $1.6
million, were held.  Payment on one loan is expected in 1998, and the
property is subject to a pending sales contract.  The Company does not
expect cash flows from real estate activities during the next several years
to be at or near recent historical levels which included cash flows from
sales of RTC Portfolio assets.

          As of December 31, 1997, the Company (excluding its subsidiaries)
had cash and marketable securities of approximately $81.2 million.  The
Company believes that its existing resources, together with the cash
available from subsidiaries and financing, 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" could materially
adversely affect the Company's consolidated financial position, results of
operations or liquidity.

          Investing Activities
          During 1995, the Company sold its remaining 893,550 of Kaiser
Depositary Shares (as defined in "--Aluminum Operations" below) for
aggregate net proceeds of $7.6 million.  See Note 10 to the Consolidated
Financial Statements.

          In 1995, the Company and certain wholly owned subsidiaries made
investments in SHRP, Ltd. of approximately $8.7 million, consisting of
land, cash ($5.8 million) and other assets, and purchased for $7.3 million,
$14.6 million aggregate initial principal amount of SHRP, Ltd.'s 11% Senior
Secured Extendible Notes (the "SHRP Notes").  In 1997, the Company
purchased an additional $11.0 million aggregate initial principal amount of
SHRP Notes for $5.9 million.  See "--Real Estate and Other Operations."

          Contingencies
          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 Company, Federated, Mr.
Charles Hurwitz and others (the "respondents") with respect to the failure
of USAT.  The OTS, among other things, alleges that the Company and
Federated are liable for approximately $560 million, representing their pro
rata portion (allegedly 35%) of USAT's capital deficiency and all imbedded
losses.  The hearing on the merits commenced on September 22, 1997,
adjourned on December 19, 1997, and is scheduled to recommence on June 16,
1998.

          In a related matter, the FDIC filed a civil action entitled
Federal Deposit Insurance Corporation, as manager of the FSLIC Resolution
Fund v. Charles E. Hurwitz (the "FDIC action").  The FDIC's amended
complaint 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.  See Note 12 to Consolidated Financial
Statements for further discussion of these matters.

     ALUMINUM OPERATIONS

          Financing Activities and Liquidity
          Note 7 to the Consolidated Financial Statements contains a
listing of Kaiser's indebtedness and information concerning certain
restrictive debt covenants.  As further described in Note 13 to the
Consolidated Financial Statements, KACC from time to time enters into
primary aluminum and energy hedging transactions in the ordinary course of
business which are designed to mitigate Kaiser's exposure to unfavorable
price changes, while retaining some ability to participate in any favorable
pricing environments that may materialize.

          Kaiser and KACC have the KACC Credit Agreement under which KACC
is able to borrow by means of revolving credit advances and letters of
credit (up to $125.0 million) in an aggregate amount equal to the lesser of
$325.0 million or a borrowing base relating to eligible accounts receivable
plus eligible inventory.  In January 1998, the term of the KACC Credit
Agreement was extended from February 1999 to August 2001.  As of December
31, 1997, no borrowings were outstanding and $273.4 million (of which $73.4
million could have been used for letters of credit) was available to KACC
under the KACC Credit Agreement.

          The declaration and payment of dividends by KACC on shares of its
common stock is subject to certain covenants contained in the indentures
for the KACC 9-7/8% Senior Notes, the KACC 10-7/8% Senior Notes due 2006
(the "KACC 10-7/8% Senior Notes"), and the KACC 12-3/4% Senior Subordinated
Notes due 2003 (the "KACC Senior Subordinated Notes").  During the fourth
quarter of 1996 KACC sold a total $225.0 million principal amount of KACC
10-7/8% Senior Notes.  The KACC 10-7/8% Senior Notes are guaranteed on a
senior, unsecured basis by certain of KACC's subsidiaries.

          At December 31, 1997, Kaiser had working capital of $451.5
million, compared with working capital of $414.3 million at December 31,
1996.  The increase in working capital in 1997 was due primarily to an
increase in receivables, offset by a reduction in cash and cash
equivalents.  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.  With respect to long-term
liquidity, Kaiser believes that operating cash flows, 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 Common Stock, with
the remaining 37% of Kaiser's Common Stock being held publicly.

          During August 1997, the 8,673,850 outstanding shares of PRIDES
were converted into 7,227,848 shares of Kaiser Common  Stock pursuant to
the terms of the PRIDES Certificate of Designations.

          In addition to the shelf registration covering 10 million shares
of Kaiser Common Stock owned by the Company discussed above (the proceeds
of which 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. 

          Investing Activities
          Kaiser's capital expenditures of $128.5 million, $161.5 million
and $88.4 million in 1997, 1996 and 1995, respectively were made primarily
to construct new facilities, improve production efficiency, reduce
operating costs, and expand capacity at existing facilities.  A substantial
portion of the increase in capital expenditures in 1996 over the 1995 level
was attributable to the development and construction of Kaiser's
proprietary Micromill(TM) technology for the production of can sheet and
other sheet products from molten metal.  The Micromill(TM), which was
constructed in Nevada during 1996 as a demonstration and production
facility, remained in a start-up mode throughout 1997.  During January
1998, the facility commenced trial product shipments to customers.  Kaiser
currently anticipates that commercial deliveries from the facility will
commence during the first quarter of 1998.  However, the Micromill(TM)
technology has not yet been fully implemented or commercialized, and there
can be no assurances that full implementation or commercialization will be
successful.

          During October 1997, a joint decision was made by a KACC
subsidiary and its joint venture partner to terminate and dissolve the
Sino-foreign aluminum joint venture formed in 1995.  In January 1998, the
KACC subsidiary reached an agreement to sell its interests in the venture
to its partner.  The terms of the agreement are subject to certain
governmental approvals by officials of the People's Republic of China. 
This transaction will not have a material effect on the Company's results
of operations.

          Kaiser's total capital expenditures are expected to be between
$75.0 million and $125.0 million per annum in each of 1998 through 2000 (of
which approximately 8% is expected to be funded by Kaiser's minority
partners in certain foreign joint ventures).  Kaiser continues to evaluate
numerous domestic and international projects all of which require
substantial capital.

          Environmental Contingencies
          Kaiser and KACC are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of the
environmental laws and regulations, and to claims and litigation based upon
such laws.  Based on Kaiser's evaluation of these and other environmental
matters, Kaiser has established environmental accruals of $29.7 million at
December 31, 1997.  However, Kaiser believes that it is reasonably possible
that the costs could exceed the accrual by up to an estimated $18.0
million.  Kaiser believes that KACC has insurance coverage available to
recover certain incurred and future environmental costs and is actively
pursuing claims in this regard.  However, no accruals have been made for
any such insurance recoveries, and no assurances can be given that Kaiser
will be successful in its attempt  to recover incurred or future costs. 
While 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 Kaiser's consolidated
financial position, results of operations, or liquidity.  See Note 12 to
Consolidated Financial Statements for further information regarding these
contingencies.

          Asbestos Contingencies
          KACC is also a defendant in a number of lawsuits  in which the
plaintiffs allege that certain of their injuries were caused by, among
other things, exposure to asbestos during, and as a result of, their
employment or association with KACC or exposure to products containing
asbestos produced or sold by KACC.  At December 31, 1997, Kaiser has an
accrual of $158.8 million for estimated asbestos-related costs for claims
filed and estimated to be filed and settled through 2008, before
consideration of insurance recoveries.  At December 31, 1997, an estimated
aggregate insurance recovery of $134.0 million, determined on the same
basis as the asbestos-related cost accrual, is recorded primarily in other
assets.  However, claims for recovery from some of KACC's insurance
carriers are subject to pending litigation and other carriers have raised
certain defenses, which have resulted in delays in recovering costs from
the insurance carriers.  While it is impossible to determine the actual
costs that ultimately may be incurred and insurance recoveries that will be
received, Kaiser believes that the resolution of these matters should not
have a material adverse effect on its consolidated financial position,
results of operations, or liquidity.  See Note 12 to Consolidated Financial
Statements for further information regarding these contingencies.

     FOREST PRODUCTS OPERATIONS

          Financing Activities and Liquidity
          As of December 31, 1997, MGI and its subsidiaries had
consolidated working capital of $161.7 million and long-term debt of $734.5
million (net of current maturities and restricted cash deposited in a
liquidity account for the benefit of the holders of the 7.95% Timber
Collateralized Notes due 2015, the "Timber Notes") as compared to $131.4
million and $729.8 million, respectively, at December 31, 1996.  The change
in long-term debt was primarily due to $9.4 million of borrowings under the
Pacific Lumber Credit Agreement for timberland acquisitions and $13.2
million in accretion of discount on the MGI Notes offset by $16.2 million
in principal payments on the Timber Notes.  See Note 7 to Consolidated
Financial Statements for further discussion of these matters.

          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 Pacific Holding Company ("Scotia Pacific"). 
Moreover, Pacific Lumber is dependent upon Scotia Pacific for the
substantial portion of its log requirements.  The holders of the Timber
Notes ($320.0 million outstanding as of December 31, 1997) have priority
over the claims of creditors of Pacific Lumber with respect to the assets
and cash flows of Scotia Pacific, and the holders of the $235.0 million of
10-1/2% Pacific Lumber Senior Notes (the "Pacific Lumber Senior Notes")
have priority over the claims of creditors of MGI with respect to the
assets and cash flows of Pacific Lumber.  In the event Scotia Pacific's
cash flows are not sufficient to generate distributable funds to Pacific
Lumber, Pacific Lumber would effectively be precluded from distributing
funds to MGI, and MGI's ability to pay interest on the MGI Notes and its
other indebtedness would also be materially impaired.  MGI is dependent
upon its existing cash resources and dividends from Pacific Lumber and
Britt to meet its financial and debt service obligations as they become
due. MGI expects that Pacific Lumber will provide a major portion of its
future operating cash flow.

          The indentures governing the MGI Notes, the Pacific Lumber Senior
Notes, the Timber Notes (the "Timber Note Indenture") and Pacific Lumber's
revolving credit agreement (the "Pacific Lumber Credit Agreement") contain
various covenants which, among other things, limit the ability to incur
additional indebtedness and liens, to engage in transactions with
affiliates, to pay dividends and to make investments.  Under the terms of
the Timber Note Indenture, Scotia Pacific will generally have available
cash for distribution to Pacific Lumber when Scotia Pacific's cash flow
from operations exceeds the amounts required by the Timber Note Indenture
to be reserved for the payment of current debt service (including interest,
principal and premiums) on the Timber Notes, capital expenditures and
certain other operating expenses.  Pacific Lumber can pay dividends in an
amount that is generally equal to 50% of Pacific Lumber's consolidated net
income plus depletion and cash dividends received from Scotia Pacific,
exclusive of the net income and depletion of Scotia Pacific as long as any
Timber Notes are outstanding.

          Dividends paid were as follows:


<TABLE>
<CAPTION>

                                                        Dividends Paid for
                                                     Years Ended December 31,
                                            -----------------------------------------
                                                 1997          1996          1995
                                            ------------- ------------- -------------
                                                     (In millions of dollars)
<S>                                         <C>           <C>           <C>
Scotia Pacific                              $        60.8 $        76.9 $        59.0
                                            ============= ============= =============

Pacific Lumber                              $        23.0 $        20.5 $        22.0
Britt                                                 4.0           6.0           6.0
                                            ------------- ------------- -------------
                                            $        27.0 $        26.5 $        28.0
                                            ============= ============= =============
MGI                                         $         3.0 $         3.9 $         4.8
                                            ============= ============= =============


</TABLE>

          On October 9, 1997, the Pacific Lumber Credit Agreement was
amended to, among other things, extend the date on which it expires to May
31, 2000.  The Pacific Lumber Credit Agreement provides for borrowings of
up to $60.0 million, of which $20.0  million may be used for standby
letters of credit and $30.0 million is restricted to acquisition of
timberlands.  Borrowings made pursuant to the portion of the credit
facility restricted to timberland acquisitions are secured by the purchased
timberlands.  As of December 31, 1997, $9.4 million of borrowings were
outstanding and letters of credit outstanding amounted to $15.1 million. 
As of December 31, 1997, $35.5 million of borrowings was available under
the Pacific Lumber Credit Agreement, of which $4.9 million was available
for letters of credit and $20.6 million was restricted to timberland
acquisitions.

          As of December 31, 1997, MGI and its subsidiary companies had
cash and marketable securities of approximately $141.2 million, $38.8
million of which represents cash and marketable securities held by
subsidiaries.  MGI and its subsidiaries anticipate that cash from
operations, together with existing cash, marketable securities 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, MGI and its subsidiaries believe that
their existing cash and cash equivalents, together with their ability to
generate sufficient levels of cash from operations and their ability to
obtain both short- and long-term financing, should provide sufficient funds
to meet their working capital and capital expenditure requirements. 
However, due to their highly leveraged condition, MGI and its subsidiaries
(and in turn MGHI) are more sensitive than less leveraged companies to
factors affecting their operations, including governmental regulation and
litigation affecting their timber harvesting practices (see "--Trends"
below), increased competition from other lumber producers or alternative
building products and general economic conditions.

          Investing
          Recent capital expenditures were made to improve production
efficiency, reduce operating costs and acquire additional timberlands. 
MGI's consolidated capital expenditures were $22.9 million, $15.2 million
and $10.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively.  Capital expenditures, excluding expenditures for
timberlands, are expected to be $21.9 million in 1998 and are estimated to
be between $10.5 million and $16.0 million per year for the 1999 - 2000
period.  Pacific Lumber may purchase additional timberlands from time to
time as appropriate opportunities arise, and such purchases could exceed
the historically modest levels of such acquisitions.

     REAL ESTATE AND OTHER OPERATIONS

          Financing Activities and Liquidity
          As of December 31, 1997, the Company's real estate and other
subsidiaries had approximately $8.8 million available for use under a $14.0
million revolving credit facility with a bank (the "MCOP Credit
Agreement"), $7.3 million of which could be borrowed and distributed to the
Company.  The Company believes that the existing cash and credit facilities
of its real estate and other subsidiaries are sufficient to fund the
working capital and capital expenditure requirements of such subsidiaries
for the next year.  With respect to the long-term liquidity of such
subsidiaries, the Company believes that their ability to generate cash from
the sale of their existing real estate, together with their ability to
obtain financing, should provide sufficient funds to meet their working
capital and capital expenditure requirements.

          The MCOP Credit Agreement, which is scheduled to expire on May
15, 1998, contains various covenants including limitations on investments
and the incurrence of indebtedness.  The MCOP Credit Agreement provides for
borrowings of up to $14.0 million, of which $8.5 million may be used for
standby letters of credit.  As of December 31, 1997, $8.8 million of
borrowings was available under the MCOP Credit Agreement; there were no
outstanding borrowings, and letters of credit outstanding amounted to $1.5
million.

          In 1997, Palmas entered into a loan agreement, the proceeds of
which are being used to construct an additional golf course, a new club
house and related facilities.  As of December 31, 1997, Palmas had drawn
on $6.0 million of the loan, and it anticipates that an additional $6.5
million will be available upon completion of the golf course in 1998.

          At December 31, 1997, SHRP, Ltd. had cash and cash equivalents of
$2.7 million and a line of credit from its partners of $1.7 million,
substantially all of which is the Company's portion.  SHRP, Ltd. projects
marginal cash flows from operations for the next two years.  In the event
that the existing cash resources of SHRP, Ltd. and the line of credit are
inadequate to support the cash flow requirements of SHRP, Ltd., alternative
sources of funding will be necessary.

