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

                                    FORM 10-K

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


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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001        COMMISSION FILE NUMBER 1-3924

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


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

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


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

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


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


                                                NAME OF EACH EXCHANGE
       TITLE OF EACH CLASS                       ON WHICH REGISTERED
      ---------------------            ------------------------------------
Common Stock, $.50 par value..........                American

   Number of shares of common stock outstanding at April 11, 2002: 6,527,671
        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 April 11, 2002 American Stock Exchange closing price of
$12.78 per share, the aggregate market value of the Registrant's outstanding
voting stock held by non-affiliates is approximately $46.7 million.

                      DOCUMENTS INCORPORATED BY REFERENCE:

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



                      TABLE OF CONTENTS


                           PART I

List of Defined Terms
Item 1.        Business
               General
               Aluminum Operations
               Forest Products Operations
               Real Estate Operations
               Racing Operations

Item 2.        Properties

Item 3.        Legal Proceedings

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

                           PART II

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

Item 6.        Selected Financial Data

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

Item 7A.       Quantitative and Qualitative Disclosures About Market Risk

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

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

                          PART III

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

                           PART IV

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


                              LIST OF DEFINED TERMS

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


Term
--------------------------------
$100 Preference Stock
1984 Plan
1994 Director Plan
1994 Omnibus Plan
Acquiring Person
AKW
Alpart
AMT Price
Anglesey
Bear Creek lawsuit
BOF
BPA
Britt
Britt Agreement
CARIFA
CDF
CEQA
CERCLA
CESA
Class A Preferred Stock
Code
Common Stock
Company
Court
Custodial Trust Agreement
CWA
DIP Facility
Drexel
Elk River Timberlands
Environmental Laws
Environmental Plans
EPA
EPIC-SYP/Permits lawsuit
Equity Fund Partnership
ERF lawsuit
ESA
FASB
FDIC
FDIC action
FDIC Counterclaim
Federated
FHLBB
FireRock, LLC
Forest Practice Act
GIS
GPS
Grizzly Creek Grove
HCP
Headwaters Agreement
Headwaters Timberlands
Hydro
Intercompany Note
Junior Preferred Stock
KACC
Kacc 10 7/8 Senior Notes
KACC 9 7/8 Senior Notes
KACC Notes
KACC Senior Subordinated Notes
Kahn lawsuit
Kaiser
KJBC
Lakepointe Assets
Lakepointe Notes
LIFO
LME Prices
London Facility
LTSY
MAXXAM
MAXXAM Parent
MGHI
MGHI Notes
MGI
NLRB
North Coast Water Board
Notice
Old growth
OTS
OTS action
Pacific Lumber
Pacific Lumber Credit Agreement
Palco Companies
Palmas
Permits
QAL
Racing Act
Racing Commission
Redeemable Preference Stock
Required Liquidity Amount
Respondents
Rights
Salmon Creek
SAR Account
Scotia LLC
Scotia LLC Line of Credit
Scotia LLC Timber
Scotia LLC Timber Rights
Scotia LLC Timberlands
Series A Right
Series B Right
SFAS No. 133
SFAS No. 141
SFAS No. 142
SFAS No. 143
SFAS No. 144
SFAS No. 66
SHRP, Ltd.
SunRidge Canyon LLC
SYP
take
THPs
Timber Notes
Timber Notes Indenture
TMDLs
UFG
ULPs
USAT
USWA
USWA lawsuit
Valco
VRA
Water Board
Wrigley lawsuit
young growth


ITEM 1.         BUSINESS

GENERAL

      MAXXAM Inc. and its subsidiaries are collectively referred to herein as
the "COMPANY" or "MAXXAM" unless otherwise indicated or the context indicates
otherwise. The Company is a holding company and, as such, conducts substantially
all of its operations through its subsidiaries. The Company operates in four
principal industries:

-     Aluminum, through its majority owned subsidiary, Kaiser Aluminum
      Corporation ("KAISER") (62% owned as of December 31, 2001), an integrated
      aluminum producer. Kaiser, through its wholly owned principal operating
      subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), operates
      in several principal aspects of the aluminum industry--the mining of
      bauxite, the refining of bauxite into alumina, the production of primary
      aluminum from alumina and the manufacture of fabricated (including
      semi-fabricated) aluminum products. As of December 31, 2001, a substantial
      portion of the Company's consolidated assets, liabilities, revenues,
      results of operations and cash flows were attributable to Kaiser. On
      February 12, 2002, Kaiser, KACC and 13 of KACC's wholly owned subsidiaries
      filed separate voluntary petitions in the United States Bankruptcy Court
      for the District of Delaware (the "COURT") for reorganization under
      Chapter 11 of the United States Bankruptcy Code (the "CODE"). On March 15,
      2002, two additional wholly owned subsidiaries of KACC filed petitions in
      the Court. Kaiser, KACC and the 15 subsidiaries of KACC that have filed
      petitions are collectively referred to herein as the "DEBTORS" and the
      Chapter 11 proceedings of these entities are collectively referred to
      herein as the "CASES." For purposes of this Report, the term "FILING DATE"
      shall mean, with respect to any particular Debtor, the date on which such
      Debtor filed its Case. See "--Aluminum Operations--Reorganization
      Proceedings" and Notes 1 and 9 to the Consolidated Financial Statements.

-     Forest products, through MAXXAM Group Inc. ("MGI") and MGI's wholly owned
      subsidiaries, The Pacific Lumber Company ("PACIFIC LUMBER") and Britt
      Lumber Co., Inc. ("BRITT"). MGI operates in several principal aspects of
      the lumber industry -- the growing and harvesting of redwood and
      Douglas-fir timber, the milling of logs into lumber and the manufacture of
      lumber into a variety of finished products. Housing, construction and
      remodeling are the principal markets for the Company's lumber products.

-     Real estate investment and development, managed through its wholly owned
      subsidiary, MAXXAM Property Company. The Company, principally through its
      wholly owned subsidiaries, is engaged in the business of residential and
      commercial real estate investment and development, primarily in Puerto
      Rico, Arizona, California and Texas.

-     Racing operations, through Sam Houston Race Park, Ltd. ("SHRP, LTD."), a
      Texas limited partnership, in which the Company currently owns a 100%
      interest. SHRP, Ltd. owns and operates a Class 1 pari-mutuel horse racing
      facility in the greater Houston metropolitan area, and a pari-mutuel
      greyhound racing facility in Harlingen, Texas.

Results and activities for MAXXAM Inc. and for MAXXAM Group Holdings Inc.
("MGHI"), exclusive of their subsidiaries, are not included in the above
segments. MGHI owns 100% of MGI and is a wholly owned subsidiary of the Company.

      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--General--Reorganization Proceedings," "--Business
Operations--Bauxite and Alumina Business Unit," "--Primary Aluminum Business
Unit," "--Commodities Marketing Business Unit," "--Competition," "--Forest
Products Operations--Harvesting Practices," "--Production Facilities" and
"--Regulatory and Environmental Factors;" most sections under Item 3. "Legal
Proceedings;" several sections under Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations;" and Item 7A.
"Quantitative and Qualitative Disclosures About Market Risk"). Such statements
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Readers are cautioned that any such forward-looking
statements are not guarantees of future performance and involve significant
risks and uncertainties, and that actual results may vary materially from the
forward-looking statements as a result of various factors. These factors include
the effectiveness of management's strategies and decisions, general economic and
business conditions, developments in technology, new or modified statutory or
regulatory requirements and changing prices and market conditions. This Report
identifies other factors that could cause such differences between such
forward-looking statements and actual results. No assurance can be given that
these are all of the factors that could cause actual results to vary materially
from the forward-looking statements.

ALUMINUM OPERATIONS

   GENERAL

      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 operates in several principal aspects of the aluminum industry--the
mining of bauxite, the refining of bauxite into alumina, the production of
primary aluminum from alumina, and the manufacture of fabricated (including
semi-fabricated) aluminum products. In addition to the production utilized by
Kaiser in its operations, Kaiser sells significant amounts of alumina and
primary aluminum in domestic and international markets. References in this
Report to tons refer to metric tons of 2,204.6 pounds.

   REORGANIZATION PROCEEDINGS

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

      The Debtors filed the Cases in the Court for reorganization under Chapter
11 of the Code. None of KACC's non-U.S. affiliates were included in the Cases.
The Cases are being jointly administered with the Debtors managing their
businesses in the ordinary course as debtors-in-possession subject to the
control and supervision of the Court.

      The Cases were filed as a result of liquidity and cash flow problems of
Kaiser arising in late 2001 and early 2002. Kaiser was facing significant
near-term debt maturities at a time of unusually weak aluminum industry business
conditions, depressed aluminum prices and a broad economic slowdown that was
further exacerbated by the events of September 11, 2001. In addition, Kaiser had
become increasingly burdened by the asbestos litigation and growing legacy
obligations for retiree medical and pension costs. The confluence of these
factors created the prospect of continuing operating losses and negative cash
flow, resulting in lower credit ratings and an inability to access the capital
markets.