          Investing
          Capital expenditures were $22.3 million, $10.7 million and $8.2
million for the years ended December 31, 1997, 1996 and 1995, respectively. 
Capital expenditures are expected to be approximately $28.2 million in
1998.  Capital expenditures in 1997 and 1998 include expenditures for the
construction of a golf course at the Company's Palmas del Mar resort.

TRENDS

     FOREST PRODUCTS OPERATIONS

          Regulatory and Environmental Factors
          Pacific Lumber's business is subject to 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 plays a significant
role in Pacific Lumber's business.  While compliance with such laws,
regulations and judicial and administrative interpretations, together with
the cost of litigation incurred in connection with certain timber
harvesting operations, have increased the costs of Pacific Lumber, they
have not had a significant adverse effect on its financial position,
results of operations or liquidity.  However, these laws and related
administrative actions and legal challenges have severely restricted the
ability of Pacific Lumber to harvest virgin old growth timber on its
timberlands, and to a lesser extent, residual old growth timber.

          On September 28, 1996, the Pacific Lumber Parties entered into
the Headwaters Agreement which provides the framework for the acquisition
by the United States and California of approximately 5,600 acres of Pacific
Lumber's timberlands.  These timberlands are commonly referred to as the
Headwaters Forest and the Elk Head Springs Forest (collectively, the
"Headwaters Timberlands").  A substantial portion of the Headwaters
Timberlands consists of virgin old growth timberlands.  Approximately 4,900
of these acres are owned by Salmon Creek, with the remaining acreage being
owned by Scotia Pacific (Pacific Lumber having harvesting rights on
approximately 300 of such acres).  The Headwaters Timberlands would be
transferred in exchange for (a) property and other consideration from the
United States and California having an aggregate fair market value of $300
million, and (b) approximately 7,755 acres of adjacent timberlands (the
"Elk River Timberlands") to be acquired from a third party.  As part of the
Headwaters Agreement, the Pacific Lumber Parties agreed to not enter the
Headwaters Forest or the Elk Head Springs Forest to conduct any logging or
salvage operations.

          Closing of the Headwaters Agreement is subject to various
conditions, including federal and California funding, approval of an
SYP, approval of a Multi-Species HCP and issuance of the Permit and the
issuance of certain tax agreements satisfactory to the Pacific Lumber
Parties.

          In November 1997, President Clinton signed an appropriations bill
which contains authorizations for the expenditure of $250 million of federal
funds toward consummation of the Headwaters Agreement.  On February 27, 1998,
Pacific Lumber, MAXXAM and various government agencies entered into the HCP/SYP
Agreement regarding certain understandings that they had reached regarding the
Multi-Species HCP, the Permit and the SYP. The HCP/SYP Agreement provides
that the Permit and Multi-Species HCP would have a term of 50 years, and would
limit the activities which could be conducted by Pacific Lumber in twelve
forest groves to those which would enhance habitat.  These groves aggregate
approximately 8,000 acres and consist of substantial quantities of virgin
and residual old growth redwood and Douglas-fir timber.

          In addition to being an important milestone toward completion of
the Headwaters Agreement, Pacific Lumber also believes that the HCP/SYP
Agreement is a positive development in respect of the environmental
challenges that it has faced over the last several years.  Several species,
including the northern spotted owl, the marbled murrelet and the coho
salmon, have been listed as endangered and threatened under the ESA and/or
the CESA.   Pacific Lumber has developed federal and state northern spotted
owl management plans which permit harvesting activities to be conducted so
long as Pacific Lumber adheres to certain measures designed to protect the
northern spotted owl.  The potential impact of the listings of the marbled
murrelet and the coho salmon is more uncertain.  If the Multi-Species HCP is
approved, Pacific Lumber would be issued the Permit, which would allow
limited incidental "take" of listed species so long as there was no
"jeopardy" to the species and the Multi-Species HCP would identify the
measures to be instituted in order to minimize and mitigate the anticipated
level of take to the greatest extent possible.  The Multi-Species HCP would
be designed to protect currently listed species as well as to consider
candidate and future-listed species.   Pacific Lumber is also attempting
to include in the Multi-Species HCP a resolution of the potential effect
of limits by the EPA on sedimentation, temperature and other factors
for seventeen northern California rivers and certain of their tributaries,
including rivers within Pacific Lumber's timberlands.  These limitations will be
aimed at protecting water quality.

     Lawsuits are pending or threatened which seek to prevent Pacific Lumber
from implementing certain of its approved THPs.  While challenges with respect
to Pacific Lumber's young growth timber have historically been limited, a
lawsuit was recently filed under the ESA which relates to a significant
number of THPs covering young growth timber of Pacific Lumber.  While Pacific
Lumber expects these environmentally focused objections and lawsuits to
continue, it believes that the HCP/SYP Agreement will enhance its position
in connection with these challenges.  Pacific Lumber also believes that the
Multi-Species HCP would expedite the preparation and facilitate approval of
its THPs.

          The HCP/SYP Agreement also contains certain provisions relating
to the SYP.  Subject to further study, Pacific Lumber expects to propose
an LTSY which is somewhat less than Pacific Lumber's recent harvest levels.
If the SYP is approved, Pacific Lumber will have complied with certain BOF
regulations requiring that timber companies project timber growth and
harvest on their timberlands over a 100-year planning period and establish
an LTSY harvest level.  The SYP must demonstrate that the average annual
harvest over any rolling ten-year period will not exceed the LTSY harvest
level and that Pacific Lumber's projected timber inventory is capable
of sustaining the LTSY harvest level in the last decade of the 100-year
planning period.  An approved  SYP is expected to be valid for ten years,
although it would be subject to review after five years.  Thereafter,
revised SYPs will  be prepared every decade that address the LTSY harvest
level based upon reassessment of changes in the resource base and other
factors.

          The final terms of the SYP, the Multi-Species HCP and the Permit
are subject to additional negotiation and agreement among the parties as
well as public review and comment.  While the parties are working
diligently to complete the Multi-Species HCP and the SYP as well as the
other closing conditions contained in the Headwaters Agreement, there can
be no assurance that the Headwaters Agreement will be consummated or that
an SYP, Multi-Species HCP or Permit acceptable to Pacific Lumber will be
approved.

          In the event that a Multi-Species HCP is not approved, Pacific
Lumber will not enjoy the benefits of expedited preparation and facilitated
review of its THPs.  Furthermore, if a Multi-Species HCP acceptable to
Pacific Lumber is not approved, it is impossible for Pacific Lumber to
determine the potential adverse effect of the listings of the marbled
murrelet and coho salmon or the EPA's limitations on Pacific Lumber's
financial position, results of operations or liquidity until such time as
the various regulatory and legal issues are resolved; however, if Pacific
Lumber is unable to harvest, or is severely limited in harvesting, on
significant amounts of its timberlands, such effect could be materially
adverse to Pacific Lumber.

YEAR 2000

          Kaiser utilizes software and related technologies throughout its
business that will be affected by the year 2000 date change.  An internal
assessment has been undertaken to determine the scope and the related costs
to assure that Kaiser's systems continue to function adequately to meet
Kaiser's needs and objectives.  A detailed implementation plan will be
developed from these findings.  Spending for related projects, which began
in 1997 and will likely continue through 1999, is currently expected to
range from $10 - $15 million.  Similar assessments undertaken for MAXXAM
and its other subsidiaries have determined that their software and related
technologies will be affected to a much smaller extent, and spending is
expected to be less than $0.5 million.  System modification costs will be
expensed as incurred.  Costs associated with new systems will be
capitalized and amortized over the estimated useful life of the product.

RECENT ACCOUNTING PRONOUNCEMENTS

          During June 1997, two new accounting standards were issued that
will affect future financial reporting.  Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
requires the presentation of an additional income measure (termed
"comprehensive income"), which adjusts traditional net income for certain
items that previously were only reflected as direct charges to equity (such
as minimum pension liabilities).  Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"), requires that segment reporting for public
reporting purposes be conformed to the segment reporting used by management
for internal purposes.  SFAS No. 131 also adds a requirement for the
presentation of certain segment data on a quarterly basis starting in 1999. 
SFAS No. 130 and SFAS No. 131 must be adopted in the Company's first
quarter ending March 31, 1998 and year-end 1998 reporting, respectively. 
Early adoption is acceptable but not required.  Management is currently
evaluating the impact of these two standards on the Company's future
financial reporting.


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,
1997 and 1996, and the related consolidated statements of operations and
cash flows for each of the three years in the period ended December 31,
1997.  These financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

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

          In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
MAXXAM Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.

          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, fairly states
in all material respects the financial data required to be set forth
therein in relation to the basic consolidated financial statements taken as
a whole.


                                        ARTHUR ANDERSEN LLP



Houston, Texas
February 27, 1998


                        MAXXAM INC. AND SUBSIDIARIES

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


<TABLE>
<CAPTION>

                                                           December 31,
                                                   --------------------------
                                                        1997          1996
                                                   ------------  ------------
<S>                                                <C>           <C>
ASSETS
Current assets:
     Cash and cash equivalents                     $      164.6  $      336.6 
     Marketable securities                                 84.6          50.3 
     Receivables:
          Trade, net of allowance for doubtful
               accounts of $5.9 and $5.2,
               respectively                               255.9         200.7 
          Other                                           126.3          85.9 
     Inventories                                          629.6         634.8 
     Prepaid expenses and other current assets            175.1         169.1 
                                                   ------------  ------------
               Total current assets                     1,436.1       1,477.4 
Property, plant and equipment, net of accumulated
     depreciation of $845.6 and $769.5,
     respectively                                       1,320.9       1,297.9 
Timber and timberlands, net of accumulated
     depletion of $169.2 and $154.6, respectively         299.1         301.8 
Investments in and advances to unconsolidated
     affiliates                                           159.5         179.5 
Deferred income taxes                                     479.9         419.7 
Long-term receivables and other assets                    418.7         439.4 
                                                   ------------  ------------
                                                   $    4,114.2  $    4,115.7 
                                                   ============  ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
     Accounts payable                              $      187.3  $      201.5 
     Accrued interest                                      68.7          61.5 
     Accrued compensation and related benefits            159.3         158.7 
     Other accrued liabilities                            174.9         154.1 
     Payable to affiliates                                 82.9          98.1 
     Short-term borrowings and current maturities
          of long-term debt                                69.0          69.6 
                                                   ------------  ------------
               Total current liabilities                  742.1         743.5 
Long-term debt, less current maturities                 1,888.0       1,881.9 
Accrued postretirement medical benefits                   730.1         731.9 
Other noncurrent liabilities                              586.3         589.4 
                                                   ------------  ------------
               Total liabilities                        3,946.5       3,946.7 
Commitments and contingencies
Minority interests                                        170.6         219.8 
Stockholders' deficit:
     Preferred stock, $.50 par value; 12,500,000
          shares authorized; Class A $.05
          Non-Cumulative Participating Convertible
               Preferred Stock;
               shares issued:  669,701                       .3            .3 
     Common stock, $0.50 par value; 28,000,000
          shares authorized; shares issued:
          10,063,359 and 10,063,885, respectively           5.0           5.0 
     Additional capital                                   222.8         155.9 
     Accumulated deficit                                 (118.5)       (185.6)
     Pension liability adjustment                          (3.3)         (5.1)
     Treasury stock, at cost (shares held: 
          preferred - 845; common - 3,062,762 and
          1,400,112, respectively)                       (109.2)        (21.3)
                                                   ------------  ------------
               Total stockholders' deficit                 (2.9)        (50.8)
                                                   ------------  ------------
                                                   $    4,114.2  $    4,115.7 
                                                   ============  ============

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


                        MAXXAM INC. AND SUBSIDIARIES

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



<TABLE>
<CAPTION>

                                                     Years Ended December 31,
                                            ----------------------------------------
                                                 1997          1996          1995
                                            ------------  ------------  ------------
<S>                                         <C>           <C>           <C>
Net sales:
     Aluminum operations                    $    2,373.2  $    2,190.5  $    2,237.8 
     Forest products operations                    287.2         264.6         242.6 
     Real estate and other operations               68.7          88.2          84.8 
                                            ------------  ------------  ------------
                                                 2,729.1       2,543.3       2,565.2 
                                            ------------  ------------  ------------
Costs and expenses:
     Costs of sales and operations:
          Aluminum operations                    1,962.6       1,869.1       1,798.4 
          Forest products operations               162.0         148.5         127.1 
          Real estate and other operations          42.4          67.4          65.4 
     Selling, general and administrative
          expenses                                 190.0         203.5         195.8 
     Depreciation and depletion                    116.0         123.5         120.9 
     Restructuring of aluminum operations           19.7             -             - 
                                            ------------  ------------  ------------
                                                 2,492.7       2,412.0       2,307.6 
                                            ------------  ------------  ------------

Operating income                                   236.4         131.3         257.6 

Other income (expense):
     Investment, interest and other income          49.7          41.1          18.2 
     Interest expense                             (201.4)       (175.5)       (172.7)
     Amortization of deferred financing
          costs                                    (10.2)         (9.0)         (8.6)
                                            ------------  ------------  ------------
Income (loss) before income taxes and
     minority interests                             74.5         (12.1)         94.5 
Credit (provision) for income taxes                  6.9          44.9         (14.8)
Minority interests                                 (16.2)         (9.9)        (22.2)
                                            ------------  ------------  ------------
Net income                                  $       65.2  $       22.9  $       57.5 
                                            ============  ============  ============

Basic earnings per common share             $       7.81  $       2.63  $       6.60 
                                            ============  ============  ============

Diluted earnings per common and common
     equivalent share                       $       7.14  $       2.42  $       6.08 
                                            ============  ============  ============



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

                        MAXXAM INC. AND SUBSIDIARIES
                    CONSOLIDATED STATEMENT OF CASH FLOWS
                          (IN MILLIONS OF DOLLARS)