      The outstanding principal of, and accrued interest on, all long-term debt
of the Debtors became immediately due and payable as a result of the
commencement of the Cases. However, the vast majority of the claims in existence
at the Filing Date (including claims for principal and accrued interest and
substantially all legal proceedings) are stayed (deferred) while Kaiser
continues to manage the businesses. The Court, however, upon motion by the
Debtors, has permitted the Debtors to pay or otherwise honor certain unsecured
pre-Filing Date claims, including employee wages and benefits and customer
claims in the ordinary course of business, subject to certain limitations, and
to fund, on an interim basis pending a final determination on the issue by the
Court, its joint ventures in the ordinary course of business. The Debtors also
have the right to assume or reject executory contracts, subject to Court
approval and certain other limitations. In this context, "assumption" means that
the Debtors agree to perform their obligations and cure certain existing
defaults under the executory contract and "rejection" means that the Debtors are
relieved from their obligations to perform further under the executory contract
and are subject only to a claim for damages for the breach thereof. Any claim
for damages resulting from the rejection of an executory contract is treated as
a general unsecured claim in the Cases.

      Generally, pre-Filing Date claims against the Debtors will fall into two
categories: secured and unsecured, including certain contingent or unliquidated
claims. Under the Code, a creditor's claim is treated as secured only to the
extent of the value of the collateral securing such claim, with the balance of
such claim being treated as unsecured. Unsecured and partially secured claims do
not accrue interest after the Filing Date. A fully secured claim, however, may
accrue interest after the Filing Date until the amount due and owing to the
secured creditor, including interest accrued after the Filing Date, is equal to
the value of the collateral securing such claim. The amount and validity of
pre-Filing Date contingent or unliquidated claims, although presently unknown,
ultimately may be established by the Court or by agreement of the parties. As a
result of the Cases, additional pre-Filing Date claims and liabilities may be
asserted, some of which may be significant. No provision has been included in
the accompanying financial statements for such potential claims and additional
liabilities that may be filed on or before a date to be fixed by the Court as
the last day to file proofs of claim.

      The following table sets forth certain 2001 financial information for the
Debtors and Kaiser.


                                                                                      Consolidation/
                                                                                       Elimination       Kaiser
                                                         Debtors       non-Debtors       Entries      Consolidated
                                                      -------------  ---------------  -------------  --------------
                                                                              (In millions)
Net sales...........................................  $    1,252.8   $        592.7   $     (112.8)  $     1,732.7
Operating income....................................          66.0             11.3          (12.4)           64.9
Net income (loss)...................................        (445.9)            11.7          (25.2)         (459.4)

Current assets......................................  $      607.6   $        151.6   $          -   $       759.2
Current liabilities.................................         702.0            101.4              -           803.4
Total assets........................................       2,449.8          1,654.7       (1,360.8)        2,743.7
Total liabilities and minority interests............       2,890.9            274.2           19.7         3,184.8
Total equity (deficit)..............................        (441.1)         1,380.5       (1,380.5)        (441.1)

      On February 12, 2002, in order to fund cash requirements during the
pendency of the Cases, Kaiser entered into a post-petition credit agreement with
a group of lenders for debtor-in-possession financing (the "DIP FACILITY") which
provides for a secured, revolving line of credit through the earlier of February
12, 2004, the effective date of a plan of reorganization or voluntary
termination by Kaiser. The DIP Facility replaced Kaiser's Credit Agreement.
Kaiser is able to borrow under the DIP Facility by means of revolving credit
advances and letters of credit (up to $125.0 million) in an aggregate amount
equal to the lesser of $300.0 million or a borrowing base relating to eligible
accounts receivable, eligible inventory and eligible fixed assets reduced by
certain reserves, as defined in the DIP Facility agreement. The DIP Facility is
guaranteed by Kaiser and certain of its significant subsidiaries. Interest on
any outstanding balances will bear a spread over either a base rate or LIBOR, at
Kaiser's option. On March 19, 2002, the Court signed a final order approving the
DIP Facility.

      Kaiser's objective is to achieve the highest possible recoveries for all
creditors and stockholders, consistent with the Debtors' abilities to pay and
the continuation of their businesses. However, there can be no assurance that
the Debtors will be able to attain these objectives or achieve a successful
reorganization. Further, there can be no assurance that the liabilities of the
Debtors will not be found in the Cases to exceed the fair value of their assets.
This could result in claims being paid at less than 100% of their face value and
the equity of Kaiser's stockholders being diluted or cancelled. At this time, it
is not possible to predict the outcome of the Cases, in general, or the effect
of the Cases on the businesses of the Debtors or on the interests of creditors
and stockholders.

      Two creditors' committees, one representing the unsecured creditors and
the other representing the asbestos claimants, have been appointed as official
committees in the Cases and, in accordance with the provisions of the Code, will
have the right to be heard on all matters that come before the Court. The
Debtors expect that the appointed committees, together with a legal
representative of potential future asbestos claimants to be appointed by the
Court, will play important roles in the Cases and the negotiation of the terms
of any plan or plans of reorganization. The Debtors are required to bear certain
of the committees' costs and expenses, including those of their counsel and
other advisors.

      The Debtors anticipate that substantially all liabilities of the Debtors
as of the Filing Date will be resolved under one or more plans of reorganization
to be proposed and voted on in the Cases in accordance with the provisions of
the Code. Although the Debtors intend to file and seek confirmation of such a
plan or plans, there can be no assurance as to when the Debtors will file such a
plan or plans, or that such plan or plans will be confirmed by the Court and
consummated.

      As provided by the Code, the Debtors initially have the exclusive right to
propose a plan of reorganization for 120 days following the Filing Date. If the
Debtors fail to file a plan of reorganization during such period or any
extension thereof, or if such plan is not accepted by the requisite classes and
numbers of creditors and equity holders entitled to vote on the plan, other
parties in interest in the Cases may be permitted to propose their own plan(s)
of reorganization for the Debtors.

      On April 12, 2002, Kaiser filed with the Court a motion seeking an order
of the Court prohibiting the Company (or MGHI), without first seeking Court
relief, from making any disposition of its stock of Kaiser, including any sale,
transfer, or exchange of such stock or treating any of its Kaiser stock as
worthless for federal income tax purposes. Kaiser indicated in its Court filing
that it was concerned that such a transaction could have the effect of depriving
Kaiser of the ability to utilize the full value of its net operating losses,
foreign tax credits and minimum tax credits. The Company is in the process of
analyzing the motion and other materials which were filed with the Court.

   SUMMARY OF BUSINESS OPERATIONS

      Kaiser's operations are conducted through KACC's business units. The
following table sets forth production and third party purchases of bauxite,
alumina and primary aluminum and third party shipments and intersegment
transfers of bauxite, alumina, primary aluminum and fabricated products for the
years ended December 31, 2001, 2000 and 1999:


                                                  Sources(1)                       Uses(1)
                                          ----------------------------  ---------------------------
                                                          Third Party    Third Party   Intersegment
                                          Production       Purchases      Shipments      Transfers
                                          -----------     ------------  ------------   ------------
                                                               (In thousands of tons)
Bauxite
   2001..................................     5,628.3         1,916.3        1,512.2        4,355.4
   2000..................................     4,305.0         2,290.0        2,007.0        2,342.0
   1999..................................     5,261.0         2,251.6        1,497.0        3,515.0
Alumina
   2001..................................     2,813.9 (2)       115.0        2,582.7          422.8
   2000..................................     2,042.9           322.0        1,927.1          751.9
   1999..................................     2,524.0           395.0        2,093.9          757.3
Primary Aluminum
   2001..................................       214.3           214.4          437.2 (3)
   2000..................................       411.4           206.5          672.4 (3)          -
   1999..................................       426.4           260.1          684.6 (3)          -
---------------

(1)   Sources and uses will not equal due to the impact of inventory changes and
      alumina and metal swaps.
(2)   During September 2001, Kaiser sold an 8.3% interest in Queensland Alumina
      Limited ("QAL"). See "--Business Operations--Bauxite and Alumina Business
      Unit" below for a discussion of the effects of the sale on alumina
      production.
(3)   Includes both primary aluminum shipments and pounds of aluminum contained
      in fabricated aluminum product shipments. See Item 7. "Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations--Results of Operations-Aluminum Operations-Summary" for an
      allocation of shipments between the primary aluminum and pounds of
      aluminum in fabricated aluminum products.

   BUSINESS 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" and below for cautionary information
with respect to such forward-looking statements.

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

      Bauxite and Alumina Business Unit
      The following table lists Kaiser's bauxite mining and alumina refining
facilities as of December 31, 2001:


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

Bauxite Mining                                 KJBC(1)            Jamaica              49.0%              4,500.0          4,500.0
                                               Alpart(2)          Jamaica              65.0%              2,275.0          3,500.0
                                                                                                     ------------     ------------
                                                                                                          6,775.0          8,000.0
                                                                                                     ============     ============

Alumina Refining                               Gramercy           Louisiana           100.0%              1,250.0          1,250.0
                                               Alpart             Jamaica              65.0%                942.5          1,450.0
                                               QAL(3)             Australia            20.0%                  730          3,650.0
                                                                                                     ------------     ------------
                                                                                                          2,922.5          6,350.0
                                                                                                     ============     ============

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

(1)   Kaiser Jamaica Bauxite Company ("KJBC").
(2)   Alumina Partners of Jamaica ("ALPART") bauxite is refined into alumina at
      the Alpart refinery.
(3)   During September 2001, Kaiser sold an 8.3% interest in QAL.

      Kaiser is a major producer of alumina and sells significant amounts of its
alumina production in domestic and international markets. Kaiser's strategy is
to sell a substantial portion of the alumina available to it in excess of its
internal smelting requirements under multi-year sales contracts with prices
linked to the price of primary aluminum. During 2001, Kaiser sold alumina to
approximately 12 customers, the largest and top five of which accounted for
approximately 21% and 64%, respectively, of the business unit's third-party net
sales. All of Kaiser's third-party sales of bauxite in 2001 were made to one
customer, which sales represent approximately 6% of the business unit's
third-party net sales. Kaiser's principal customers for bauxite and alumina
consist of other aluminum producers, trading intermediaries who resell raw
materials to end-users, and users of chemical grade alumina. See "--Commodities
Marketing Business Unit" and "--Competition."

      The Government of Jamaica has granted Kaiser a mining lease for the mining
of bauxite which will, at a minimum, satisfy the bauxite requirements of
Kaiser's Gramercy, Louisiana, alumina refinery so that it will be able to
produce at its current rated capacity until 2020. KJBC mines bauxite from the
land which is subject to the mining lease as an agent for Kaiser. Although
Kaiser owns 49% of KJBC, it is entitled to, and generally takes, all of its
bauxite output. A substantial majority of the bauxite mined by KJBC is refined
into alumina at the Gramercy facility, and the remainder is sold to two third
party customers. The Government of Jamaica, which owns 51% of the KJBC, has
agreed to grant Kaiser an additional bauxite mining lease. The new mining lease
will be effective upon the expiration of the current lease in 2020 and will
enable the Gramercy facility to produce at its rated capacity for an additional
ten year period. The Debtors have received the authority from the Court to
continue to fund KJBC's cash requirements in the ordinary course of business.
See Note 3 to the Consolidated Financial Statements for more detailed
information regarding the Gramercy incident.

      Alumina produced by the Gramercy plant is primarily sold to third parties.
The Gramercy refinery produces two products: smelter grade alumina and chemical
grade alumina (e.g. hydrate). Smelter grade alumina is sold under long-term
contracts typically linked to London Metal Exchange prices ("LME PRICES") for
primary aluminum. Chemical grade alumina is sold at a premium price over smelter
grade alumina. Production at the Gramercy refinery was completely curtailed in
July 1999 when it was extensively damaged by an explosion in the digestion area
of the plant. A number of employees were injured in the incident, some of them
severely. Production at the plant remained curtailed until the middle of
December 2000 at which time partial production commenced. Construction at the
facility was substantially completed during the third quarter of 2001. During
2001, the Gramercy facility incurred abnormal related start-up costs of
approximately $64.9 million. These abnormal costs resulted from operating the
plant in an interim and less efficient mode pending the completion of
construction and reaching the plant's intended production rates and efficiency.
During the first nine months of 2001, the plant operated at approximately 68% of
its newly rated estimated annual capacity of 1,250,000 tons. During the fourth
quarter of 2001, the plant operated at approximately 90% of its newly-rated
capacity. By the end of February 2002, the plant was operating at just below
100% of its newly-rated capacity. The facility is now focusing its efforts on
achieving its full operating efficiency. While production was curtailed, Kaiser
purchased alumina from third parties, in excess of the amounts of alumina
available from other Kaiser-owned facilities, to supply major customers' needs
as well as to meet intersegment requirements. 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 3 to the Consolidated
Financial Statements for further information regarding the Gramercy incident.

      Kaiser holds its interests in Alpart through two wholly owned subsidiaries
which did not file petitions for reorganization under the Code. The Debtors have
received the authority from the Court to continue to fund Alpart's cash
requirements in the ordinary course of business. Alpart holds bauxite reserves
and owns a 1.45 million ton per year alumina plant located in Jamaica. Kaiser
owns a 65% interest in Alpart, and Hydro Aluminium a.s ("HYDRO") owns the
remaining 35% interest. Kaiser has management responsibility for the facility on
a fee basis. Kaiser and Hydro have agreed to be responsible for their
proportionate shares of Alpart's costs and expenses. The Government of Jamaica
has granted Alpart a mining lease and has entered into other agreements with
Alpart designed to assure that sufficient reserves of bauxite will be available
to Alpart to operate its refinery, as it may be expanded up to a capacity of 2.0
million tons per year, through the year 2024.

      In the first half of 2000, Alpart and JAMALCO, a joint venture between
affiliates of Alcoa Inc. and the Government of Jamaica, began operating a
bauxite mining operation joint venture that consolidates their bauxite mining
operations in Jamaica, the objective of which is to optimize mining operating
and capital costs. The joint venture agreement also grants Alpart certain rights
to acquire bauxite mined from JAMALCO's reserves.

      Kaiser owns a 20% interest in QAL after selling an approximate 8.3%
interest in September 2001. Kaiser holds its interest in QAL through a wholly
owned subsidiary which was one of Kaiser's subsidiaries that filed a petition
for reorganization under the Code. The Debtors currently have the authority from
the Court to fund QAL's cash requirements in the ordinary course of business.
QAL, which is located in Queensland, Australia, owns one of the largest and most
competitive alumina refineries in the world. QAL refines bauxite into alumina,
essentially on a cost basis, for the account of its shareholders under long-term
tolling contracts. The shareholders, including Kaiser, purchase bauxite from
another QAL shareholder under long-term supply contracts. Kaiser has contracted
with QAL to take approximately 614,000 tons per year of alumina or pay standby
charges. Kaiser is unconditionally obligated to pay amounts calculated to
service its share ($79.4 million at December 31, 2001) of certain debt of QAL,
as well as other QAL costs and expenses, including bauxite shipping costs. Had
the sale of the QAL interest been effective as of the beginning of 2001,
Kaiser's share of QAL's production for 2001 would have been reduced by
approximately 196,000 tons. Historically, Kaiser has sold about half of its
share of QAL's production to third parties and has used the remainder to supply
its Northwest smelters, which are temporarily curtailed. The reduction in
Kaiser's alumina supply associated with its sale of the QAL interest is expected
to be substantially offset by the return of its Gramercy alumina refinery to
full operations at a higher capacity and by a planned increase in capacity at
its Alpart alumina refinery in Jamaica. Accordingly, the QAL transaction is not
expected to have an adverse impact on Kaiser's ability to satisfy existing
third-party customer contracts.

      In 2001, Kaiser sold alumina to approximately 12 customers, the largest
and top five of which accounted for approximately 21% and 64% of the business
unit's third party net sales, respectively. All of Kaiser's third-party sales of
bauxite in 2001 were made to one customer, which sales represent approximately
6% of the business unit's third party net sales. Kaiser's principal customers
for bauxite and alumina consist of other aluminum producers, trading
intermediaries who resell raw materials to end-users, and users of chemical
grade alumina.

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

      The following table lists Kaiser's primary aluminum smelting facilities as
of December 31, 2001:


                                                                               ANNUAL
                                                                                RATED              TOTAL
                                                                              CAPACITY            ANNUAL           2001
                                                            KAISER          AVAILABLE TO           RATED         OPERATING
           LOCATION                    FACILITY            OWNERSHIP           KAISER            CAPACITY          RATE
------------------------------      ---------------      ------------      --------------      ------------     -----------
                                                                                (IN THOUSANDS OF TONS)
Domestic:
      Washington                    Mead                      100%                200.0              200.0             -(1)
      Washington                    Tacoma                    100%                 73.0               73.0             -(1)
                                                                           --------------      ------------
           Subtotal                                                               273.0              273.0
                                                                           --------------      ------------

International:
      Ghana                         Valco                      90%                180.0              200.0           81%
      Wales, United Kingdom         Anglesey                   49%                 66.2              135.0          102%
                                                                           --------------      ------------
           Subtotal                                                               246.2              335.0
                                                                           --------------      ------------

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

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

(1)  Production was completely curtailed during 2001.

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

      The process of converting alumina into aluminum requires significant
amounts of electric power. Electric power represents an important production
input for Kaiser at its aluminum smelters, and its cost can significantly affect
Kaiser's profitability. Kaiser has historically purchased a significant portion
of its electric power for the Mead and Tacoma, Washington, smelters from the
Bonneville Power Administration ("BPA"). Over recent years, the BPA has supplied
approximately half of the electric power for the two plants, with the balance
coming from other suppliers.

      In response to the unprecedented high market prices for power in the
Pacific Northwest, Kaiser temporarily curtailed primary aluminum production at
the Mead and Tacoma, Washington, smelters during the second half of 2000 and all
of 2001. During this same period, Kaiser sold the available power that it had
under contract through September 30, 2001. As a result of the curtailments,
Kaiser avoided the need to purchase power on a variable market price basis and
received cash proceeds sufficient to more than offset the cash impact of the
potline curtailments over the period for which the power was sold. As of
December 31, 2001, both the Mead and Tacoma, Washington, smelters were
completely curtailed and are expected to remain curtailed at least through early
2003. However, Kaiser continues to operate the Tacoma rod-mill.

      The Mead facility uses pre-bake technology. 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. The business unit maintains specialized
laboratories and a miniature carbon plant in the state of Washington which
concentrate on the development of cost-effective technical innovations such as
equipment and process improvements.