<TABLE>
<CAPTION>

                                                     Years Ended December 31,
                                            ----------------------------------------
                                                 1997          1996          1995
                                            ------------  ------------  ------------
<S>                                         <C>           <C>           <C>
Cash flows from operating activities:
     Net income                             $       65.2  $       22.9  $       57.5 
     Adjustments to reconcile net income to
          net cash provided by operating
          activities:
          Depreciation and depletion               116.0         123.5         120.9 
          Restructuring of operations               19.7             -             - 
          Minority interests                        16.2           9.9          22.2 
          Amortization of deferred
               financing costs and
               discounts on long-term
               debt                                 24.8          21.5          19.5 
          Amortization of excess investment
               over equity in net assets of
                unconsolidated affiliates           11.4          11.6          11.4 
          Equity in (earnings) loss of
               unconsolidated affiliates,
               net of dividends
               received                             23.3           3.0         (19.1)
          Net gain on sales of real estate,
               mortgage loans and other
               assets                               (7.9)        (23.7)         (9.7)
          Net gains on marketable
               securities                          (18.1)         (7.8)         (8.6)
          Net sales (purchases) of
               marketable securities               (16.2)          3.4          (4.0)
          Increase (decrease) in cash
               resulting from changes in:
               Prepaid expenses and other
                    assets                          (9.8)        (33.3)         84.5 
               Accounts payable                    (14.8)          4.8          34.7 
               Receivables                         (86.1)         60.4        (103.6)
               Inventories                            .4         (30.6)        (65.3)
               Accrued and deferred income
                    taxes                           (4.4)        (46.0)        (13.1)
               Payable to affiliates and
                    other liabilities              (67.5)        (74.0)         (1.2)
               Accrued interest                      8.4           6.2          (1.0)
          Other                                      8.0           4.2          12.8 
                                            ------------  ------------  ------------
               Net cash provided by
                    operating activities            68.6          56.0         137.9 
                                            ------------  ------------  ------------
Cash flows from investing activities:
     Net proceeds from disposition of
          property and investments                  40.6          51.8          39.3 
     Capital expenditures                         (164.5)       (173.1)        (97.7)
     Investment in subsidiaries and joint
          ventures                                  (7.2)         (2.4)        (15.9)
     Other                                          (7.8)         (1.4)         (1.1)
                                            ------------  ------------  ------------
               Net cash used for investing
                    activities                    (138.9)       (125.1)        (75.4)
                                            ------------  ------------  ------------
Cash flows from financing activities:
     Proceeds from issuance of long-term
          debt                                      30.1         371.8           5.7 
     Net borrowings (payments) under
          revolving and short-term credit
          facilities                                 2.5         (13.8)          4.4 
     Restricted cash withdrawals (deposits)         (3.7)           .4           1.0 
     Redemptions, repurchase of and
          principal payments on long-term
          debt                                     (78.4)        (32.8)        (40.9)
     Dividends paid to Kaiser's minority
          preferred stockholders                    (4.2)        (10.5)        (20.5)
     Redemption of preference stock                 (2.1)         (5.2)         (8.8)
     Treasury stock repurchases                    (52.8)         (1.8)            - 
     Incurrence of financing costs                  (1.8)        (12.1)         (1.8)
     Other                                           8.7           5.5          18.0 
                                            ------------  ------------  ------------
               Net cash provided by (used
                    for) financing
                    activities                    (101.7)        301.5         (42.9)
                                            ------------  ------------  ------------
Net increase (decrease) in cash and cash
     equivalents                                  (172.0)        232.4          19.6 
Cash and cash equivalents at beginning of
     year                                          336.6         104.2          84.6 
                                            ------------  ------------  ------------
Cash and cash equivalents at end of year    $      164.6  $      336.6  $      104.2 
                                            ============  ============  ============


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


                        MAXXAM INC. AND SUBSIDIARIES

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)


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' 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 three principal industries: aluminum, through its majority
owned subsidiary, Kaiser Aluminum Corporation ("Kaiser", 63% owned as of
December 31, 1997), an integrated aluminum producer; forest products,
through MAXXAM Group Inc. ("MGI") and MGI's wholly owned subsidiaries,
principally 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 other
commercial operations through various other wholly owned subsidiaries. 
MAXXAM Group Holdings Inc. ("MGHI") owns 100% of MGI and is a wholly owned
subsidiary of the Company.

          The cumulative losses of Kaiser in 1993, principally due to the
implementation of the new accounting standard for postretirement benefits
other than pensions, eliminated Kaiser's equity with respect to its common
stock; accordingly, from 1993 until August 1997, the Company has recorded
100% of Kaiser's earnings and losses, without regard to the minority
interests represented by Kaiser's other common stockholders (as described
in Note 10).  With the conversion of Kaiser's 8.255% Preferred Redeemable
Increased Dividend Equity Securities (the "PRIDES") into Kaiser common
stock in August 1997, the cumulative losses recorded by the Company with
respect to Kaiser's minority common stockholders were recovered, and the
Company began reflecting a minority interest in Kaiser's results in its
financial statements.

          Description of the Company's Operations
          Kaiser operates in the aluminum industry through its wholly owned
principal operating subsidiary, Kaiser Aluminum & Chemical Corporation
("KACC").  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.  KACC's production levels of alumina 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 14).

          Pacific Lumber 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.  Britt manufactures redwood and cedar
fencing and decking products from small diameter logs, a substantial
portion of which are obtained from Pacific Lumber.  Housing, construction
and remodeling markets are the principal markets for the Company's lumber
products.  Export sales constituted less than 5% of forest products sales
in 1997.  A significant portion of forest products sales are made to third
parties located west of the Mississippi River.

          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 California, Arizona, Texas and
Puerto Rico.  With respect to periods after October 6, 1995, other
commercial operations include the results of Sam Houston Race Park, Ltd.
("SHRP, Ltd."), a Texas limited partnership which owns and operates a Class
1 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) 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 12 could
differ materially from current estimates.  The results of an adverse
resolution of such uncertainties could have a material effect on the
Company's consolidated financial position, results of operations or
liquidity.

     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

          Marketable Securities
          Marketable securities are carried at fair value.  The cost of the
securities sold is determined using the first-in, first-out method. 
Included in investment, interest and other income for each of the three
years in the period ended December 31, 1997 were:  1997 - net unrealized
holding gains of $5.0 and net realized gains of $11.9; 1996 - net
unrealized holding losses of $.8 and net realized gains of $8.1; and 1995 -
net unrealized holding gains of $1.9 and net realized gains of $6.8.

          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.  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,
                                                   ---------------------------
                                                        1997          1996
                                                   ------------- -------------
<S>                                                <C>           <C>
Aluminum Operations:
     Finished fabricated products                  $       103.9 $       113.5
     Primary aluminum and work in process                  226.6         200.3
     Bauxite and alumina                                   108.4         110.2
     Operating supplies and repair and maintenance
          parts                                            129.4         138.2
                                                   ------------- -------------
                                                           568.3         562.2
                                                   ------------- -------------
Forest Products Operations:
     Lumber                                                 49.7          55.8
     Logs                                                   11.6          16.8
                                                   ------------- -------------
                                                            61.3          72.6
                                                   ------------- -------------
                                                   $       629.6 $       634.8
                                                   ============= =============


</TABLE>


          Property, Plant and Equipment
          Property, plant and equipment 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.

          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 Concentrations of Credit Risk
          At December 31, 1997 and 1996, cash and cash equivalents includes
$17.8 and $17.6, respectively, which is reserved for debt service payments
on the Company's 7.95% Timber Collateralized Notes due 2015 (the "Timber
Notes").  At December 31, 1997 and 1996, long-term receivables and other
assets includes $33.7 and $30.0, respectively, primarily of restricted cash
deposits held for the benefit of the Timber Note holders (the "Liquidity
Account") as described in Note 7.  Each of these deposits is held by a
different financial institution.  In the event of nonperformance by such
financial institutions, the Company's exposure to credit loss is
represented by the amounts deposited plus any unpaid accrued interest
thereon.  The Company mitigates its concentrations of credit risk with
respect to these restricted cash deposits by maintaining them at high
credit quality financial institutions and monitoring the credit ratings of
these institutions.

          Investment, Interest and Other Income
          Investment, interest and other income for the years ended
December 31, 1997, 1996 and 1995 includes $8.8, $3.1, and $17.8,
respectively, of pre-tax charges related principally to establishing
additional litigation reserves for asbestos claims and environmental
reserves for potential soil and ground water remediation matters, each
pertaining to operations which were discontinued prior to the acquisition
of Kaiser by the Company in 1988.  Also included in investment, interest
and other income are net gains from sales of real estate of $10.4, $25.4
and $11.1 for the years ended December 31, 1997, 1996 and 1995,
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 KACC's exposure to changes in prices for
certain of the products which KACC sells and consumes and, to a lesser
extent, to mitigate KACC's exposure to changes in foreign currency exchange
rates. KACC does not utilize derivative financial instruments for trading
or other speculative purposes. KACC's derivative activities are initiated
within guidelines established by Kaiser's management and approved by KACC's
and Kaiser's boards of directors. Hedging transactions are executed
centrally on behalf of all of KACC's business segments to minimize
transactions costs, monitor consolidated net exposures and to allow for
increased responsiveness to changes in market factors.

          Most of KACC'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 KACC 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 and operations (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.

          KACC 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, KACC
is entitled to receive advances from the counterparties on open positions
or is required to make margin deposits to counterparties as the case may
be.  At December 31, 1997, KACC had neither received nor made any margin
deposits.  At December 31, 1996, KACC had received $13.0 of margin advances
from counterparties.  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 are included
in prepaid expenses and other current assets and other accrued liabilities. 
See Note 13.

          Fair Value of Financial Instruments
          The carrying amounts of cash equivalents and restricted cash
approximate fair value.  Marketable securities are carried at fair value
which is determined based on quoted market prices.  As of December 31, 1997
and 1996, the estimated fair value of long-term debt was $2,010.6 and
$1,972.2, respectively.  The estimated fair value of long-term 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 for accounting
for stock or stock-based compensation awards described by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations (see Note 11).  Had the Company
applied the alternative "fair value" method as described in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company's pro forma net income and diluted earnings per
share would have been $64.0 and $7.00 per share, respectively, for the year
ended December 31, 1997 and $22.3 and $2.36 per share, respectively, for
the year ended December 31, 1996.

          Earnings Per Share Information
          In the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128").  Under SFAS No. 128, primary earnings per share ("Primary EPS") has
been replaced by basic earnings per share ("Basic EPS"), and fully diluted
earnings per share ("Fully Diluted EPS") has been replaced by diluted
earnings per share ("Diluted EPS").  Basic EPS differs from Primary EPS in
that it only includes the weighted average impact of outstanding shares of
the Company's common stock (i.e., it excludes the dilutive effect of common
stock equivalents such as the Class A Preferred Stock as defined below,
options, etc.).  Diluted EPS is substantially similar to Fully Diluted EPS. 
The provisions of SFAS No. 128 resulted in the retroactive restatement of
previously reported earnings per share figures.

          Basic earnings per share is calculated by dividing net income 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 was 8,357,062
shares, 8,700,269 shares and 8,707,649 shares for the years ended December
31, 1997, 1996 and 1995, respectively.

          Diluted earnings per share calculations also include the dilutive
effect of the Class A Preferred Stock which are convertible into Common
Stock as well as common and preferred stock options.  The weighted average
number of common and common equivalent shares was 9,143,920 shares,
9,465,051 shares and 9,459,293 shares for the years ended December 31,
1997, 1996 and 1995, respectively.

2.        ACQUISITION

          During June 1997, Kaiser Bellwood Corporation, a newly formed,
wholly owned subsidiary of KACC, completed the acquisition of the Reynolds
Metals Company's Richmond, Virginia, extrusion plant and its existing
inventories for a total purchase price of $41.6, consisting of cash
payments of $38.4 and the assumption of approximately $3.2 of employee
related and other liabilities.  Upon completion of the transaction, Kaiser
Bellwood Corporation became a subsidiary guarantor under the indentures in
respect of the KACC 9-7/8% Senior Notes, KACC 10-7/8% Senior Notes, and
KACC 12-3/4% Senior Subordinated Notes (all as defined below).

3.        RESTRUCTURING OF OPERATIONS

          Kaiser has previously disclosed that it set a goal of achieving
significant cost reductions and other profit improvements, measured against
1996 results, with the full effect planned to be realized in 1998 and
beyond.  The initiative is based on Kaiser's conclusion that the level of
performance of its existing facilities and businesses would not achieve the
level of profits Kaiser considers satisfactory based upon historic long-
term average prices for primary aluminum and alumina.  During the second
quarter of 1997, Kaiser recorded a $19.7 restructuring charge to reflect
actions taken and plans initiated to achieve the reduced production costs,
decreased corporate selling, general and administrative expenses, and
enhanced product mix intended to achieve this goal.  The significant
components of the restructuring charge are enumerated below.

          Erie Plant Disposition
          During the second quarter of 1997, Kaiser formed a joint venture
with a third party related to the assets and liabilities associated with
the wheel manufacturing operations at its Erie, Pennsylvania, fabrication
plant.  Kaiser's management subsequently decided to close the remainder of
the Erie plant in order to consolidate its aluminum forging operations at
two other facilities for increased efficiency.  As a result of the joint
venture formation and plant closure, Kaiser recognized a net pre-tax loss
of approximately $1.4.

          Other Asset Dispositions
          As a part of Kaiser's profit enhancement and cost reduction
initiative, Kaiser's management made decisions regarding product
rationalization and geographical optimization, which led management to
decide to dispose of certain assets which had nominal operating
contribution.  These strategic decisions resulted in Kaiser recognizing a
pre-tax charge for approximately $15.6 associated with such asset
dispositions.

          Employee and Other Costs
          As another part of Kaiser's profit enhancement and cost reduction
initiative, Kaiser's management concluded that certain corporate and other
staff functions could be consolidated or eliminated resulting in a second
quarter pre-tax charge of approximately $2.7 for benefit and other costs.

4.        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), Kaiser Jamaica Bauxite Company (49% owned) and Anglesey Aluminium
Limited ("Anglesey") (49% owned).  KACC provides some of its affiliates
with services such as financing, management and engineering.  Purchases
from these affiliates for the acquisition and processing of bauxite,
alumina and primary aluminum aggregated $245.2, $281.6 and $284.4 for the
years ended December 31, 1997, 1996 and 1995, respectively.  KACC's equity
in earnings (loss) before income taxes of such operations is treated as a
reduction (increase) in cost of sales.  At December 31, 1997 and 1996,
KACC's net receivables from these affiliates were not material.

          Kaiser, principally through KACC, has a variety of financial
commitments, including purchase agreements, tolling arrangements, forward
foreign exchange and forward sales contracts (see Note 13), 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, KACC is unconditionally obligated to pay its proportional share
of debt, operating costs and certain other costs of QAL.  The aggregate
minimum amount of required future principal payments at December 31, 1997
is $97.6, of which approximately $12.0 is due in each of 2000 and 2001 with
the balance being due thereafter.  KACC's share of payments, including
operating costs and certain other expenses under the agreements, has ranged
between $100.0 and $120.0 per year over the past three years.  KACC also
has agreements to supply alumina to and to purchase aluminum from Anglesey.

          The summary combined financial information for the year ended
December 31, 1997 also contains the balances and results of AKW L.P. (50%
owned), an aluminum wheels joint venture formed with a third party in April
1997 (in millions).

<TABLE>
<CAPTION>


                                                            December 31,
                                                    ---------------------------
                                                         1997          1996
                                                    ------------- -------------
<S>                                                 <C>           <C>
Current assets                                      $       393.0 $       450.3
Property, plant and equipment, net and other assets         395.0         364.7
                                                    ------------- -------------
     Total assets                                   $       788.0 $       815.0
                                                    ============= =============

Current liabilities                                 $       117.1 $       116.9
Long-term debt and other liabilities                        400.8         386.7
Stockholders' equity                                        270.1         311.4
                                                    ------------- -------------
     Total liabilities and stockholders' equity     $       788.0 $       815.0
                                                    ============= =============


</TABLE>



<TABLE>
<CAPTION>

                                                      Years Ended December 31,
                                             ----------------------------------------
                                                  1997          1996          1995
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Net sales                                    $      644.1  $      660.5  $      685.9 
Costs and expenses                                 (637.8)       (631.5)       (618.7)
Provision for income taxes                           (8.2)         (8.7)        (18.7)
                                             ------------  ------------  ------------
Net income (loss)                            $       (1.9) $       20.3  $       48.5 
                                             ============  ============  ============ 

Kaiser's equity in earnings                  $        2.9  $        8.8  $       19.2 
                                             ============  ============  ============ 

Dividends received                           $       10.7  $       11.8  $          - 
                                             ============  ============  ============ 


</TABLE>

          Kaiser's equity in earnings differs from the summary net income
(loss) due to various percentage ownerships in the entities and equity
method accounting adjustments.  At December 31, 1997, Kaiser's investment
in its unconsolidated affiliates exceeded its equity in their net assets by
approximately $28.8 which amount will be fully amortized over the next three
years.