      During October 2000, Kaiser signed a new power contract with the BPA under
which the BPA, starting October 1, 2001, provides Kaiser's operations in the
State of Washington with up to approximately 290 megawatts of power through
September 2006. The contract provides Kaiser with sufficient power to fully
operate the Flat-Rolled Products Business Unit's Trentwood facility (which
requires up to an approximate 40 megawatts) as well as approximately 40% of the
combined capacity of Kaiser's Mead and Tacoma smelting operations. The BPA has
announced that it currently intends to set rates under the contract in six month
increments. The rate for the initial period (from October 1, 2001 through March
31, 2002) was approximately 46% higher than power costs under the prior
contract. Power prices for the April 2002 through September 2002 period are
essentially unchanged from the prior six-month rate. Kaiser cannot predict what
rates will be charged in future periods. Such rates will be dependent on such
factors as the availability of and demand for electrical power, which are
largely dependent on weather, the price for alternative fuels, particularly
natural gas, as well as general and regional economic and ecological factors.
The contract also includes a take-or-pay requirement and clauses under which
Kaiser's power allocation could be curtailed, or its costs increased, in certain
instances. Under the contract, Kaiser can only remarket its power allocation to
reduce or eliminate take-or-pay requirements. Kaiser is not entitled to receive
any profits from any such remarketing efforts. During October 2001, Kaiser and
the BPA reached an agreement whereby: (a) Kaiser would not be obligated to pay
for potential take-or-pay obligations in the first year of the contract and (b)
Kaiser retained its rights to restart its smelter operations at any time. In
return for the foregoing, Kaiser granted the BPA certain limited power
interruption rights in the first year of the contract if Kaiser is operating its
Northwest smelters. The Department of Energy acknowledged that capital spending
in respect of the Gramercy refinery was consistent with the contractual
provisions of the prior contract with respect to the use of power sale proceeds.
Beginning October 2002, unless there is a further amendment of Kaiser's
obligations, Kaiser could be liable for take-or-pay costs under the BPA
contract, and such amounts could be significant. Kaiser is reviewing its rights
and obligations in respect of the BPA contract in light of the filing of the
Cases. See Note 4 of Notes to Consolidated Financial Statements for additional
information regarding the BPA contract.

      Subject to the limited interruption rights granted to the BPA (described
above), Kaiser has sufficient power under contract, and retains the ability, to
restart up to 40% (4.75 potlines) of its Northwest smelting capacity. Were
Kaiser to restart additional capacity (in excess of 4.75 potlines), it would
have to purchase additional power from the BPA or other suppliers. For Kaiser to
make such a decision, it would have to be able to purchase such power at a
reasonable price in relation to current and expected market conditions for a
sufficient term to justify its restart costs, which could be significant
depending on the number of lines restarted and the length of time between the
shutdown and restart. Given recent primary aluminum prices and the forward price
of power in the Northwest, it is unlikely that Kaiser would operate more than a
portion of its Northwest smelting capacity in the near future. Were Kaiser to
restart all or a portion of its Northwest smelting capacity, it would take
between three to six months to reach the full operating rate for such
operations, depending upon the number of lines restarted. Even after achieving
the full operating rate, operating only a portion of the Northwest capacity
would result in production/cost inefficiencies such that operating results
would, at best be breakeven to modestly negative at long-term primary aluminum
prices. However, operating at such a reduced rate could, depending on prevailing
economics, result in improved cash flows as opposed to remaining curtailed and
incurring the Company's fixed and continuing labor and other costs. This is
because Kaiser is contractually liable for certain severance, supplemental
unemployment benefits and early retirement benefits for laid-off workers under
Kaiser's contract with the United Steelworkers of America ("USWA") during
periods of curtailment. As of December 31, 2001, all such contractual
compensation costs have been accrued for all USWA workers in excess of those
expected to be required to run the Northwest smelters at a rate up to the above
stated 40% smelter operating rate. These costs are expected to be incurred
periodically through September 2002. Costs associated with the USWA workers that
Kaiser estimates would be required to operate the smelters at an operating rate
of up to 40% have been accrued through early 2003, as Kaiser does not currently
expect to restart the Northwest smelters prior to that date. If such workers are
not recalled prior to the end of the first quarter of 2003, Kaiser could become
liable for additional early retirement costs. Such costs could be significant
and could adversely impact Kaiser's operating results and liquidity. The present
value of such costs could be in the $50.0 million to $60.0 million range.
However, such costs would likely be paid out over an extended period.

      Kaiser manages, and owns a 90% interest in, the Volta Aluminium Company
Limited ("VALCO") aluminum smelter in Ghana. The Valco smelter uses pre-bake
technology and processes alumina supplied by Kaiser and the other participant
into primary aluminum under tolling contracts which provide for proportionate
payments by the participants. Kaiser's share of the primary aluminum is sold to
third parties. Valco's operating level has been subject to fluctuations
resulting from the amount of power it is allocated by the Volta River Authority
("VRA"). The operating level over the last five years has ranged from one to
four out of a total of five potlines. During 2001 and 2000, Valco operated an
average of four potlines. During late 2000, Valco, the Government of Ghana and
the VRA reached an agreement, subject to Parliamentary approval, that would
provide sufficient power for Valco to operate at least three and one-half of its
five potlines through 2017. However, Parliamentary approval has not been
received and, effective March 3, 2002, the Government of Ghana reduced Valco's
power allocation forcing Valco to curtail one of its four operating potlines.
Valco has objected to the power curtailment and expects to seek remedies from
the Government of Ghana. Valco has met with the Government of Ghana and the VRA
and anticipates such discussions will continue in respect of the current and
future power situation. Valco currently expects to operate approximately three
potlines during the remainder of 2002. However, no assurances can be provided
that Valco will continue to receive sufficient power to operate three potlines
for the balance of 2002 or thereafter.

      Kaiser owns a 49% interest in the Anglesey Aluminium Limited ("ANGLESEY")
aluminum smelter at Holyhead, Wales. The Anglesey smelter uses pre-bake
technology. Kaiser supplies 49% of Anglesey's alumina requirements and purchases
49% of Anglesey's aluminum output. Kaiser sells its share of Anglesey's output
to third parties. During early 2000, Anglesey entered into a new power agreement
that provides sufficient power to sustain its operations at full capacity
through September 2009.

      Kaiser does not expect Valco's or Anglesey's operations to be adversely
affected as a result of the Cases as the Debtors have received the authority
from the Court to fund Valco's and Anglesey's cash requirements in the ordinary
course of business.

      Kaiser's principal primary aluminum customers consist of large trading
intermediaries and metal brokers. In 2001, Kaiser sold its primary aluminum
production not utilized for internal purposes to approximately 96 customers, the
largest and top five of which accounted for approximately 72% and 92% of the
business unit's third-party net sales, respectively. See "--Competition."
Marketing and sales efforts are conducted by personnel located in Houston,
Texas, and Tacoma and Spokane, Washington.

      Commodities Marketing Business Unit
      Kaiser's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold. Primary
aluminum prices have historically been subject to significant cyclical
fluctuations. Alumina prices, as well as fabricated aluminum product prices
(which vary considerably among products), are significantly influenced by
changes in the price of primary aluminum and generally lag behind primary
aluminum prices by up to three months. From time to time in the ordinary course
of business, Kaiser enters into hedging transactions to provide risk management
in respect of its net exposure of earnings and cash flow related to primary
aluminum price changes. Given the significance of primary aluminum hedging
activities, Kaiser has begun (starting with the year ended December 31, 2000)
reporting its primary aluminum-related hedging activities as a separate segment.
Primary aluminum-related hedging activities are managed centrally on behalf of
all of Kaiser's business segments to minimize transaction costs, monitor
consolidated net exposures and to allow for increased responsiveness to changes
in market factors. Because the agreements underlying Kaiser's hedging positions
provided that the counterparties to the hedging contracts could liquidate
Kaiser's hedging positions if Kaiser filed for reorganization, Kaiser chose to
liquidate these positions in advance of the Filing Date. Gains or losses
associated with these liquidated positions have been deferred and are being
recognized over the original hedging periods as the underlying purchases/sales
are still expected to occur. Kaiser anticipates that, subject to the approval of
the Court and prevailing economic conditions, it may reinstitute an active
hedging program. However, no assurance can be given as to when or if the
appropriate Court approval will be obtained or when or if such hedging
activities will restart. See Item 7A. "Quantitative and Qualitative Disclosures
about Market Risk" and Notes 1 and 17 to the Consolidated Financial Statements.

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

      Flat-Rolled Products Business Unit
      The flat-rolled products business unit operates the Trentwood, Washington,
rolling mill. During recent years, the business unit has sold to the aerospace,
transportation and industrial markets (producing heat treat sheet and plate
products and automotive brazing sheet) and the beverage container market
(producing lid and tab stock), both directly and through distributors.

      During 2000, KACC shifted the product mix of its Trentwood rolling mill
toward higher value-added product lines, and exited beverage can body stock and
wheel and common alloy products in an effort to enhance its profitability.
Kaiser continues to reassess the product mix of its Trentwood rolling mill, and
has concluded that the business unit's profitability can be enhanced by further
focusing resources on its core, heat-treat business and by exiting lid and tab
stock product lines used in the beverage container market and brazing sheet for
the automotive market. As a result of this decision, Kaiser plans to sell or
idle several pieces of equipment resulting in an impairment charge of
approximately $17.7 million at December 31, 2001. Additional charges are likely
as Kaiser works through all of the operational impacts of this decision to exit
lid and tab stock and brazing sheet.

      In 2001, the business unit sold to approximately 101 customers, most of
which represented heat treat product shipments to distributors who sell to a
variety of industrial end-users. The largest and top five customers in the ATI
markets for flat-rolled heat-treat products accounted for approximately 17% and
35%, respectively, of the business unit's third party net sales. The business
unit also sold lid and tab stock to beverage container manufacturing locations
in the United States. The largest and top five of such customers accounted for
approximately 9% and 16%, respectively, of the business unit's third-party net
sales. See "--Competition" below. Sales are made directly to end-use customers
and distributors by Kaiser sales representatives located in the United States
and Europe, and by independent sales agents in Asia.

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

      Soft-alloy extrusion facilities are located in Los Angeles, California;
Sherman, Texas; Tulsa, Oklahoma; Richmond, Virginia; and London, Ontario,
Canada. Products manufactured at these facilities include rod, bar, tube, shapes
and billet. Hard-alloy extrusion facilities are located in Newark, Ohio, and
Jackson, Tennessee, and produce rod, bar, screw machine stock, redraw rod,
forging stock and billet. The business unit also extrudes seamless tubing in
both hard and soft alloys at a facility in Richland, Washington, and produces
drawn tube in both hard and soft alloys at a facility in Chandler, Arizona, that
it purchased in May 2000. Soft-alloy extruded seamless and drawn tubing is also
produced at the Richmond, Virginia facility.

      The business unit sells forged parts to customers in the automotive,
heavy-duty truck, general aviation, rail, machinery and equipment, and ordnance
markets. The high strength-to-weight properties of forged aluminum make it
particularly well-suited for automotive applications. Forging facilities are
located in Oxnard, California, and Greenwood, South Carolina. Through its sales
and engineering office in Southfield, Michigan, the business unit staff works
with automobile makers and other customers and plant personnel to create new
automotive component designs and to improve existing products.

      Kaiser's London, Ontario facility (the "LONDON FACILITY") is owned by one
of its wholly owned subsidiaries that did not file a petition for reorganization
under the Code. The Debtors have received the authority to continue to fund the
London Facility's cash requirements in the ordinary course of business.
Accordingly, Kaiser does not believe the London Facility's operations will be
adversely affected by the Cases.

      In 2001, the engineered products business unit had approximately 400
customers, the largest and top five of which accounted for approximately 10% and
24%, respectively, of the business unit's third party net sales. See
"--Competition" below. Sales are made directly to end-use customers and
distributors by Kaiser sales representatives located across the United States.

   COMPETITION

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

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

   LABOR MATTERS

      As a result of the September 1998 strike by the USWA and the subsequent
"lock-out" by Kaiser in January 1999, and prior to the settlement of the dispute
in September 2000, Kaiser was operating five of its U.S. facilities with
salaried employees and other employees. Under the terms of the settlement, USWA
members generally returned to the affected plants during October 2000. The new
labor contract, which expires in September 2005, provides for a 2.6% average
annual increase in the overall wage and benefit packages, and results in the
reduction of at least 540 hourly jobs at the five facilities (from approximately
2,800 in September 1998). It also provides that Kaiser is liable for certain
severance and supplemental unemployment benefits for laid-off workers. See Note
4 to the Consolidated Financial Statements for a discussion of the labor dispute
and settlement.

      Although the USWA dispute has been settled and the workers have returned
to the facilities, two allegations of unfair labor practices ("ULPS") remain in
connection with the USWA strike and subsequent lock-out. Kaiser believes that
these charges are without merit. See Item 3. "Legal Proceedings--Kaiser
Litigation--Labor Matters" and Note 16 to the Consolidated Financial Statements,
"--Labor Matters" for a discussion of the ULPs. The Company believes that the
remaining charges made against Kaiser by the USWA are without merit.

   RESEARCH AND DEVELOPMENT

      Net expenditures for Kaiser-sponsored research and development activities
were $4.0 million in 2001, $5.6 million in 2000 and $11.0 million in 1999.
Kaiser estimates that research and development net expenditures will be in the
range of $3.0 million to $5.0 million in 2002.

   EMPLOYEES

      During 2001, Kaiser employed an average of approximately 6,500 persons,
compared with an average of approximately 7,800 persons in 2000 and
approximately 8,600 persons in 1999. At December 31, 2000, Kaiser employed
approximately 5,800 persons (excluding approximately 1,100 on a layoff status),
of which approximately 3,100 were employed by the Debtors, and 2,700 were
employed by the non-Debtors. The foregoing employee figures for 2000 and 1999
include the USWA workers who were subject to the lockout imposed by Kaiser as a
result of the labor dispute that was settled in September 2000. During the labor
dispute, Kaiser operated the five affected facilities with temporary workers who
were not included in the employee counts for 2000 and 1999.

      The labor agreements with hourly employees at the Los Angeles, California,
and Richmond, Virginia, Engineered products facilities were renewed in 2001. The
labor agreement with the employees at the Valco smelter in Ghana was renewed
during the first quarter of 2002 and the labor agreement with the employees at
the Alpart refinery in Jamaica is expected to be renewed during the second
quarter of 2002.

   ENVIRONMENTAL MATTERS

      Kaiser is subject to a wide variety of international, federal, state and
local environmental laws and regulations (the "ENVIRONMENTAL LAWS"). The
Environmental Laws regulate, among other things, air and water emissions and
discharges; the generation, storage, treatment, transportation and disposal of
solid and hazardous waste; and the release of hazardous or toxic substances,
pollutants and contaminants into the environment. During the pendency of the
Cases, substantially all pending litigation, except certain environmental claims
and litigation, against the Debtors is stayed.

      Kaiser's current and former operations can subject it to fines or
penalties for alleged breaches of the Environmental Laws and to other actions
seeking clean-up or other remedies under these Environmental Laws. Kaiser also
may be subject to damages related to alleged injuries to health or to the
environment, including claims with respect to certain waste disposal sites and
the clean-up of sites currently or formerly used by Kaiser.

      Currently, Kaiser is subject to certain lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). Kaiser,
along with certain other companies, has been named as a Potentially Responsible
Party for clean-up costs at certain third-party sites listed on the National
Priorities List under CERCLA. As a result, Kaiser may be exposed not only to its
assessed share of clean-up but also the costs of others if they are unable to
pay. Additionally, Kaiser's Mead, Washington, facility has been listed on the
National Priorities List under CERCLA. Kaiser and the regulatory authorities
agreed to a plan of remediation in January 2000.

      In response to environmental concerns, Kaiser has established
environmental accruals representing its estimate of the costs it may reasonably
expect to incur in connection with these matters. 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, Labor and Other Contingencies" and Note 16 to the
Consolidated Financial Statements under the heading "Aluminum
Operations--Environmental Contingencies."

   PROPERTIES

      The locations and general character of the principal plants, mines, and
other materially important physical properties relating to Kaiser's operations
are described above. Kaiser owns in fee or leases all of the real estate and
facilities used in connection with its business. Plants and equipment and other
facilities are generally in good condition and suitable for their intended uses,
subject to changing environmental requirements. Although Kaiser's domestic
aluminum smelters 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.
However, the long-term viability of Kaiser's Pacific Northwest smelters may be
adversely impacted if an adequate supply of power at reasonable prices is not
ultimately available.

      Kaiser's obligations under the DIP Facility, are secured by, among other
things, mortgages on its major domestic plants. For a description of the DIP
Facility, see Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities--Aluminum Operations" and Note 11 to the Consolidated
Financial Statements.

FOREST PRODUCTS OPERATIONS

   GENERAL

      The Company engages in forest products operations through MGI and its
wholly owned subsidiaries, Pacific Lumber and Britt, and Pacific Lumber's wholly
owned subsidiary, Scotia Pacific Company LLC ("SCOTIA LLC"). Pacific Lumber,
which has been in continuous operation for over 130 years, engages in several
principal aspects of the lumber industry--the growing and harvesting of redwood
and Douglas-fir timber, the milling of logs into lumber products and the
manufacturing of lumber into a variety of value-added finished products. Britt
manufactures redwood fencing and decking products from small diameter logs, a
substantial portion of which Britt acquires from Pacific Lumber (as Pacific
Lumber cannot efficiently process them in its own mills).

   TIMBER AND TIMBERLANDS

      Pacific Lumber owns and manages approximately 218,000 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 71% redwood, 23%
Douglas-fir and 6% other timber, are located in close proximity to Pacific
Lumber's and Britt's sawmills, and contain an extensive network of roads.
Approximately 205,000 acres of Pacific Lumber's timberlands are owned by Scotia
LLC (the "SCOTIA LLC TIMBERLANDS"), and Scotia LLC has the exclusive right to
harvest (the "SCOTIA LLC TIMBER RIGHTS") approximately 12,200 acres of Pacific
Lumber's timberlands. The timber in respect of the Scotia LLC Timberlands and
the Scotia LLC Timber Rights is collectively referred to as the "SCOTIA LLC
TIMBER." Substantially all of Scotia LLC's assets are pledged as security for
Scotia LLC's $867.2 million original aggregate principal amount of its 6.55%
Series B Class A-1 Timber Collateralized Notes, 7.11% Series B Class A-2 Timber
Collateralized Notes and 7.71% Series B Class A-3 Timber Collateralized Notes
(collectively, the "TIMBER NOTES"). The Indenture governing the Timber Notes is
referred to herein as the "TIMBER NOTES INDENTURE." Pacific Lumber harvests and
purchases from Scotia LLC virtually all of the logs harvested from the Scotia
LLC Timber. See "--Relationships with Scotia LLC and Britt" below for a
description of this and other relationships among Pacific Lumber, Scotia LLC and
Britt.