          Other Investees
          In 1995, pursuant to a joint venture agreement with SunCor
Development Company ("SunCor") for the purpose of developing and managing a
real estate project, the Company, through a wholly owned real estate
subsidiary, contributed 950 acres of undeveloped land valued at $10.0 in
exchange for a 50% initial interest in the joint venture.  SunCor, the
managing partner, contributed $10.0 in cash in exchange for its 50% initial
interest.  At December 31, 1997, the joint venture had assets of $32.9,
liabilities of $10.5 and equity of $22.4.  At December 31, 1996, the joint
venture had assets of $33.5, liabilities of $11.1 and equity of $22.4.  For
the years ended December 31, 1997, 1996 and 1995, the joint venture
incurred income of $3.8, $2.3 and $0.2, respectively.

          As a result of certain transactions in 1995, the Company
increased its ownership interest in SHRP, Ltd. from 45.0% to 78.8% and
acquired certain of the 11% Senior Secured Extendible Notes due September
1, 2001 of SHRP Equity, Inc. (the "SHRP Notes").  Supplemental cash flows
disclosure related to the acquisition of SHRP, Ltd. in October 1995 is as
follows: assets acquired of $29.3, assumed liabilities of $20.7, and
additional minority interest of $2.8.  In 1997, the Company purchased an
additional amount of the SHRP Notes and the corresponding equity interest
in SHRP Equity Inc. for $5.9 , thereby increasing the Company's ownership
in SHRP, Ltd. to 88.5%.

          The assets and liabilities of SHRP, Ltd. are included in the
accompanying Consolidated Balance Sheet as of December 31, 1997 and 1996,
and the results of SHRP, Ltd.'s operations and cash flows for the period
from October 6, 1995 to December 31, 1995 and for the years ended December
31, 1996 and 1997 are included in the accompanying Consolidated Statements
of Operations and Cash Flows.

5.        PROPERTY, PLANT AND EQUIPMENT

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


<TABLE>
<CAPTION>

                                           Estimated            December 31,
                                             Useful     --------------------------
                                             Lives           1997          1996
                                         -------------  ------------  ------------
<S>                                      <C>            <C>           <C>
Land and improvements                     5 - 30 years  $      206.1  $      194.6 
Buildings                                 5 - 45 years         324.5         304.6 
Machinery and equipment                   3 - 22 years       1,568.8       1,479.1 
Construction in progress                                        67.1          89.1 
                                                        ------------  ------------
                                                             2,166.5       2,067.4 
Less:  accumulated depreciation                               (845.6)       (769.5)
                                                        ------------  ------------
                                                        $    1,320.9  $    1,297.9 
                                                        ============  ============


</TABLE>

          Depreciation expense for the years ended December 31, 1997, 1996
and 1995 was $99.9, $105.9 and $105.4, respectively.

6.        SHORT-TERM BORROWINGS

          During 1997, the Company had average short-term borrowings
outstanding of $9.0 under the notes described below.  The weighted average
interest rate during 1997 was 9.8%.

          Demand Note
          On November 26, 1997, the Company entered into a credit facility
with Salomon Smith Barney providing for up to $25.0 in borrowings payable
on demand.  Borrowings are secured by 400,000 shares of Kaiser common stock
for each $1.0 of borrowings.  As of December 31, 1997, $2.5 of borrowings
were outstanding under this facility.

          Notes to NL Industries, Inc. ("NL") and the Combined Master
          Retirement Trust ("CMRT")
          On October 17, 1997, the Company agreed to repurchase 1,277,250
shares of its common stock, consisting of 250,000 shares owned by NL and
1,027,250 shares owned by CMRT, an affiliate of NL.  The aggregate purchase
price for these shares of $70.2 was paid $35.1 in cash and $35.1 in one-year
notes issued to NL and CMRT bearing interest at 10% per annum.  These notes
are secured by the common stock which was repurchased.

7.        LONG-TERM DEBT

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

<TABLE>
<CAPTION>

                                                            December 31,
                                                    --------------------------
                                                         1997          1996
                                                    ------------  -------------
<S>                                                 <C>           <C>
14% MAXXAM Senior Subordinated Reset Notes due May
     20, 2000                                       $          -  $       25.0 
12-1/2% MAXXAM Subordinated Debentures due December
     15, 1999, net of discount                                 -          17.6 
12% MGHI Senior Secured Notes due August 1, 2003           130.0         130.0 
11-1/4% MGI Senior Secured Notes due August 1, 2003        100.0         100.0 
12-1/4% MGI Senior Secured Discount Notes due
     August 1, 2003, net of discount                       117.3         104.2 
10-1/2% Pacific Lumber Senior Notes due March 1,
     2003                                                  235.0         235.0 
Pacific Lumber Credit Agreement                              9.4             - 
7.95% Scotia Pacific Timber Collateralized Notes
     due July 20, 2015                                     320.0         336.1 
1994 KACC Credit Agreement                                     -             - 
10-7/8% KACC Senior Notes due October 15, 2006,
     including premium                                     225.8         225.9 
9-7/8% KACC Senior Notes due February 15, 2002, net
     of discount                                           224.2         224.0 
12-3/4% KACC Senior Subordinated Notes due February
     1, 2003                                               400.0         400.0 
Alpart CARIFA Loans                                         60.0          60.0 
Other aluminum operations debt                              61.6          52.0 
Other notes and contracts, primarily secured by
     receivables, buildings, real estate
     and equipment                                          36.1          41.7 
                                                    ------------  ------------ 
                                                         1,919.4       1,951.5 
          Less: current maturities                         (31.4)        (69.6)
                                                    ------------  ------------ 
                                                    $    1,888.0  $    1,881.9 
                                                    ============  ============ 


</TABLE>

          14% MAXXAM Senior Subordinated Reset Notes due 2000 (the "Reset
          Notes") and
          12-1/2% MAXXAM Subordinated Debentures due 1999 (the "12-1/2%
          Debentures")
          The Company redeemed the Reset Notes and 12-1/2% Debentures at
par on January 7, 1997 and January 22, 1997, respectively, using proceeds
from the Intercompany Note (defined below).

          MAXXAM Loan Agreement (the "Custodial Trust Agreement")
          On October 21, 1997, the Company renewed a loan and pledge
agreement with the Custodial Trust Company providing for up to $25.0 in
borrowings.  Any amounts drawn would likely be secured by Kaiser common
stock owned by the Company and having an initial market value equal to
three times the amount borrowed.  Borrowings under the Custodial Trust
Agreement would bear interest at LIBOR plus 2% per annum.  The Custodial
Trust Agreement provides for a revolving credit arrangement during the
first year of the agreement.  Any borrowings outstanding on October 21,
1998 convert into a term loan maturing on October 21, 1999.  No borrowings
were outstanding as of December 31, 1997.

          12% MGHI Senior Secured Notes due 2003 (the "MGHI Notes")
          On December 23, 1996, MGHI issued $130.0 principal amount of 12%
Senior Secured Notes due August 1, 2003.  The MGHI Notes are guaranteed on
a senior, unsecured basis by the Company.  Interest is payable semi-
annually.  MGHI has agreed to pledge up to 16,055,000 of the 27,938,250
shares of Kaiser common stock it owns if and when such shares are released
from the pledge securing the MGI Notes (as defined below).

          The net proceeds from the offering after estimated expenses were
approximately $125.0, 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 will be
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.  No interest was deferred on the
Intercompany Note as of December 31, 1997.

          11-1/4% MGI Senior Secured Notes due 2003 (the "MGI Senior
          Notes") and
          12-1/4% MGI Senior Secured Discount Notes due 2003 (the "MGI
          Discount Notes")
          The MGI Senior Notes and the MGI Discount Notes (together, the
"MGI Notes") are secured by MGI's pledge of 100% of the common stock of
Pacific Lumber, Britt and MAXXAM Properties Inc. (a wholly owned subsidiary
of MGI) and by MGHI's pledge of 27,983,250 shares of Kaiser's common stock. 
The indenture governing the MGI Notes, among other things, restricts the
ability of MGI to incur additional indebtedness, to engage in transactions
with affiliates, to pay dividends and to make investments.  Interest on the
MGI Senior Notes is payable semi-annually.  The MGI Discount Notes are net
of discount of $8.4 and $21.5 at December 31, 1997 and 1996, respectively. 
The MGI Discount Notes will not pay any interest until February 1, 1999, at
which time semi-annual interest payments will become due on each February 1
and August 1 thereafter.

          10-1/2% Pacific Lumber Senior Notes due 2003 (the "Pacific Lumber
          Senior Notes")
          Interest on the Pacific Lumber Senior Notes is payable semi-
annually.  The Pacific Lumber Senior Notes are redeemable at the option of
Pacific Lumber, in whole or in part, on or after March 1, 1998 at a price
of 103% of the principal amount plus accrued interest.  The redemption
price is reduced annually until March 1, 2000, after which time the Pacific
Lumber Senior Notes are redeemable at par.  The Pacific Lumber Senior Notes
are unsecured and are senior indebtedness of Pacific Lumber.  The indenture
governing the Pacific Lumber Senior Notes contains various covenants which,
among other things, limit Pacific Lumber's ability to incur additional
indebtedness and liens, to engage in transactions with affiliates, to pay
dividends and to make investments.

          Pacific Lumber Revolving Credit Agreement (as amended and
          restated, the "Pacific Lumber Credit Agreement")
          On October 9, 1997, the Pacific Lumber Credit Agreement was
amended to extend the date on which it expires to May 31, 2000.  Borrowings
under the Pacific Lumber Credit Agreement are secured by Pacific Lumber's
trade receivables and inventories, with interest currently computed at the
bank's reference rate plus 1-1/4% or the bank's offshore rate plus 2-1/4%. 
The Pacific Lumber Credit Agreement provides for borrowings of up to $60.0,
of which $20.0 may be used for standby letters of credit and $30.0 is
restricted to timberland acquisitions.  Borrowings made pursuant to the
portion of the credit facility restricted to timberland acquisitions would
also be secured by the purchased timberlands.  As of December 31, 1997,
$35.5 of borrowings was available under the Pacific Lumber Credit
Agreement, of which $4.9 was available for letters of credit and $20.6 was
restricted to timberland acquisitions.  As of December 31, 1997, $9.4 of
borrowings were outstanding, and letters of credit outstanding amounted to
$15.1.  The Pacific Lumber Credit Agreement contains covenants
substantially similar to those contained in the indenture governing the
Pacific Lumber Senior Notes.

          Scotia Pacific Timber Notes
          The indenture governing the Timber Notes (the "Timber Note
Indenture") prohibits Scotia Pacific from incurring any additional
indebtedness for borrowed money and limits the business activities of
Scotia Pacific to the ownership and operation of its timber and
timberlands.  The Timber Notes are senior secured obligations of Scotia
Pacific and are not obligations of, or guaranteed by, Pacific Lumber or any
other person.  The Timber Notes are secured by a lien on (i) Scotia
Pacific's timber and timberlands (representing $154.3 of the Company's
consolidated balance at December 31, 1997), (ii) substantially all of
Scotia Pacific's property and equipment, and (iii) other property including
cash equivalents reserved for debt service payments and the funds deposited
in the Liquidity Account.

          The Timber Notes are structured to link, to the extent of
available cash, the deemed depletion of Scotia Pacific's timber (through
the harvest and sale of logs) to required amortization of the Timber Notes. 
The required amount of amortization due on any Timber Note payment date is
determined by various mathematical formulas set forth in the Timber Note
Indenture.  The minimum amount of principal which Scotia Pacific must pay
(on a cumulative basis) through any Timber Note payment date in order to
avoid an Event of Default (as defined in the Timber Note Indenture) is
referred to as rated amortization ("Rated Amortization").  If all payments
of principal are made in accordance with Rated Amortization, the payment
date on which Scotia Pacific will pay the final installment of principal is
July 20, 2015.  The amount of principal which Scotia Pacific must pay
through each Timber Note payment date in order to avoid payment of
prepayment or deficiency premiums is referred to as scheduled amortization
("Scheduled Amortization").  If all payments of principal are made in
accordance with Scheduled Amortization, the payment date on which Scotia
Pacific will pay the final installment of principal is July 20, 2009.

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

          1994 KACC Credit Agreement (as amended, the "KACC Credit
          Agreement")
          KACC is able to borrow under this facility by means of revolving
credit advances and letters of credit (up to $125.0) in an aggregate amount
equal to the lesser of $325.0 or a borrowing base relating to eligible
accounts receivable plus eligible inventory.  In January 1998, the term of
this facility was extended from February 1999 to August 2001.  As of
December 31, 1997, no borrowings were outstanding and $273.4 (of which
$73.4 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 Kaiser'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 and Nevada
micromill facility), (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.  Substantially all of the identifiable assets of
the bauxite and alumina and aluminum processing segments (see Note 14) are
attributable to KACC and collateralize the KACC Credit Agreement
indebtedness.

          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")
          During the fourth quarter of 1996, KACC sold a total of $225.0
principal amount of KACC 10-7/8% Senior Notes in two separate transactions. 
A net premium of $0.9 was realized from the issuance of the KACC 10-7/8%
Senior Notes.  The KACC 10-7/8% Senior Notes rank equal in right and
priority of payment with the indebtedness under the KACC Credit Agreement
and the KACC 9-7/8% Senior Notes (defined below).

          Concurrent with the offering by Kaiser of the PRIDES, KACC issued
$225.0 of the KACC 9-7/8% Senior Notes.  The net proceeds from the offering of
the KACC 9-7/8% Senior Notes were used to reduce outstanding borrowings under
the revolving credit facility of the 1989 KACC Credit Agreement immediately
prior to the effectiveness of the KACC Credit Agreement and for working
capital and general corporate purposes.  The KACC 9-7/8% Senior Notes are
net of discount of $.8 and $1.0 at December 31, 1997 and 1996, respectively.

          The obligations of KACC with respect to the KACC 9-7/8% Senior
Notes, the KACC 10-7/8% Senior Notes and the KACC Senior Subordinated Notes
are guaranteed, jointly and severally, by certain subsidiaries of KACC. 
The indentures governing the KACC 9-7/8% Senior Notes, the KACC 10-7/8%
Senior Notes and the KACC Senior Subordinated Notes (together, the "KACC
Indentures") restrict, among other things, KACC's ability to incur debt,
undertake transactions with affiliates, and pay dividends.  Under the most
restrictive of the covenants in the KACC Indentures and the KACC Credit
Agreement, neither Kaiser nor KACC currently is permitted to pay dividends
on their common stock.  Further, the KACC Indentures provide that KACC must
offer to purchase such notes upon the occurrence of a Change of Control (as
defined therein), and the KACC Credit Agreement provides that the
occurrence of a Change in Control (as defined therein) shall constitute an
Event of Default thereunder.