      On March 1, 1999, Pacific Lumber and its wholly owned subsidiaries, Scotia
LLC and Salmon Creek LLC ("SALMON CREEK")(collectively, the "PALCO COMPANIES")
consummated the Headwaters Agreement (the "HEADWATERS AGREEMENT") with the
United States and California. Pursuant to the agreement, approximately 5,600
acres of timberlands owned by the Palco Companies known as the Headwaters Forest
and the Elk Head Springs Forest (the "HEADWATERS TIMBERLANDS") were transferred
to the United States. In exchange, Salmon Creek was paid $299.9 million, Scotia
LLC was paid $150,000 and approximately 7,700 acres of timberlands known as the
Elk River Timberlands (the "ELK RIVER TIMBERLANDS") were transferred to Pacific
Lumber and subsequently transferred to Scotia LLC. In addition, habitat
conservation and sustained yield plans (the "ENVIRONMENTAL PLANS") were approved
covering the Scotia LLC Timberlands and California agreed to purchase a portion
of Pacific Lumber's Grizzly Creek grove, as well as Scotia LLC's Owl Creek
grove. In December 2000, California purchased the Owl Creek grove for $67.0
million in cash, and on November 15, 2001, purchased a portion of the Grizzly
Creek grove for $19.8 million in cash. Salmon Creek placed $169.0 million of the
proceeds from the sale of the Headwaters Timberlands into a Scheduled
Amortization Reserve Account ("SAR ACCOUNT") in order to support principal
payments on Scotia LLC's Timber Notes. See "Regulatory and Environmental
Factors" below and Note 16 to the Consolidated Financial Statements.

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

      Pacific Lumber engages in extensive efforts to supplement the natural
regeneration of timber and increase the amount of timber on its timberlands.
Pacific Lumber is required to comply with California forestry regulations
regarding reforestation, which generally require that an area be reforested to
specified standards within an established period of time. Pursuant to the
Services Agreement described below (see "--Relationships with Scotia LLC and
Britt"), Pacific Lumber conducts regeneration activities on the Scotia LLC
Timberlands for Scotia LLC. Regeneration of redwood timber generally is
accomplished through the natural growth of new redwood sprouts from the stump
remaining after a redwood tree is harvested. Such new redwood sprouts grow
quickly, thriving on existing mature root systems. In addition, Pacific Lumber
supplements natural redwood regeneration by planting redwood seedlings.
Douglas-fir timber is regenerated almost entirely by planting seedlings. During
2001, Pacific Lumber planted an estimated 1,006,000 redwood and Douglas-fir
seedlings.

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

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

      During 2001, comprehensive external and internal reviews were conducted by
Pacific Lumber with respect to its business operations. These reviews were an
effort to identify ways in which Pacific Lumber could operate on a more
efficient and cost effective basis. Based upon the results of these reviews,
Pacific Lumber, among other things, indefinitely idled two of its four sawmills,
eliminated certain of its operations, including its soil amendment and concrete
block activities, has began utilizing more efficient harvesting methods and
adopted certain other cost saving measures. Most of these changes were
implemented by Pacific Lumber in the last quarter of 2001, or the first quarter
of 2002. Pacific Lumber also ended its internal logging operations as of April
1, 2002, and intends to rely exclusively on third party contract loggers to
conduct these activities in the future. See "--Production Facilities" and
"--Regulatory and Environmental Factors - Timber Operations."

   HARVESTING PRACTICES

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

      The ability of Pacific Lumber to harvest timber largely depends upon its
ability to obtain regulatory approval of timber harvesting plans ("THPS"). Prior
to harvesting timber in California, companies are required to obtain the CDF's
approval of a detailed THP for the area to be harvested. A THP must be submitted
by a registered professional forester and must include information regarding the
method of proposed timber operations for a specified area, whether the
operations will have any adverse impact on the environment and, if so, the
mitigation measures to be used to reduce any such impact. The CDF's evaluation
of THPs incorporates review and analysis of such THPs by several California and
federal agencies and public comments received with respect to such THPs. An
approved THP is applicable to specific acreage and specifies the harvesting
method and other conditions relating to the harvesting of the timber covered by
such THP. The number of Pacific Lumber's approved THPs and the amount of timber
covered by such THPs varies significantly from time to time, depending upon the
timing of agency review and other factors. Timber covered by an approved THP is
typically harvested within a one year period from the date that harvesting first
begins. The Timber Notes Indenture requires Scotia LLC to use its best efforts
(consistent with prudent business practices) to maintain a number of pending
THPs which, together with THPs previously approved, would cover rights to
harvest a quantity of Scotia LLC Timber adequate to pay interest and principal
amortization based on the Minimum Principal Amortization Schedule for the Timber
Notes for the next succeeding twelve month period. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Forest
Products Operation--Industry Overview" for information regarding developments in
the rate of THP approvals.

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

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

   PRODUCTION FACILITIES

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

      Pacific Lumber owns four highly mechanized sawmills and related facilities
located in Scotia, Fortuna and Carlotta, California. The sawmills historically
have been supplied almost entirely from timber harvested from Pacific Lumber's
timberlands, but are supplemented from time to time by logs purchased from third
parties. Since 1986, Pacific Lumber has implemented numerous technological
advances that have increased the operating efficiency of its production
facilities and the recovery of finished products from its timber. Pacific Lumber
produced approximately 160, 205 and 155 million board feet of lumber in 2001,
2000 and 1999, respectively. The Fortuna sawmill produces primarily common grade
lumber and during 2001 produced approximately 98 million board feet of lumber.
The Carlotta sawmill produces both common and upper grade redwood lumber and
during 2001 produced approximately 37 million board feet of lumber. Although
partially curtailed during July through November of 2001, Carlotta restarted in
December 2001. As part of Pacific Lumber's strategic review of its operations,
Sawmills "A" and "B" were indefinitely idled in 2001. Sawmill "A" processed
Douglas-fir logs and Sawmill "B" processed primarily large diameter redwood
logs. During 2001, Sawmills "A" and "B" processed approximately 17 million and 6
million board feet of lumber, respectively. Sawmills "A" and "B" are both
located in Scotia. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations-Forest
Products Operations-Industry Overview."

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

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

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

      Pacific Lumber owns and operates a modern 25-megawatt cogeneration power
plant which is fueled almost entirely by the wood residue from Pacific Lumber's
milling and finishing operations. This power plant generates substantially all
of the energy requirements of Scotia, California, the town adjacent to Pacific
Lumber's timberlands where several of its manufacturing facilities are located.
Pacific Lumber sells surplus power to Pacific Gas and Electric Company. In 2001,
the sale of surplus power accounted for approximately 6% of Pacific Lumber's
total revenues.

   PRODUCTS

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


                                             YEAR ENDED DECEMBER 31, 2001              YEAR ENDED DECEMBER 31, 2000
                                    ------------------------------------------   ---------------------------------------
                                    % OF TOTAL                                   % OF TOTAL
                                    LUMBER         % OF TOTAL                    LUMBER        % OF TOTAL
                                    PRODUCTION     LUMBER         % OF TOTAL     PRODUCTION    LUMBER        % OF TOTAL
              PRODUCT               VOLUME         REVENUES       REVENUES       VOLUME        REVENUES      REVENUES
----------------------------------- -------------  ------------   ------------   -----------   -----------   -----------
Upper grade redwood lumber.........            7%           19%            15%            7%           16%           14%
Common grade redwood lumber........           68%           62%            51%           59%           58%           51%
                                    -------------  ------------   ------------   -----------   -----------   -----------
   Total redwood lumber............           75%           81%            66%           66%           74%           65%
                                    -------------  ------------   ------------   -----------   -----------   -----------
Upper grade Douglas-fir lumber.....            4%            7%             6%            4%            9%            8%
Common grade Douglas-fir lumber....           20%           11%             9%           28%           16%           14%
                                    -------------  ------------   ------------   -----------   -----------   -----------
   Total Douglas-fir lumber........           24%           18%            15%           32%           25%           22%
                                    -------------  ------------   ------------   -----------   -----------   -----------
Other grades of lumber.............            1%            1%             1%            2%            1%            1%
                                    -------------  ------------   ------------   -----------   -----------   -----------
      Total lumber.................          100%          100%            82%          100%          100%           88%
                                    =============  ============   ============   ===========   ===========   ===========

Logs...............................                                         6%                                        2%
                                                                  ============                               ===========

Hardwood chips.....................                                         2%                                        2%
Softwood chips.....................                                         2%                                        4%
                                                                  ------------                               -----------

   Total wood chips................                                         4%                                        6%
                                                                  ============                               ===========

      In 2001, MGI sold 244 million board feet of lumber, which accounted for
82% of its total revenues. Lumber products vary greatly by the species and
quality of the timber from which they are produced. Lumber is sold not only by
grade (such as "upper" grade versus "common" grade), but also by board size and
the drying process associated with the lumber.

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

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

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

      MGI does not have any significant contractual relationships with third
parties relating to the purchase of logs. During 2001, MGI purchased
approximately 25 million board feet of logs from third parties. Pacific Lumber
uses a whole-log chipper to produce wood chips from hardwood trees which would
otherwise be left as waste. These chips are sold to third parties primarily for
the production of facsimile and other specialty papers. Pacific Lumber also
produces softwood chips from the wood residue from its milling operations. These
chips are sold to third parties for the production of wood pulp and paper
products.