     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 a $64.2 letter of
credit guaranteed by the partners in Alpart (of which $22.5 is guaranteed
by Kaiser's minority partner 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, 1997 are as follows (in millions):

<TABLE>
<CAPTION>


                                                          Years Ending December 31,
                             -----------------------------------------------------------------------------------
                                  1998          1999          2000          2001          2002       Thereafter
                             ------------- ------------- ------------- ------------- ------------- -------------
<S>                          <C>           <C>           <C>           <C>           <C>           <C>
12% MGHI Senior Secured
     Notes                   $           - $           - $           - $           - $           - $       130.0
11-1/4% MGI Senior Secured
     Notes                               -             -             -             -             -         100.0
12-1/4% MGI Senior Secured
     Discount Notes                      -             -             -             -             -         125.7
10-1/2% Pacific Lumber
     Senior Notes                        -             -             -             -             -         235.0
7.95% Scotia Pacific Timber
     Collateralized
     Notes                            19.3          21.6          24.0          24.7          24.8         205.5
10-7/8% KACC Senior Notes                -             -             -             -             -         225.0
9-7/8% KACC Senior Notes                 -             -             -             -         225.0             -
12-3/4% KACC Senior
     Subordinated Notes                  -             -             -             -             -         400.0
Alpart CARIFA Loans                      -             -             -             -             -          60.0
Other aluminum operations
     debt                              8.8           0.4           0.3           0.3           0.3          51.5
Other                                 37.7           4.3           4.4          27.2           3.6          14.8
                             ------------- ------------- ------------- ------------- ------------- -------------
                                                                                                                
                             $        65.8 $        26.3 $        28.7 $        52.2 $       253.7 $     1,547.5
                             ============= ============= ============= ============= ============= =============


</TABLE>

     CAPITALIZED INTEREST

          Interest capitalized during the years ended December 31, 1997,
1996 and 1995 was $6.6, $5.0 and $2.8, respectively.

     RESTRICTED NET ASSETS OF SUBSIDIARIES

          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, 1997, all of the assets relating to the
Company's aluminum, forest products, real estate and other operations are
subject to such restrictions.  The Company could eliminate all of such
restrictions with respect to approximately $193.7 of the Company's real
estate assets with the extinguishment of $24.6 of debt.

8.        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. 
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,
                                             ----------------------------------------
                                                  1997          1996          1995
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Domestic                                     $      (93.0) $      (55.0) $      (49.4)
Foreign                                             167.5          42.9         143.9 
                                             ------------  ------------  ------------ 
                                             $       74.5  $      (12.1) $       94.5 
                                             ============  ============  ============ 


</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,
                                             ----------------------------------------
                                                  1997          1996          1995
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Current:
     Federal                                 $       (1.5) $       (1.5) $       (4.3)
     State and local                                  (.4)          (.5)          (.4)
     Foreign                                        (28.7)        (21.8)        (40.2)
                                             ------------  ------------  ------------
                                                    (30.6)        (23.8)        (44.9)
                                             ------------  ------------  ------------
Deferred:
     Federal                                         48.4          42.6          35.4 
     State and local                                 (3.9)         18.5           (.4)
     Foreign                                         (7.0)          7.6          (4.9)
                                             ------------  ------------  ------------
                                                     37.5          68.7          30.1 
                                             ------------  ------------  ------------
                                             $        6.9  $       44.9  $      (14.8)
                                             ============  ============  ============


</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,
                                             ----------------------------------------
                                                  1997          1996          1995
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Income (loss) before income taxes and
     minority interests                      $       74.5  $      (12.1) $       94.5 
                                             ============  ============  ============

Amount of federal income tax based upon the
     statutory rate                          $      (26.1) $        4.2  $      (33.1)
Revision of prior years' tax estimates and
     other changes in valuation allowances           33.8          41.2          24.2 
Percentage depletion                                  4.2           3.9           4.2 
Foreign taxes, net of federal tax benefit            (3.1)         (5.5)         (6.9)
State and local taxes, net of federal tax
     benefit                                         (2.8)          1.1          (2.4)
Other                                                  .9             -           (.8)
                                             ------------  ------------  ------------
                                             $        6.9  $       44.9  $      (14.8)
                                             ============  ============  ============


</TABLE>

          The caption entitled "Revision of prior years' tax estimates and
other changes in valuation allowances," as shown in the preceding table,
includes amounts for the reversal of reserves which the Company no longer
believes are necessary, other revisions 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, 1997, 1996 and 1995, the
reversal of reserves which the Company believes are no longer necessary
resulted in a credit to the income tax provision of $32.1, $40.8 and $20.0,
respectively.

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


<TABLE>
<CAPTION>

                                                            December 31,
                                                    --------------------------
                                                         1997          1996
                                                    ------------  ------------
<S>                                                 <C>           <C>
Deferred income tax assets:
     Postretirement benefits other than pensions    $      293.1  $      294.7 
     Other liabilities                                     219.6         203.4 
     Loss and credit carryforwards                         148.3         179.0 
     Real estate                                            48.1          47.3 
     Timber and timberlands                                 34.2          37.8 
     Other                                                 127.7         113.0 
     Valuation allowances                                 (126.4)       (141.2)
                                                    ------------  ------------
          Total deferred income tax assets, net            744.6         734.0 
                                                    ------------  ------------
Deferred income tax liabilities:
     Property, plant and equipment                        (145.6)       (163.7)
     Other                                                 (95.1)       (101.4)
                                                    ------------  ------------
          Total deferred income tax liabilities           (240.7)       (265.1)
                                                    ------------  ------------
Net deferred income tax assets                      $      503.9  $      468.9 
                                                    ============  ============


</TABLE>

          As of December 31, 1997, approximately $351.7 of the net deferred
income tax assets listed above are attributable to Kaiser.  A principal
component of this amount is the $258.0 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 thirty to forty-year
period.  If such deductions create or increase a net operating loss in any
year subsequent to 1997, 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 $93.7 of Kaiser's net deferred income tax assets
is approximately $59.8 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.  For example, full valuation
allowances were provided for certain credit carryforwards that expire in
the near term.  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 approximately $152.2
as of December 31, 1997.  This amount includes approximately $73.5 which
relates to the excess of the tax basis over financial statement basis with
respect to timber and timberlands and real estate.  The Company has
concluded that it is more likely than not that these net deferred income
tax assets will be realized based in part upon the estimated values of the
underlying assets which are in excess of their tax basis.

          As of December 31, 1997 and 1996, $58.8 and $76.6, 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 tax attributes for federal
income tax purposes at December 31, 1997 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  $        19.0          2012 $           -             -
     Prior year net operating losses           98.1          2011          33.2          2011
     Capital loss                               8.0          2002             -             -
     General business tax credits                .5          2002          10.4          2011
     Foreign tax credits                          -             -          50.0          2002
     Alternative minimum tax credits            1.2    Indefinite          21.6    Indefinite

Alternative Minimum Tax Attribute
     Carryforwards:
     Current year net operating loss  $        27.4          2012 $           -             -
     Prior year net operating losses          105.3          2011          17.6          2011
     Capital loss                               8.0          2002             -             -
     Foreign tax credits                          -             -          74.7          2002


</TABLE>

9.        EMPLOYEE BENEFIT AND INCENTIVE PLANS

          Postretirement Medical Benefits
          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.  A summary of the components of net periodic postretirement
medical benefit cost is as follows (in millions):


<TABLE>
<CAPTION>

                                                      Years Ended December 31,
                                             ----------------------------------------
                                                  1997          1996          1995
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Service cost - medical benefits earned
     during the year                         $        6.5  $        4.3  $        4.9 
Interest cost on accumulated postretirement
     medical benefit obligation                      44.4          47.5          52.7 
Net amortization and deferral                       (12.5)        (12.5)         (9.1)
                                             ------------  ------------  ------------ 
Net periodic postretirement medical benefit
     cost                                    $       38.4  $       39.3  $       48.5 
                                             ============  ============  ============ 

</TABLE>

          Included in the net periodic postretirement medical benefit cost
is $37.6, $38.3 and $47.9 for the years ended December 31, 1997, 1996 and
1995, respectively, attributable to Kaiser's plans.

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


<TABLE>
<CAPTION>

                                                            December 31,
                                                    ---------------------------
                                                         1997          1996
                                                    ------------- -------------
<S>                                                 <C>           <C>
Retirees                                            $       448.1 $       500.9
Actives eligible for benefits                                36.1          37.7
Actives not eligible for benefits                            67.5          72.3
                                                    ------------- -------------
     Accumulated postretirement medical benefit
          obligation                                        551.7         610.9
Unrecognized prior service cost                              86.3          98.6
Unrecognized net gain                                       137.4          72.4
                                                    ------------- -------------
     Postretirement medical benefit liability       $       775.4 $       781.9
                                                    ============= =============


</TABLE>

          The accumulated postretirement medical benefit obligation
attributable to Kaiser's plans was $544.5 and $602.8 as of December 31,
1997 and 1996, respectively.  The postretirement medical benefit liability
recognized in the Company's Consolidated Balance Sheet attributable to
Kaiser's plans was $765.6 and $772.6 as of December 31, 1997 and 1996,
respectively.

          The annual assumed rates of increase in the per capita cost of
covered benefits (i.e., health care cost trend rates) are approximately
7.5% and 5.5% for retirees under age 65 and over age 65, respectively, and
are assumed to decrease gradually to approximately 5.3% in 2007 and remain
at that level thereafter.  Each one percentage point increase in the
assumed health care cost trend rate would increase the accumulated
postretirement medical benefit obligation as of December 31, 1997 by
approximately $54.0 and the aggregate of the service and interest cost
components of net periodic postretirement medical benefit cost by
approximately $6.2.

          The discount rates and rates of compensation increase used in
determining the accumulated postretirement medical benefit obligation were
7.3% and 5.0% at December 31, 1997, respectively, and 7.8% and 5.0% at
December 31, 1996, respectively.

          Retirement 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 years
of service and the employee's compensation.  The Company's funding policy
is to contribute annually an amount at least equal to the minimum cash
contribution required by ERISA.

          The Company has various defined contribution savings plans
designed to enhance the existing retirement programs of participating
employees.  Under the MAXXAM Inc. Savings Plan (the "MAXXAM Savings Plan"),
employees may elect to defer up to 16% of their base compensation to the
plan.  For those participants who have elected to defer a portion of their
compensation contributions to the MAXXAM Savings Plan, the Company's
contributions consist of matching contributions of up to 4% of the base
compensation of participants for each calendar quarter.  Under the Kaiser
Aluminum Savings and Retirement Plan, salaried employees may elect to defer
from 2% to 18% of their compensation to the plan.  For those eligible
participants who have elected to make contributions to the plan, Kaiser's
contributions consist of matching 25% to 100% of contributions of up to 10%
of their compensation.

          A summary of the components of net periodic pension costs for the
defined benefit plans and total pension costs for the defined contribution
plans and non-qualified retirement and incentive plans is as follows (in
millions):


<TABLE>
<CAPTION>

                                                      Years Ended December 31,
                                             ----------------------------------------
                                                  1997          1996          1995
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Defined benefit plans:
     Service cost - benefits earned during
          the year                           $       15.8  $       15.7  $       12.1 
     Interest cost on projected benefit
          obligations                                64.6          62.8          62.5 
     Return on assets:
          Actual gain                              (136.5)        (94.4)       (118.7)
          Deferred gain (loss)                       68.1          34.8          64.6 
     Net amortization and deferral                   10.1           8.0           8.7 
     Curtailment gain                                   -           (.6)            - 
                                             ------------  ------------  ------------
     Net periodic pension cost                       22.1          26.3          29.2 
Defined contribution plans                            5.1           3.1           5.4 
Non-qualified retirement and incentive plans          5.3          (3.2)          8.2 
                                             ------------  ------------  ------------
                                             $       32.5  $       26.2  $       42.8 
                                             ============  ============  ============


</TABLE>

          The total pension costs attributable to Kaiser's plans was $27.5,
$21.3 and $38.3 for the years ended December 31, 1997, 1996 and 1995,
respectively.

          The following table sets forth the funded status and amounts
recognized for the defined benefit plans in the Consolidated Balance Sheet
(in millions):


<TABLE>
<CAPTION>

                                                            December 31,
                                                    --------------------------
                                                         1997          1996
                                                    ------------  ------------
<S>                                                 <C>           <C>
Actuarial present value of accumulated plan
benefits:
     Vested benefit obligation                      $      821.6  $      768.9 
     Non-vested benefit obligation                          44.4          40.9 
                                                    ------------  ------------
          Total accumulated benefit obligation      $      866.0  $      809.8 
                                                    ============  ============

Projected benefit obligation                        $      918.0  $      854.7 
Plan assets at fair value, primarily common stocks
     and fixed income obligations                         (799.4)       (698.1)
                                                    ------------  ------------
Projected benefit obligation in excess of plan
     assets                                                118.6         156.6 
Unrecognized net transition obligation                       (.3)          (.5)
Unrecognized net gain (loss)                                 7.5          (9.0)
Unrecognized prior service cost                            (23.5)        (27.3)
Adjustment required to recognize minimum liability           5.4          13.7 
                                                    ------------  ------------
          Accrued pension cost                      $      107.7  $      133.5 
                                                    ============  ============

</TABLE>

          With respect to Kaiser's defined benefit plans, the projected
benefit obligation was $873.0 and $816.2 as of December 31, 1997 and 1996,
respectively.  This obligation exceeded Kaiser's fair value of plan assets
by $116.1 and $154.2 as of December 31, 1997 and 1996, respectively.

          The assumptions used in accounting for the defined benefit plans
were as follows (in millions):


<TABLE>
<CAPTION>

                                                            December 31,
                                             ----------------------------------------
                                                  1997          1996          1995
                                             ------------- ------------  ------------
<S>                                          <C>           <C>           <C>
Rate of increase in compensation levels               5.0%         5.0%          5.0% 
Discount rate                                         7.3%         7.8%          7.5% 
Expected long-term rate of return on assets           9.5%         9.5%          9.5% 


</TABLE>

          The Company has recorded an additional pension liability equal to
the excess of the accumulated benefit obligation over the fair value of
plan assets.  The amount of the additional pension liability in excess of
unrecognized prior service cost is recorded as a reduction to stockholders'
equity.  In 1997, the pension liability adjustment decreased by $1.8.  In
1996 and 1995, the pension liability adjustment decreased by $11.0 and
increased by $4.7, respectively.  These adjustments were recorded net of a
related deferred federal and state income tax credit (provision) of $(0.8),
$(6.5) and $2.8, respectively, which approximated the federal and state
statutory rates.

          Incentive Plans
          Kaiser has an unfunded incentive compensation program, which
provides incentive compensation based upon performance against annual plans
and over a three-year period.

10.  MINORITY INTERESTS

          Minority interests represent the following (in millions):


<TABLE>
<CAPTION>

                                                            December 31,
                                                    ---------------------------
                                                         1997          1996
                                                    ------------- -------------
<S>                                                 <C>           <C>
Kaiser Aluminum Corporation:
     Common stock, par $.01                         $        42.9 $           -
     PRIDES                                                     -          98.1
Minority interests attributable to Kaiser's
     subsidiaries                                           127.7         121.7
                                                    ------------- -------------
                                                    $       170.6 $       219.8
                                                    ============= =============


</TABLE>

          The Company has recorded 100% of the losses attributable to
Kaiser's common stock since July 1993, as Kaiser's cumulative losses
through that date had eliminated Kaiser's equity with respect to its common
stock.  The redemption of Kaiser's Series A Mandatory Conversion Premiums
Dividend Preferred Stock (the "Series A Shares"), together with the
voluntary redemption of 181,700 shares of PRIDES in 1995, decreased
Kaiser's preferred equity, and reduced Kaiser's deficit in common equity,
by $136.2.  Accordingly, in 1995, the Company recorded an adjustment to
reduce the minority interests reflected on its Consolidated Balance Sheet
for that same amount, with an offsetting decrease in the Company's
stockholders' deficit.

          $.65 Depositary Shares (the "Depositary Shares")
          On September 19, 1995, Kaiser redeemed all 1,938,295 of its
Series A Shares, which resulted in the simultaneous redemption of all
19,382,950 Depositary Shares in exchange for (i) 13,126,521 shares of
Kaiser's common stock and  (ii) $2.8 cash in satisfaction of all accrued
and unpaid dividends and fractional shares of common stock that would have
otherwise been issuable.  As a result of the Company's sale of its
Depository Shares prior to September 19, 1995, the shares of Kaiser's
common stock which were issued upon redemption of the Series A Shares are
all held by minority stockholders.

          Conversion of PRIDES to Kaiser Common Stock
          During August 1997, the 8,673,850 outstanding shares of PRIDES
were converted into 7,227,848 shares of Kaiser common stock pursuant to the
terms of the PRIDES Certificate of Designations.  Further, in accordance
with the PRIDES Certificate of Designations no dividends were paid or
payable for the period June 30, 1997, to, but not including, the date of
conversion.  As a result of the equity attributable to the PRIDES being
converted into equity attributable to common stockholders, the Company
recorded a $64.8 adjustment to stockholders equity and a reduction in
minority interest of the same amount.

          Subsidiary 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 $29.9 as of
December 31, 1997.  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.

          Changes in Series A and B Stock are as follows (in millions):


<TABLE>
<CAPTION>

                                                   Years Ended December 31,
                                          ----------------------------------------
                                               1997          1996          1995
                                          ------------  ------------  ------------
<S>                                       <C>           <C>           <C>
Shares:
     Beginning of year                         634,684       737,363       912,167 
     Redeemed                                  (39,631)     (102,679)     (174,804)
                                          ------------  ------------  ------------
     End of year                               595,053       634,684       737,363 
                                          ============  ============  ============


</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 and the maximum payment is $7.3.  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 common stock if KACC is in default on any dividends payable on
Redeemable Preference Stock.

          Kaiser Stock Incentive Plans
          Kaiser has a total of 5,500,000 shares of Kaiser common stock
reserved for grant under its incentive compensation programs.  At December
31, 1997, 3,536,653 shares were available for grant.

          Stock options granted pursuant to Kaiser's nonqualified stock
program are granted at the prevailing market price and generally vest at
the rate of 20% to 33% per year and have a 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 (in millions).


<TABLE>
<CAPTION>

                                       1997                        1996                        1995
                           --------------------------- --------------------------- ---------------------------
                               Shares        Price         Shares        Price         Shares        Price
                           ------------  ------------- ------------  ------------- ------------  -------------
<S>                        <C>           <C>           <C>           <C>           <C>           <C>
Outstanding at beginning
     of year                    890,395  $       10.33      926,085  $       10.32    1,119,680  $        9.85
Granted                          15,092          10.06            -             -             -             - 
Exercised                       (48,410)          8.33       (8,275)          8.99     (155,500)          7.32
Expired or forfeited            (37,325)         10.12      (27,415)         10.45      (38,095)          8.88
                           ------------                ------------                ------------ 
Outstanding at end of year      819,752          10.45      890,395          10.33      926,085          10.32
                           ============                ============                ============ 
                                                                                                              
Exercisable at end of year      601,115  $       10.53      436,195  $       10.47      211,755  $       10.73
                           ============                ============                ============ 


</TABLE>


11.  STOCKHOLDERS' DEFICIT

          Changes in stockholders' deficit were (in millions):


<TABLE>
<CAPTION>

                        Preferred
                          Stock           Common Stock
                                    ------------------------
                                                                                                Pension
                                                                 Additional     Accumulated    Liability    Treasury
                        ($.50 Par)     Shares     ($.50 Par)      Capital         Deficit     Adjustment      Stock        Total
                      ------------  ----------   -----------  --------------  -------------  -----------  -----------  -----------
<S>                   <C>           <C>          <C>          <C>             <C>            <C>          <C>          <C>
Balance,
     January 1,
     1995             $         .3          8.7  $       5.0  $         53.2  $      (302.9) $     (11.4) $     (19.5) $    (275.3)
     Net income                  -            -            -               -           57.5            -            -         57.5 
     Gain from
          issuance
          of Kaiser
          Aluminum
          Corporation
          common
          stock                  -            -            -             2.5              -            -            -          2.5 
     Redemption of
          Kaiser
          Aluminum
          Corporation
          preferred
          stock                  -            -            -            99.3           36.9            -            -        136.2 
     Additional
          pension
          liability              -            -            -               -              -         (4.7)           -         (4.7)
                      ------------  -----------  -----------  --------------  -------------  -----------  -----------  ----------- 
Balance, December 31,
     1995                       .3          8.7          5.0           155.0         (208.5)       (16.1)       (19.5)       (83.8)
     Net income                  -            -            -               -           22.9            -            -         22.9 
     Gain from
          issuance of
          Kaiser
          Aluminum
          Corporation
          common
          stock                  -            -            -              .9              -            -            -           .9 
     Treasury stock
          repurchases            -            -            -               -              -            -         (1.8)        (1.8)
     Reduction of
          pension
          liability              -            -            -               -              -         11.0            -         11.0 
                      ------------  ----------   ------------ --------------  -------------  ------------ -----------  ----------- 
Balance, December 31,
     1996                       .3          8.7          5.0           155.9         (185.6)        (5.1)       (21.3)       (50.8)
     Net income                  -            -            -               -           65.2            -            -         65.2 
     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)
     Reduction of
          pension
          liability              -            -            -               -              -          1.8            -          1.8 
     Gain on
          settlement
          of
          shareholder            -            -            -             2.9              -            -            -          2.9 
          litigation  ------------  ----------   -----------  --------------  -------------  ------------ -----------  ----------- 
Balance, December 31,
     1997             $         .3          7.0  $       5.0  $        222.8  $      (118.5) $      (3.3) $    (109.2) $      (2.9)
                      ============  ===========  ============ ==============  =============  ============ ===========  ===========


</TABLE>


          Preferred Stock
          The holders of the Company's Class A $.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 $.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 $.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 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 843,000 and 910,000 shares, respectively, were available to be
awarded at December 31, 1997.  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 1995, 1996 and 1997 vest at the
rate of 20% per year commencing one year from the date of grant.  The
Company paid $1.6 and $2.7 in respect of awards issued pursuant to the 1984
Plan for the years ended December 31, 1997 and 1995, respectively.  Amounts
paid in respect of awards issued pursuant to the 1984 Plan for the year
ended December 31, 1996 was not significant.  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 (in
millions).


<TABLE>
<CAPTION>

                                       1997                        1996                        1995
                           --------------------------- --------------------------- ---------------------------
                               Shares        Price         Shares        Price         Shares        Price
                           ------------  ------------- ------------  ------------- ------------  -------------
<S>                        <C>           <C>           <C>           <C>           <C>           <C>
Outstanding at beginning
     of year                    250,100  $       34.75      207,900  $       31.59      238,000  $       26.74
Granted                          98,500          41.71       45,000          48.84       36,000          45.15
Exercised                       (50,300)         26.11       (1,800)         15.31      (66,100)         21.52
Expired or forfeited             (1,500)         45.15       (1,000)         45.15            -              -
                           ------------                ------------                ------------
Outstanding at end of year      296,800          38.47      250,100          34.75      207,900          31.59
                           ============                ============                ============ 
                                                                                  
Exercisable at end of year      117,200  $       33.53      122,100  $       29.40       93,900  $       27.95
                           ============                ============                ============ 


</TABLE>

          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.  In 1997, 1996 and 1995, options to
purchase 1,800 shares, 900 shares and 1,500 shares of common stock,
respectively, were granted to three non-employee directors.  The weighted
average exercise prices of these options are $43.19, $43.88 and $31.63 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, 1997, options for 1,800 shares were
exercisable.

          Shares Reserved for Issuance
          At December 31, 1997, the Company had 2,703,856 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 11.

          Rights
          On November 29, 1989, 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 Right and the Series B
Right 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 November 29, 1989, 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, subject to adjustment. 
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 $.50 per
share (the "Junior Preferred Stock"), at an exercise price of $165.00,
subject to adjustment.

          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 in 1999, but may be redeemed by action of
the Board prior to that time for $.01 per right, subject to certain
restrictions.

          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% of the Company's Class A Preferred Stock and
38.7% of the Company's common stock (resulting in combined voting control
of approximately 68% 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.

12.  COMMITMENTS AND CONTINGENCIES

          Commitments
          Minimum rental commitments under operating leases at December 31,
1997 are as follows: years ending December 31, 1998 - $32.5; 1999 - $37.2;
2000 - $32.9; 2001 - $29.9; 2002 - $27.2; thereafter - $134.7.  Rental
expense for operating leases was $35.6, $34.2 and $31.4 for the years ended
December 31, 1997, 1996 and 1995, respectively.  The minimum future rentals
receivable under noncancelable subleases at December 31, 1997 were $62.5.

          Environmental Contingencies
          Kaiser and KACC are subject to a number of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of the
environmental laws and regulations, and to claims and litigation based upon
such laws.  KACC is currently subject to a number of 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,
                                             ----------------------------------------
                                                  1997          1996          1995
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Balance at beginning of year                 $       33.3  $       38.9  $       40.1 
Additional amounts                                    2.0           3.2           3.3 
Less expenditures                                    (5.6)         (8.8)         (4.5)
                                             ------------  ------------  ------------
Balance at end of year                       $       29.7  $       33.3  $       38.9 
                                             ============  ============  ============


</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 to $8.0 for the years 1998 through 2002
and an aggregate of approximately $8.0 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 
$18.0.  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 KACC has insurance coverage available
to recover certain incurred and future environmental costs and is actively
pursuing claims in this regard.  However, no accruals have been made for
any such insurance recoveries, and no assurances can be given that Kaiser
will be successful in its attempt to recover incurred or future costs. 
While uncertainties are inherent in the final outcome of these
environmental matters, and it is impossible to determine the actual costs
that ultimately may be incurred, management believes that the resolution of
such uncertainties should not have a material adverse effect on the
Company's consolidated financial position, results of operations or
liquidity.

          Asbestos Contingencies
          KACC is a defendant in a number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with
KACC or exposure to products containing asbestos produced or sold by KACC. 
The lawsuits generally relate to products KACC has not manufactured for at
least 20 years.  At December 31, 1997, the number of claims pending was
approximately 77,400 compared to 71,100 at December 31, 1996.  During 1997,
approximately 15,600 of such claims were received and approximately 9,300
were settled or dismissed.  During 1996, approximately 21,100 claims were
received and approximately 9,700 were settled or dismissed.

          Based on past experience and reasonably anticipated future
activity, Kaiser has established an accrual for estimated asbestos-related
costs for claims filed and estimated to be filed through 2008.  There are
inherent uncertainties involved in estimating asbestos-related costs and
KACC's actual costs could exceed these estimates.  Kaiser's accrual was
calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice of Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to
the current state of the law related to asbestos claims.  Accordingly, an
asbestos-related cost accrual of $158.8, before consideration of insurance
recoveries, is included primarily in other noncurrent liabilities at
December 31, 1997.  While Kaiser does not believe there is a reasonable
basis for estimating such costs beyond 2008 and, accordingly, no accrual
has been recorded for such costs which may be incurred beyond 2008, there
is a reasonable possibility that such costs may continue beyond 2008, and
such costs may be substantial.  Kaiser estimates that annual future cash
payments in connection with such litigation will be approximately $13.0 to
$20.0 for each of the years 1998 through 2002, and an aggregate of
approximately $80.0 thereafter.

          Kaiser believes that KACC has insurance coverage available to
recover a substantial portion of its asbestos-related costs.  Claims for
recovery from some of KACC's insurance carriers are currently subject to
pending litigation and other carriers have raised certain defenses, which
have resulted in delays in recovering costs from the insurance carriers. 
The timing and amount of ultimate recoveries from these insurance carriers
are dependent upon the resolution of these disputes.  Kaiser believes,
based on prior insurance-related recoveries with respect to asbestos-
related claims, existing insurance policies, and the advice of Thelen,
Marrin, Johnson & Bridges LLP with respect to applicable insurance coverage
law relating to the terms and conditions of these policies, that
substantial recoveries from the insurance carriers are probable. 
Accordingly, an estimated aggregate insurance recovery of $134.0,
determined on the same basis as the asbestos-related cost accrual, is
recorded primarily in long-term receivables and other assets at December
31, 1997.

          Subsequent to December 31, 1997, KACC reached agreements settling
approximately 25,000 of the pending asbestos-related claims.  Also,
subsequent to year-end, KACC reached agreements on asbestos-related
coverage matters with two insurance carriers under which the Company will
collect a total of approximately $18.0 million during the first quarter of
1998.  As the amounts related to the claim settlements and insurance
recoveries were consistent with the Company's year-end 1997 accrual
assumptions, these events are not expected to have a material impact on the
Company's financial position or results of operations.

          Kaiser continues to monitor claims activity, the status of
lawsuits (including settlement initiatives), legislative progress, 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. 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, Kaiser currently believes
that, based on the factors discussed in the preceding paragraphs, the
resolution of asbestos-related uncertainties and the incurrence of
asbestos-related costs net of related insurance recoveries should not have
a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity.

          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 Development 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").  The Notice claims that the Company was a
savings and loan holding company, that with others it controlled USAT, and
that it was therefore obligated to maintain the net worth of USAT.  The
Notice makes numerous other allegations against the Company and the other
respondents, including, among other things, allegations that through USAT
it was involved in prohibited transactions with Drexel, Burnham, Lambert
Inc.  The OTS, among other things, seeks unspecified damages in excess of
$560.0 from the Company and Federated, civil money penalties and a removal
from, and prohibition against the Company and the other respondents
engaging in, the banking industry.  The hearing on the merits of this
matter commenced on September 22, 1997, adjourned on December 19, 1997, and
is scheduled to recommence on June 16, 1998.

          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
(No. H-95-3956) (the "FDIC action") in the U.S. District Court for the
Southern District of Texas (the "Court").  The original complaint against
Mr. Hurwitz alleged damages in excess of $250.0 based on the allegation
that Mr. Hurwitz was a controlling shareholder, de facto senior officer and
director of USAT, and was involved in certain decisions which contributed
to the insolvency of USAT.  The original complaint further alleged, among
other things, that Mr. Hurwitz was obligated to ensure that UFG, Federated
and the Company maintained the net worth of USAT.  On January 15, 1997, the
FDIC filed an amended complaint which seeks, conditioned on the OTS
prevailing in its administrative proceeding, unspecified damages from Mr.
Hurwitz relating to amounts the OTS does not collect from the Company and
Federated with respect to their alleged obligations to maintain USAT's net
worth.