   BACKLOG AND SEASONALITY

      MGI's backlog of sales orders at each of December 31, 2001 and 2000 was
approximately $15.7 million, the substantial portion of which was delivered in
the first quarter of the next fiscal year. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations--Forest Products Operations--Net Sales." MGI has historically
experienced lower first quarter sales due largely to the general decline in
construction-related activity during the winter months. As a consequence, MGI's
results in any one quarter are not necessarily indicative of results to be
expected for the full year. See "--Regulatory and Environmental Factors" below
and Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Forest Products
Operations--Industry Overview."

   MARKETING

      The housing, construction and remodeling markets are the primary markets
for MGI's lumber products. MGI's policy is to maintain a wide distribution of
its products both geographically and in terms of the number of customers. MGI
sells its lumber products throughout the country to a variety of accounts, the
large majority of which are wholesalers, followed by retailers, industrial
users, exporters and manufacturers. Upper grades of redwood and Douglas-fir
lumber are sold throughout the entire United States, as well as to export
markets. Common grades of redwood lumber are sold principally west of the
Mississippi River, with California accounting for approximately 75% of these
sales in 2001. Common grades of Douglas-fir lumber are sold primarily in
California. In 2001, Pacific Lumber had three customers which accounted for
approximately 15%, 3% and 3%, respectively, of MGI's total net lumber sales.
Exports of lumber accounted for approximately 4% of MGI's total revenues in
2001. MGI markets its products through its own sales staff which focuses
primarily on domestic sales.

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

   COMPETITION

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

   EMPLOYEES

      As of March 1, 2002, MGI had approximately 1,100 employees, none of whom
are covered by a collective bargaining agreement.

   RELATIONSHIPS WITH SCOTIA LLC AND BRITT

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

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

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

   REGULATORY AND ENVIRONMENTAL FACTORS

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

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

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

      Under the Environmental Plans, harvesting activities are prohibited or
restricted on certain areas of the Scotia LLC Timberlands. For a 50-year period,
harvesting activities are severely restricted in several areas (consisting of
substantial quantities of old growth redwood and Douglas-fir timber) to serve as
habitat conservation areas for the marbled murrelet, a coastal seabird, and
certain other species. Harvesting in certain other areas of the Scotia LLC
Timberlands is currently prohibited while these areas are evaluated for the
potential risk of landslide and the degree to which harvesting activities will
be prohibited or restricted in the future. Further, additional areas alongside
streamsides have been designated as buffers, in which harvesting is prohibited
or restricted, to protect aquatic and riparian habitat. Streamside buffers and
restrictions related to potential landslide prone acres may be adjusted up or
down, subject to certain minimum and maximum buffers, based upon an ongoing
watershed analysis process, which the HCP requires be completed within five
years of its effective data. The first analysis by the Company of a watershed,
Freshwater, was released in June 2001. This analysis was used by the Company to
develop proposed harvesting prescriptions. Because the Company and the
government agencies were unable to reach agreement on the appropriate
prescriptions, the matter is being reviewed by an independent panel of
scientists. Analyses for two additional watersheds are currently undergoing
agency review. Pacific Lumber and the agencies are working to streamline the
watershed analysis process prior to beginning up to three more watershed studies
in 2002.

      The HCP also imposes certain restrictions on the use of roads on the
timberlands covered by the HCP during several months of the year and during
periods of wet weather. However, Pacific Lumber anticipates that some harvesting
will be able to be conducted during these other months. The HCP also requires
that 75 miles of roads be stormproofed on an annual basis (within a specified
six month period) and that certain other roads must be built or repaired (within
a specified five month period).

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

      Water Quality
      Under the Federal Clean Water Act, the Environmental Protection Agency
(the "EPA") is required to establish total maximum daily load limits ("TMDLS")
in water courses that have been declared to be "water quality impaired." The EPA
and the North Coast Regional Water Quality Control Board ("NORTH COAST WATER
BOARD") are in the process of establishing TMDLs for 17 northern California
rivers and certain of their tributaries, including certain water courses that
flow within the Scotia LLC Timberlands. The Company expects this process to
continue into 2010. In December 1999, the EPA issued a report dealing with TMDLs
on two of the nine water courses. The agency indicated that the requirements
under the HCP would significantly address the sediment issues that resulted in
TMDL requirements for these water courses. However, a September 2000 report by
the staff of the North Coast Water Board proposed various actions, including
restrictions on harvesting beyond those required under the HCP. Establishment of
the final TMDL requirements applicable to the Company's timberlands will be a
lengthy process, and the final TMDL requirements applicable to the Company's
timberlands may require aquatic protection measures that are different from or
in addition to the prescriptions to be developed pursuant to the watershed
analysis process provided for in the HCP.

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

      Timber Operations
      In order to conduct logging operations, stormproofing and certain other
activities, a company must obtain from the CDF a Timber Operator's License. In
December 2001, Pacific Lumber was granted a Timber Operator's License for 2002.
Pacific Lumber had historically conducted logging operations on the Scotia LLC
Timberlands with its own staff of logging personnel as well as through contract
loggers. However, effective April 1, 2002, Pacific Lumber ended its internal
logging operations and intends to rely exclusively on third party contract
loggers to conduct these activities in the future.

REAL ESTATE OPERATIONS

   GENERAL

      The Company, principally through its wholly owned subsidiaries, invests in
and develops residential and commercial real estate primarily in Arizona, Puerto
Rico, California and Texas. Real estate properties and receivables for real
estate sales as of December 31, 2001 are as follows:

                                                                                        BOOK VALUE
                                                                                      AS OF DECEMBER
                                                                                         31, 2001
                                                                                      --------------
                                                                                       (IN MILLIONS
                                                                                       OF DOLLARS)

Palmas del Mar (Puerto Rico):
   Developed lots...................................................        12 lots   $         2.2
   Undeveloped land and parcels held for sale.......................     1,233 acres           30.8
   Property, plant and equipment, receivables and other, net........                           12.0
                                                                                      --------------
      Total.........................................................                           45.0
                                                                                      --------------
   Resort operations (owned facilities)(1):
      Palmas Country Club(2)........................................                           28.5
      Casino........................................................                            0.3
                                                                                      --------------
      Total.........................................................                           28.8
                                                                                      --------------
Fountain Hills (Arizona):
   Residential, commercial and industrial developed lots............        34 lots             2.4
   Residential lots under development...............................        48 lots             4.5
   Undeveloped residential land.....................................     1,000 acres            8.8
   Property, plant, equipment and receivables, net..................                            1.0
                                                                                      --------------
      Total.........................................................                           16.7
                                                                                      --------------
Rancho Mirage (California):
   Residential developed lots and lots under development............        69 lots            16.1
   Undeveloped land.................................................        57 acres           10.8
                                                                                      --------------
      Total.........................................................                           26.9
                                                                                      --------------
Other properties (3):
   Residential developed lots.......................................        75 lots             0.2
   Undeveloped land.................................................       214 acres            1.2
   Receivables for sales of real estate, net........................                            5.0
                                                                                      --------------
      Total.........................................................                            6.4
                                                                                      --------------
LakePointe Plaza (Texas):
   Property, plant and equipment....................................                          128.7
                                                                                      --------------
   Total real estate properties and receivables.....................                  $       252.5
                                                                                      ==============
---------------

(1)   At Palmas del Mar, third parties own other resort facilities, including a
      marina and restaurants.
(2)   Palmas Country Club operations include two 18-hole golf courses, a 20
      court tennis facility, a member clubhouse, and a beach club. Amounts shown
      are net of accumulated depreciation.
(3)   Includes various properties in Arizona, New Mexico and Texas.


                                                                                                BOOK VALUE
                                                                                               AS OF DECEMBER
                                                                                                 31, 2001
                                                                                               -------------
                                                                                               (IN MILLIONS
                                                                                                OF DOLLARS)
Joint Ventures:
   FireRock, LLC(1):
      Residential developed lots and lots under development.............       166   lots      $       12.0
      Undeveloped land..................................................       120   acres              0.3
      Golf course, clubhouse and other club facilities..................                               21.1
      Other property, plant and equipment, net..........................                                1.0
                                                                                               -------------
        Total...........................................................                       $        34.4
                                                                                               =============
      Investment in FireRock LLC........................................                       $         6.9
                                                                                               =============

   SunRidge Canyon L.L.C.(1):
      Residential developed lots........................................         1   lot       $         0.1
      Golf course.......................................................                                 8.9
                                                                                               -------------
        Total...........................................................                       $         9.0
                                                                                               =============
      Investment in SunRidge Canyon L.L.C...............................                       $         1.0
                                                                                               =============
------------------

(1)   50% owned.