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

          Rancho Mirage Litigation Settlement
          On December 8, 1997, the Delaware Chancery Court approved the
settlement of certain shareholder derivative actions brought in connection
with an exchange between Federated and MCOP of certain real estate assets
in Rancho Mirage, California.  In connection with the settlement, MCOP
received approximately $7.5 in cash and a 23.7 acre commercial development
property owned by a subsidiary of Federated and paid the plaintiffs'
counsel $5.5 for attorneys fees and expenses.  In addition, a subsidiary
of Federated transferred to MCOP approximately $3.9 (liquidation value)
of MCOP preferred stock while retaining the right to purchase certain
shares of common stock at a price of approximately $55.00 per share and
canceled rights to purchase common stock valued at approximately $1.0.
The transactions provided for in the settlement have been reflected in
the Company's financial statements for the year ended December 31, 1997.

13.  DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

          At December 31, 1997, the net unrealized loss on KACC's position
in aluminum forward sales and option contracts, (based on an average price
of $1,643 per ton or $.75 per pound of primary aluminum), natural gas and
fuel oil forward purchase and option contracts, and forward foreign
exchange contracts, was approximately $21.0.  Any gains or losses on the
derivative contracts utilized in KACC's hedging activities are offset by
losses or gains, respectively, on the transactions being hedged.

          Alumina and Aluminum
          Kaiser's earnings are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products, and also depend
to a significant degree upon the volume and mix of all products sold. 
Primary aluminum prices have historically been subject to significant
cyclical 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 $.50 to $1.00 per pound.

          From time to time in the ordinary course of business, KACC enters
into hedging transactions to provide price risk management in respect of
the net exposure of earnings 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 market price of primary
aluminum.  Forward sales contracts are used by KACC to effectively fix the
price that KACC will receive for its shipments.  KACC also uses option
contracts (i) to establish a minimum price for its product shipments, (ii)
to establish a "collar" or range of price for KACC's anticipated sales
and/or (iii) to permit KACC to realize possible upside price movements.  As
of December 31, 1997, KACC had sold forward, at fixed prices, approximately
109,850 and 24,000 tons of primary aluminum with respect to 1998 and 1999. 
KACC had also purchased put options to establish a minimum price for
approximately 52,000 tons with respect to 1998 and had entered into option
contracts that established a price range for an additional 243,600 and
124,500 tons with respect to 1998 and 1999.  Additionally, at December 31,
1997, KACC also held fixed price purchase contracts for 134,850 tons of
primary aluminum with respect to 1998.

          As of December 31, 1997, KACC had sold forward virtually all of
the alumina available to it in excess of its projected internal smelting
requirements for 1998 and 1999 at prices indexed to future prices of
primary aluminum.

          Energy
          KACC is exposed to energy price risk from fluctuating prices for
fuel oil and natural gas consumed in the production process. Accordingly,
KACC from time to time in the ordinary course of business enters into
hedging transactions with major suppliers of energy and energy related
financial instruments.  As of December 31, 1997, KACC had a combination of
fixed price purchase and option contracts for the purchase of approximately
41,000 MMBtu of natural gas per day during 1998.  At December 31, 1997,
KACC also held a combination of fixed price purchase and option contracts
for an average of 232,000 and 25,000 barrels of fuel oil per month for 1998
and 1999, respectively.

          Foreign Currency
          KACC enters into forward foreign exchange contracts to hedge
material cash commitments to foreign subsidiaries or affiliates.  At
December 31, 1997, KACC had net forward foreign exchange contracts totaling
approximately $136.6 for the purchase of 180.0 Australian dollars from
January 1998 through February 1999, in respect of its commitments for 1998
and 1999 expenditures denominated in Australian dollars.

14.  SEGMENT INFORMATION

          The following tables present financial information by industry
segment and by geographic area at December 31, 1997 and 1996 and for the
three years ended December 31, 1997, 1996 and 1995 (in millions).

          Industry Segments


<TABLE>
<CAPTION>

                                                                                   Real
                                         Bauxite                    Forest        Estate
                             Years         and       Aluminum      Products      and Other
                             Ended       Alumina    Processing    Operations    Operations   Corporate      Total
                          ----------   ---------- -------------  ------------  ------------ -----------  ---------
<S>                       <C>          <C>        <C>            <C>           <C>          <C>          <C>
Sales to
     unaffiliated
     customers                  1997   $    483.3 $     1,889.9  $     287.2   $       68.7 $         -  $ 2,729.1 
                                1996        508.0       1,682.5        264.6           88.2           -    2,543.3 
                                1995        514.2       1,723.6        242.6           84.8           -    2,565.2 
Operating income
     (loss)                     1997          6.8         167.2         84.9           (5.0)      (17.5)     236.4 
                                1996        (10.7)        114.4         73.0          (12.0)      (33.4)     131.3 
                                1995         37.2         179.3         74.3          (13.6)      (19.6)     257.6 

Equity in
     earnings
     (loss) of
     unconsolidated
     affiliates                 1997         (7.0)          9.9            -            3.2           -        6.1 
                                1996          1.8           7.0            -            2.3           -       11.1 
                                1995          3.5          15.7            -            (.1)          -       19.1 
Depreciation and
     depletion                  1997         28.4          56.7         26.1            4.2          .6      116.0 
                                1996         30.2          59.9         27.2            5.7          .5      123.5 
                                1995         30.0          58.4         25.3            6.2         1.0      120.9 

Capital expenditures            1997         28.4         100.1         22.9           22.3          .3      174.0 
                                1996         31.6         128.7         15.2           10.7          .4      186.6 
                                1995         30.2          49.2          9.9            8.2          .2       97.7 
Investments in and
     advances to
     unconsolidated
     affiliates                 1997         88.8          59.8            -           10.9           -      159.5 
                                1996        121.5          46.9            -           11.1           -      179.5 
Identifiable assets             1997        966.4       1,984.3        700.0          228.4       235.1    4,114.2 
                                1996      1,032.1       1,852.8        681.2          207.1       342.5    4,115.7 


</TABLE>

          Sales to unaffiliated customers exclude intersegment sales
between bauxite and alumina and aluminum processing of $193.2, $181.6 and
$159.7 for the years ended December 31, 1997, 1996 and 1995, respectively. 
Intersegment sales are made on a basis intended to reflect the market value
of the products.

          Operating losses for Corporate represent general and
administrative expenses of MAXXAM Inc. that are not attributable to the
Company's industry segments.  General and administrative expenses of Kaiser
are allocated in the Company's industry segment presentation based upon
those segments' ratio of sales to unaffiliated customers.

          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.  Geographical area information relative to
operations is summarized as follows (in millions):


<TABLE>
<CAPTION>

                         Years                                               Other
                         Ended     Domestic    Caribbean       Africa       Foreign     Eliminations     Total
                      ---------- ----------  ------------  ------------  ------------  ------------  ------------
<S>                   <C>        <C>         <C>           <C>           <C>           <C>           <C>
Sales to
     unaffiliated
     customers              1997 $  2,076.2  $      204.6  $      234.2  $      214.1  $          -  $    2,729.1 
                            1996    1,962.8         201.8         198.3         180.4             -       2,543.3 
                            1995    1,916.9         191.7         239.4         217.2             -       2,565.2 
Sales and
     transfers
     among
     geographic
     areas                  1997          -         121.7             -         197.3        (319.0)            - 
                            1996          -         116.9             -         206.0        (322.9)            - 
                            1995          -          79.6             -         191.5        (271.1)            - 

Operating income
     (loss)                 1997       87.3          11.6          72.2          65.3             -         236.4 
                            1996       37.9           1.6          27.8          64.0             -         131.3 
                            1995       79.0           9.8          83.5          85.3             -         257.6 
Equity in earnings
     (loss) of
     unconsolidated
     affiliates             1997        8.0             -             -          (1.9)            -           6.1 
                            1996        2.6             -             -           8.5             -          11.1 
                            1995        (.3)            -             -          19.4             -          19.1 

Investments in and
     advances to
     unconsolidated
     affiliates             1997       26.7          23.9             -         108.9             -         159.5 
                            1996       11.6          25.3             -         142.6             -         179.5 

Identifiable assets         1997    3,375.2         391.2         179.6         168.2             -       4,114.2 
                            1996    3,318.4         391.2         194.7         211.4             -       4,115.7 


</TABLE>

          Included in results of operations are aggregate foreign currency
translation and transaction gains of $13.2 and $5.3 for the years ended
December 31, 1997 and 1995, respectively.  Foreign currency translation and
transaction gains were immaterial in 1996.

          Export sales were less than 10% of total revenues during the
years ended December 31, 1997, 1996 and 1995.  For the years ended December
31, 1997, 1996 and 1995, sales to any one customer did not exceed 10% of
consolidated revenues.

15.   SUPPLEMENTAL CASH FLOW INFORMATION


<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                             -----------------------------------------
                                                  1997          1996          1995
                                             ------------- ------------- -------------
                                                      (In millions of dollars)
<S>                                          <C>           <C>           <C>
Supplemental information on non-cash                                                  
     investing and financing activities:
     Capital spending accrual excluded from
          investing activities               $           - $        13.5 $           -
     Contribution of property and inventory
          in exchange for joint venture
          interest                                    10.6             -           1.3
     Timber and timberlands acquired,
          subject to long-term debt                    9.4             -            .6
     Net margin repayments for marketable
          securities                                     -             -           6.9
     Reduction of stockholders' deficit due
          to redemption of Kaiser preferred
          stock                                       64.8             -         136.2
     Repurchase of treasury stock, subject
          to short-term debt                          35.1             -             -
Supplemental disclosure of cash flow
     information:
     Interest paid, net of capitalized
          interest                           $       178.3 $       156.8 $       162.8
     Income taxes paid, net                           25.4          21.5          30.3


</TABLE>


16.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

          Summary quarterly financial information for the years ended
December 31, 1997 and 1996 is as follows (in millions):


<TABLE>
<CAPTION>
                                                     Three Months Ended
                                  ------------------------------------------------------
                                     March 31      June 30     September 30  December 31
                                  ------------  ------------  ------------  ------------
<S>                               <C>           <C>           <C>           <C>
1997:
     Net sales                    $      631.6  $      689.1  $      726.0  $      682.4 
     Operating income                     49.0          52.7          73.9          60.8 
     Net income                             .7          31.9          18.0          14.6 
     Earnings per share:
          Basic                            .08          3.72          2.17          1.84 
          Diluted                          .07          3.42          1.98          1.67 
1996:
     Net sales                    $      612.2  $      667.7  $      641.2  $      622.2 
     Operating income                     53.2          46.0           9.6          22.5 
     Net income (loss)                     5.8          16.9           5.3          (5.1)
     Earnings (loss) per share:
          Basic                            .66          1.95           .61          (.59)
          Diluted                          .61          1.79           .56          (.59)



</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


                                                                       PAGE
(A)  INDEX TO FINANCIAL STATEMENTS

     1.   FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):

          Report of Independent Public Accountants                    43
          Consolidated balance sheet at December 31, 1997 and 1996    44
          Consolidated statement of operations for the years ended
               December 31, 1997, 1996 and 1995                       45
          Consolidated statement of cash flows for the years ended
               December 31, 1997, 1996 and 1995                       46
          Notes to consolidated financial statements                  47

     2.   FINANCIAL STATEMENT SCHEDULES:

          Schedule I - Condensed Financial Information of Registrant
               at December 31, 1997 and 1996 and for the years ended
               December 31, 1997, 1996 and 1995                       73-77
          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

     There were no reports on Form 8-K during the fourth quarter of 1997.

(C)  EXHIBITS

     Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 79), 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 AMOUNTS)


<TABLE>
<CAPTION>

                                                            December 31,
                                                    --------------------------
                                                         1997          1996
                                                    ------------  ------------
<S>                                                 <C>           <C>
                       ASSETS

Current assets:
     Cash and cash equivalents                      $       47.9  $      169.6 
     Marketable securities                                  33.2          18.9 
     Other current assets                                   13.5          14.6 
                                                    ------------  ------------ 
          Total current assets                              94.6         203.1 
Deferred income taxes                                       70.1          66.1 
Investment in subsidiaries                                 127.0          16.5 
Other assets                                                 2.3           3.9 
                                                    ------------  ------------ 
                                                    $      294.0  $      289.6 
                                                    ============  ============ 

       LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
     Accounts payable and accrued liabilities       $       20.6  $        8.3 
     Short-term borrowings and current maturities
          of long-term debt                                 35.1          42.6 
                                                    ------------  ------------ 
          Total current liabilities                         55.7          50.9 
Notes payable to subsidiaries, net of notes
     receivable and advances                               174.5         192.2 
Other noncurrent liabilities                                66.7          97.3 
                                                    ------------  ------------ 
          Total liabilities                                296.9         340.4 
                                                    ------------  ------------ 

Stockholders' deficit:
     Preferred stock, $.50 par value; 12,500,000
          shares authorized; Class A $.05
          Non-Cumulative Participating Convertible
               Preferred Stock; shares issued:
               669,701                                        .3            .3 
     Common stock, $.50 par value; 28,000,000
          shares authorized; shares issued:
          10,063,359 and 10,063,885, respectively            5.0           5.0 
     Additional capital                                    222.8         155.9 
     Accumulated deficit                                  (118.5)       (185.6)
     Pension liability adjustment                           (3.3)         (5.1)
     Treasury stock, at cost (shares held:
          preferred - 845; common:  3,062,762 and
          1,400,112, respectively)                        (109.2)        (21.3)
                                                    ------------  ------------ 
          Total stockholders' deficit                       (2.9)        (50.8)
                                                    ------------  ------------ 
                                                    $      294.0  $      289.6 
                                                    ============  ============ 


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


                                MAXXAM INC.

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


<TABLE>
<CAPTION>

                                                       Years Ended December 31,
                                              ----------------------------------------
                                                   1997          1996          1995
                                              ------------  ------------  ------------
<S>                                           <C>           <C>           <C>
Investment, interest and other income
     (expense)                                $       (3.2) $       (1.5) $        5.6 
Interest expense                                      (1.3)         (7.0)         (6.2)
General and administrative expenses                  (16.3)        (32.8)        (18.9)
Equity in earnings of subsidiaries                    54.1          15.1          43.6 
                                              ------------  ------------  ------------
Income (loss) before income taxes                     33.3         (26.2)         24.1 
Credit for income taxes                               31.9          49.1          33.4 
                                              ------------  ------------  ------------
Net income                                    $       65.2  $       22.9  $       57.5 
                                              ============  ============  ============

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

</TABLE>

                                MAXXAM INC.

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



<TABLE>
<CAPTION>
                                                       Years Ended December 31,
                                              ----------------------------------------
                                                   1997          1996          1995
                                              ------------  ------------  ------------
<S>                                           <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                               $       65.2  $       22.9  $       57.5 
     Adjustments to reconcile net income
          (loss) to net cash provided by
          (used for) operating activities:
          Equity in earnings of subsidiaries         (54.1)        (15.1)        (43.6)
          Net sales (purchases) of
               marketable securities                  (5.8)         (7.1)         14.5 
          Amortization of deferred financing
               costs and discounts on
               long-term debt                           .1            .3            .3 
          Net gains on marketable securities          (8.5)         (2.5)         (3.4)
          Decrease in receivables, prepaids
               and other assets                        (.1)           .3           3.3 
          Increase in accrued and deferred
               income taxes                           12.2         (30.2)        (18.9)
          Decrease in accounts payable and
               other liabilities                     (40.4)          (.1)        (14.5)
          Other                                        6.4           4.6           3.0 
                                              ------------  ------------  ------------
               Net cash used for operating
                    activities                       (25.0)        (26.9)         (1.8)
                                              ------------  ------------  ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from sale of Kaiser Depositary
          Shares                                         -             -           7.6 
     Dividends received from subsidiaries                -           3.9           4.8 
     Investments in and net advances from
          (to) subsidiaries                           (3.6)         49.7            .4 
     Capital expenditures                              (.3)          (.4)          (.2)
                                              ------------  ------------  ------------
               Net cash provided by (used
                    for) investing
                    activities                        (3.9)         53.2          12.6 
                                              ------------  ------------  ------------ 
CASH FLOWS FROM FINANCING ACTIVITIES:
     Short-term borrowings                             2.5             -             - 
     Proceeds from issuance of intercompany
          note                                           -         125.0             - 
     Redemption, repurchase of and principal
          payments on long-term debt                 (42.5)          (.3)         (5.9)
     Treasury stock repurchases                      (52.8)         (1.8)            - 
                                              ------------  ------------  ------------ 
               Net cash provided by (used
                    for) financing
                    activities                       (92.8)        122.9          (5.9)
                                              ------------  ------------  ------------ 

NET INCREASE (DECREASE) IN CASH AND CASH
     EQUIVALENTS                                    (121.7)        149.2           4.9 
CASH AND CASH EQUIVALENTS AT BEGINNING OF
     YEAR                                            169.6          20.4          15.5 
                                              ------------  ------------  ------------ 
CASH AND CASH EQUIVALENTS AT END OF YEAR      $       47.9  $      169.6  $       20.4 
                                              ============  ============  ============ 

SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING
     AND FINANCING ACTIVITIES:
     Reduction of stockholders' deficit due
          to redemption of Kaiser preferred
          stock                               $       64.8  $          -  $      136.2 
     Repurchase of treasury stock subject to
          short-term debt                             35.1             -             - 
     Distribution of intercompany payable
          received from a subsidiary                  19.8          20.0           8.0 
     Net assets transferred to subsidiary                -             -         (14.5)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
     INFORMATION:
     Interest paid                            $        1.6  $        6.7  $        6.0 
     Income taxes paid (refunded)                       .6           1.5           (.3)


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


                                MAXXAM INC.

                       NOTES TO FINANCIAL STATEMENTS
                          (IN MILLIONS OF DOLLARS)

A.   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 the excess
of the tax basis over financial statement basis with respect to timber and
timberlands and real estate held for sale by various subsidiaries.  The
Company has concluded that it is more likely than not that these net
deferred income tax assets will be realized based in part upon the
estimated values of the underlying assets which are in excess of their tax
basis.

B.   SHORT-TERM BORROWINGS

          During 1997, the Company had average short-term borrowings
outstanding of $9.0 under the notes described below.  The weighted average
interest rate during 1997 was 9.8%.

          Demand Note
          On November 26, 1997, the Company entered into a credit facility
with Salomon Smith Barney providing for up to $25.0 in borrowings payable
on demand.  Borrowings are secured by 400,000 shares of a subsidiary's
common stock for each $1.0 of borrowings.  As of December 31, 1997, $2.5 of
borrowings were outstanding under this facility.

          Notes to NL Industries, Inc. ("NL") and the Combined Master
          Retirement Trust ("CMRT")
          On October 17, 1997, the Company agreed to repurchase 1,277,250
shares of its common stock, consisting of 250,000 shares owned by NL and
1,027,250 shares owned by CMRT, an affiliate of NL.  The aggregate purchase
price for these shares of $70.2 was paid $35.1 in cash and $35.1 in one-
year notes issued to NL and CMRT bearing interest at 10% per annum.  These
notes are secured by the common stock which was repurchased.

C.   LONG-TERM DEBT

          Long-term debt consists of the following:


<TABLE>
<CAPTION>
                                                         December 31,
                                                 --------------------------
                                                      1997          1996     
                                                 ------------  ------------
<S>                                              <C>           <C>
14% Senior Subordinated Reset Notes due May 20,
     2000                                        $          -  $       25.0 
12-1/2% Subordinated Debentures due December 15,
     1999, net of discount                                  -          17.6 
                                                 ------------  ------------
                                                            -          42.6 
Less: current maturities                                    -         (42.6)
                                                 ------------  ------------
                                                 $          -  $          - 
                                                 ============  ============


</TABLE>

          The Company redeemed the 14% Senior Subordinated Reset Notes and
the 12-1/2% Subordinated Debentures at par on January 7, 1997 and January
22, 1997, respectively.


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

          At December 31, 1997, the Company's indebtedness to its
subsidiaries, which includes accrued interest, consists of the following:


<TABLE>
<CAPTION>

                                                         December 31,
                                                 --------------------------
                                                      1997          1996
                                                 ------------  ------------
<S>                                              <C>           <C>
Note payable, interest at 11%                    $      125.0  $      125.0 
Unsecured note payable, interest at 6%                   20.5          19.3 
Unsecured notes payable, interest at 7%                  15.4          14.6 
Net advances                                             13.6          33.3 
                                                 ------------  ------------
                                                 $      174.5  $      192.2 
                                                 ============  ============


</TABLE>

          The increase in net advances is principally due to cash receipts
from the sale of real property and notes from the RTC Portfolio.  There are
no restrictions which would preclude the Company's subsidiaries from
declaring a dividend of such advances to the Company.

          In January 1998, the Company elected to defer $.9 of the $6.9
interest payment due to a subsidiary on February 2, 1998.  The deferred
amount effectively increases the note payable balance to $125.9.


                                 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,
who has signed this report on behalf of the Registrant and as the chief
financial officer of the Registrant.

                                          MAXXAM INC.


Date:  March 26, 1998         By:    /S/ PAUL N. SCHWARTZ
                                       Paul N. Schwartz
                              President, Chief Financial Officer
                                         and Director

          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 26, 1998         By:   /S/ CHARLES E. HURWITZ
                                      Charles E. Hurwitz
                                 Chairman of the Board, Chief
                                Executive Officer and Director


Date:  March 26, 1998         By:  /S/ ROBERT J. CRUIKSHANK
                                     Robert J. Cruikshank
                                           Director


Date:  March 26, 1998         By:      /S/ EZRA G. LEVIN
                                         Ezra G. Levin
                                           Director


Date:  March 26, 1998         By:  /S/ STANLEY D. ROSENBERG
                                     Stanley D. Rosenberg
                                           Director


Date:  March 26, 1998         By:    /S/ PAUL N. SCHWARTZ
                                       Paul N. Schwartz
                              President, Chief Financial Officer
                                         and Director
                                 (Principal Financial Officer)


Date:  March 26, 1998         By:  /S/ ELIZABETH D. BRUMLEY
                                     Elizabeth D. Brumley
                                     Assistant 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 July 6, 1994 (incorporated herein by reference to
               Exhibit 4(c) to the Registration Statement of the Company
               on Form S-8, Registration No. 33-54479)

       3.4     Amended and Restated By-laws of the Company dated February
               3, 1997 (incorporated herein by reference to Exhibit 3.4
               to the Company's Annual Report on Form 10-K for the fiscal
               year ended December 31, 1996)

       4.1     Non-Negotiable Intercompany Note, dated 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     Non-Negotiable Secured Promissory Note, dated October 17,
               1997, by the Company payable to The Combined Master
               Retirement Trust (incorporated herein by reference to
               Exhibit 10.3 to the Company's Quarterly Report on Form 10-
               Q  for  the  quarter ended September 30, 1997, File No. 1-
               9447)

       4.3     Non-Negotiable Secured Promissory Note dated October 17,
               1997, by the Company payable to NL Industries, Inc.
               (incorporated herein by reference to Exhibit 10.4 to the
               Company's Quarterly Report on Form 10-Q for the quarter
               ended September 30, 1997, File No. 1-9447)

      *4.4     Secured Demand Promissory Note, dated November 26, 1997,
               by the Company in favor of Salomon Smith Barney

       4.5     Loan and Pledge Agreement, dated 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)

       4.6     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 (incorporated herein by reference
               to Exhibit 4.1 to MGHI's Registration Statement on Form S-
               4, Registration No. 333-18723)

       4.7     Indenture, dated as of August 4, 1993, between Shawmut
               Bank, N.A. and MAXXAM Group Inc. ("MGI") regarding MGI's
               11-1/4% Senior Secured Notes due 2003 and 12-1/4% Senior
               Secured Discount Notes due 2003 (the "MGI Indenture")
               (incorporated herein by reference to Exhibit 4.1 to MGI's
               Annual Report on Form 10-K for the year ended December 31,
               1993, File No. 1-8857)

       4.8     First Supplemental Indenture, dated as of December 17,
               1996, to the MGI Indenture (incorporated herein by
               reference to Exhibit 4.35 to Amendment No. 1 to MGHI's
               Registration  Statement on Form S-4, Registration No. 333-
               18723)

       4.9     Second Supplemental Indenture, dated as of December 23,
               1996, to the MGI Indenture (incorporated herein by
               reference to Exhibit 4.36 to Amendment No. 1 to MGHI's
               Registration  Statement on Form S-4, Registration No. 333-
               18723)

       4.10    Indenture, dated 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 KACC's
               Registration  Statement on Form S-4, Registration No. 333-
               19143)

       4.11    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)

       4.12    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)

       4.13    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)

       4.14    Indenture, dated as of February 1, 1993, among KACC, as
               Issuer, and certain of its subsidiaries (as guarantors)
               and State Street Bank and Trust Company (as successor
               trustee to The First National Bank of Boston; "State
               Street"), 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, 1993, File No. 1-3605)

       4.15    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)

       4.16    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)

       4.17    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)

       4.18    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")

       4.19    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)

       4.20    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)

       4.21    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)

       4.22    First Amendment, dated 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)

       4.23    Second Amendment, dated 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)

       4.24    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)

       4.25    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)

       4.26    Fifth Amendment, dated 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)

       4.27    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)

       4.28    Seventh Amendment, dated 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, File No. 333-19143)

       4.29    Eighth Amendment, dated 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)

       4.30    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).

       4.31    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)

       4.32    Eleventh Amendment, dated 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)

       4.33    Twelfth Amendment to 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)

       4.34    Indenture, dated as of March 23, 1993, between The Pacific
               Lumber Company ("Pacific Lumber") and State Street (as
               successor trustee to The First National Bank of Boston)
               regarding Pacific Lumber's 10-1/2% Senior Notes due 2003
               (incorporated herein by reference to Exhibit 4.1 to
               Pacific Lumber's Annual Report on Form 10-K for the year
               ended December 31, 1993, File No. 1-9204)

       4.35    Indenture, dated as of March 23, 1993, between Scotia
               Pacific Holding Company ("Scotia Pacific") and State
               Street, as Trustee, regarding Scotia Pacific's 7.95%
               Timber Collateralized Notes due 2015 (incorporated herein
               by reference to Exhibit 4.1 to Scotia Pacific's Annual
               Report on Form 10-K for the year ended December 31, 1993,
               File No. 33-55538)

       4.36    Amended and Restated Credit Agreement of Pacific Lumber,
               dated November 10, 1995 (the "Pacific Lumber Credit
               Agreement"; incorporated herein by reference to Exhibit
               4.1 to Pacific Lumber's Quarterly Report on Form 10-Q for
               the quarter ended September 30, 1995, File No. 1-9204)

       4.37    First Amendment, dated as of February 10, 1997, to the
               Pacific Lumber Credit Agreement (incorporated by reference
               to Exhibit 4.4 to Pacific Lumber's Annual Report on Form
               10-K  for  the  year  ended December 31, 1996, File No. 1-
               9204)

       4.38    Second Amendment, dated October 9, 1997, to the Pacific
               Lumber Credit Agreement (incorporated herein by reference
               to Exhibit 4.1 to Pacific Lumber's Quarterly Report on
               Form 10-Q for the quarter ended September 30, 1997, File
               No. 1-9204)

       4.39    Second Amended and Restated Credit and Security Agreement,
               dated July 15, 1995, among the First National Bank of
               Boston, MCO Properties Inc., Westcliff Development
               Corporation, Horizon Corporation, Horizon Properties
               Corporation and MCO Properties L.P. (incorporated herein
               by reference to Exhibit 4.25 to the Company's Annual
               Report on Form 10-K for the year ended December 31, 1996)

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

      10.1     Tax Allocation Agreement, dated 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 August 4, 1993, between
               the Company and 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, Salmon Creek
               Corporation 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 fiscal year ended
               December 31, 1993, File No. 1-8857)

      10.8     Senior Subordinated Intercompany Note, dated 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 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 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, File No. 1-3924)

      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 Annual Report
               on Form 10-K for the year ended December 31, 1996, File
               No. 1-3924)

      10.12    Agreement, dated September 28, 1996, among MAXXAM Inc.,
               The Pacific Lumber Company (on behalf of itself, its
               subsidiaries and its affiliates), the United States of
               America and the State of California (the "Headwaters
               Agreement") (incorporated herein by reference to Exhibit
               10.1 to the Company's Form 8-K dated September 28, 1996)

      10.13    Pre-Permit Application Agreement in Principle, dated
               February 27, 1998, relating to the Headwaters Agreement
               (incorporated herein by reference to Exhibit 10.16 to the
               Annual Report on Form 10-K of Pacific Lumber for the
               fiscal year ended December 31, 1997, File No. 1-9204)

      10.14    Put and Call Agreement, dated November 16, 1987 (the "Put
               and Call Agreement") between Charles E. Hurwitz and MAXXAM
               Properties Inc. ("MPI") (incorporated herein by reference
               to Exhibit C to Schedule 13D dated November 24, 1987,
               filed by MGI with respect to the Company's common stock)

      10.15    Amendment to Put and Call Agreement, dated May 18, 1988,
               (incorporated herein by reference to Exhibit D to the
               Final Amendment to Schedule 13D dated May 20, 1988, filed
               by MGI relating to the Company's common stock)

               Amendment to Put and Call Agreement, dated as of February
      10.16    17, 1989 (incorporated herein by reference to Exhibit
               10.35 to the Company's Annual Report on Form 10-K for the
               year ended December 31, 1988, File No. 1-3924)

      10.17    Note Purchase Agreement, dated July 26, 1982, as amended,
               between the Company and Drexel Burnham Lambert
               Incorporated, relating to the Company's Zero Coupon Senior
               Subordinated Notes due 2007 (incorporated herein by
               reference to Exhibit B to Schedule 13D dated November 24,
               1987, filed by MGI relating to the Company's common stock)

      10.18    Third Amended and Restated Limited Partnership Agreement
               of Sam Houston Race Park, Ltd., 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)

                      Executive Compensation Plans and Arrangements


      10.19    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")

      10.20    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)

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

     *10.22    Amendment No. 1 to the MAXXAM 1994 Non-Employee Director
               Stock Plan

      10.23    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)

      10.24    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)

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

      10.26    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)

      10.27    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")

      10.28    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)

      10.29    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)

      10.30    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)

      10.31    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)

      10.32    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)

      10.33    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)

      10.34    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)

      10.35    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)

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

      10.37    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)

     *11       Computation of Net Income Per Common and Common Equivalent
               Share Information.

     *21       List of the Company's Subsidiaries

     *23       Consent of Arthur Andersen LLP

     *27       Financial Data Schedule

<FN>

---------------
* Included with this filing

</TABLE>