      Revenues from real estate operations are as follows:


                                                                                            YEARS ENDED DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001        2000
                                                                                            ----------  -----------
Palmas del Mar:
   Real estate sales......................................................................  $    11.7   $      4.8
   Resort operations and other............................................................       12.6         12.0
                                                                                            ----------  -----------
      Total...............................................................................       24.3         16.8
                                                                                            ----------  -----------
Fountain Hills:
   Real estate sales......................................................................       33.6         15.0
   Resort operations and other............................................................        3.5          3.6
                                                                                            ----------  -----------
      Total...............................................................................       37.1         18.6
                                                                                            ----------  -----------
Rancho Mirage:
   Real estate sales......................................................................          -          0.3
   Resort operations and other............................................................        0.2          0.1
                                                                                            ----------  -----------
      Total...............................................................................        0.2          0.4
                                                                                            ----------  -----------
Other:
   Real estate sales......................................................................        2.9          6.3
   Resort operations and other............................................................        0.2          5.1
                                                                                            ----------  -----------
      Total...............................................................................        3.1         11.4
                                                                                            ----------  -----------

LakePointe Plaza:.........................................................................        4.4            -
                                                                                            ----------  -----------
      Total...............................................................................  $    69.1   $     47.2
                                                                                            ==========  ===========

FireRock LLC(1):
   Real estate sales......................................................................  $    24.9   $     28.9
   Resort operations and other............................................................        3.2          2.1
                                                                                            ----------  -----------
      Total...............................................................................  $    28.1   $     31.0
                                                                                            ==========  ===========
SunRidge Canyon L.L.C.(1):
   Real estate sales......................................................................  $     0.8   $      9.3
   Resort operations and other............................................................        4.2          4.4
                                                                                            ----------  -----------
      Total...............................................................................  $     5.0   $     13.7
                                                                                            ==========  ===========
-----------------

(1)   50% owned.

   PALMAS DEL MAR

      Palmas del Mar is a master-planned residential community and resort
located on the southeastern coast of Puerto Rico near Humacao ("PALMAS"). The
Company is planning the development and sale of certain of the remaining
acreage. Future sales are expected to consist of undeveloped acreage,
semi-developed parcels and fully-developed lots. Resort operations include golf,
tennis, beach club and casino facilities owned by subsidiaries of the Company.
Certain other amenities, including a hotel, marina, equestrian center and
various restaurants, are owned and operated by third parties.

   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. The year-round
population of Fountain Hills is approximately 20,000. The Company is planning
the development of certain remaining acreage at Fountain Hills. Future sales are
expected to consist mainly of undeveloped acreage, semi-developed parcels and
fully-developed lots.

      In 1994, a subsidiary of the Company entered into a joint venture to
develop a 950 acre area in Fountain Hills known as SunRidge Canyon. The
development is a residential, golf-oriented, upscale master-planned community.
Sales of the individual lots began in November 1995. The project consists of
custom lots, marketed on an individual basis, production lots marketed to home
builders, and a championship level 18-hole daily fee golf course. The
development is owned by SunRidge Canyon L.L.C., an Arizona limited liability
company organized by a subsidiary of the Company and SunCor Development Company.
A subsidiary of the Company holds a 50% equity interest in the joint venture.

      In 1998, a subsidiary of the Company entered into a joint venture to
develop an 808 acre area in Fountain Hills known as FireRock Country Club. The
development is a residential, golf-oriented, upscale master-planned community. A
championship level private 18-hole golf course opened in February 2000, and the
clubhouse opened in September 2000. The first phase (120 lots) of the project
has been developed, and construction of the second phase (178 lots) is currently
underway. The development is owned by FireRock, L.L.C., a limited liability
company organized by a subsidiary of the Company (which holds a 50% equity
interest in the joint venture) and an unaffiliated third party.

   RANCHO MIRAGE

      In 1991, a subsidiary of the Company acquired Mirada, a 220-acre luxury
resort-residential project located in Rancho Mirage, California. Mirada is a
master planned community built into the Santa Rosa Mountains, 650 feet above the
Coachella Valley floor. Two of the six parcels within the project have been
developed, one of which is the first phase of a custom lot subdivision of 46
estate lots. The Lodge at Ranch Mirage, formerly the Ritz-Carlton Rancho Mirage
Hotel, which is owned and operated by a third party, was developed on the second
parcel. The four remaining parcels encompass approximately 130 acres, which,
under a development agreement with the City of Rancho Mirage which extends until
2011, may be developed with a variety of residential and commercial uses. The
Company has nearly completed construction on the second phase of the custom lot
subdivision consisting of 63 estate lots and is currently planning to develop
and/or market the remaining parcels. The Company has obtained final regulatory
and environmental approvals for development of all four of its remaining parcels
within Mirada, including the second phase of the custom lot subdivision.

   OTHER PROPERTIES

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

   MARKETING

      The Company is engaged in marketing and sales programs of varying
magnitudes at its real estate developments. The Company intends to continue
selling undeveloped acreage and semi-developed parcels to builders and
developers and fully developed lots to individuals and builders. All sales are
made directly to purchasers through the Company's marketing personnel,
independent contractors or through independent real estate brokers who are
compensated through the payment of customary real estate brokerage commissions.
The Company may also continue to enter into joint ventures with third parties
similar to those entered into in connection with its SunRidge Canyon and
FireRock developments.

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

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

   EMPLOYEES

      As of March 1, 2002, the Company's real estate operations had
approximately 168 employees.

RACING OPERATIONS

   GENERAL

      SHRP, Ltd. owns and operates Sam Houston Race Park, a Texas Class 1 horse
racing facility located within the greater Houston metropolitan area. In January
2000, a wholly owned subsidiary of SHRP, Ltd. acquired Valley Race Park, a
greyhound racing facility located in Harlingen, Texas, which had been closed
since 1995. Valley Race Park opened for simulcast wagering in mid-March of 2000,
and live greyhound racing began in December 2000.

   RACING OPERATIONS AND FACILITIES

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

   REGULATION OF RACING OPERATIONS

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

   MARKETING AND COMPETITION

      SHRP, Ltd's management believes that the majority of Sam Houston Race
Park's patrons reside within a 20-mile radius, which includes most of the
greater Houston metropolitan area, and that a secondary market of occasional
patrons can be developed outside the 20-mile radius but within a 50-mile radius
of the race park. Sam Houston Race Park uses a number of marketing strategies in
an attempt to reach these people and make them more frequent visitors to Sam
Houston Race Park. Sam Houston Race Park competes with other forms of
entertainment, including casinos located approximately 125 to 150 miles from
Houston, a greyhound racetrack located 60 miles from Sam Houston Race Park, a
wide range of sporting events and other entertainment activities in the Houston
area and certain other forms of wagering which are offered on the Internet. Sam
Houston Race Park could in the future also compete with other forms of gambling
in Texas, including casino gambling on Indian reservations or otherwise. While
Sam Houston Race Park believes that the location of Sam Houston Race Park is a
competitive advantage over the other more distant gaming ventures mentioned
above, the most significant challenge for Sam Houston Race Park is to develop
and educate new racing fans in a market where pari-mutuel wagering has been
absent since the 1930s. Other competitive factors faced by Sam Houston Race Park
include the allocation of sufficient live race days by the Racing Commission and
attraction of sufficient race horses to run at Sam Houston Race Park.
Competitive factors faced by Valley Race Park include the attraction of
sufficient greyhounds to run live racing, along with the ability of Valley Race
Park to market its simulcast signal due to its brief live racing season. Sam
Houston Race Park had 128 days of live racing during 2001, and currently has 128
days of live racing scheduled for 2002. Valley Race Park had 123 live racing
performances during 2001, and currently has 130 live racing performances
scheduled for 2002.

   EMPLOYEES

      As of March 1, 2002, the Company's racing operations had approximately 620
employees, approximately 400 of whom are seasonal employees during live racing.

EMPLOYEES

      At March 1, 2002, MAXXAM and its subsidiaries employed approximately 1,930
persons, excluding those employees involved in Aluminum Operations.


ITEM 2.         PROPERTIES

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


ITEM 3.         LEGAL PROCEEDINGS

GENERAL

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

      The following describes certain legal proceedings in which the Company or
its subsidiaries are involved. The Company and certain of its subsidiaries are
also involved in various claims, lawsuits and other proceedings not discussed
herein which relate to a wide variety of matters. Uncertainties are inherent in
the final outcome of those and the below-described matters, and it is presently
impossible to determine the actual costs that ultimately may be incurred.

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

MAXXAM INC. LITIGATION

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

   USAT MATTERS

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

      On December 26, 1995, the OTS initiated a formal administrative proceeding
(the "OTS ACTION") against the Company and others by filing a Notice of Charges
(No. AP 95-40; the "NOTICE"). The Notice alleged, among other things, misconduct
by the Company, Federated Development Company ("FEDERATED"), Mr. Charles Hurwitz
and others (the "RESPONDENTS") with respect to the failure of USAT. Mr. Hurwitz
is the Chairman of the Board and Chief Executive Officer of the Company. Mr.
Hurwitz is also the Chairman of the Board and Chief Executive Officer of
Federated, a Texas corporation wholly owned by Mr. Hurwitz, members of his
immediate family and trusts for the benefit thereof. Mr. Hurwitz and a wholly
owned subsidiary of Federated collectively own approximately 71% of the
aggregate voting power of the Company. The Notice claims, among other things,
that the Company was a savings and loan holding company, that with others it
controlled USAT, and that, as a result of such status, it was obligated to
maintain the net worth of USAT. The Notice makes numerous other allegations
against the Company and the other Respondents, including that through USAT it
was involved in prohibited transactions with Drexel, Burnham, Lambert Inc.
("DREXEL"). The OTS's pre-hearing statement alleged unspecified damages in
excess of $560 million from the Company and Federated for restitution and
reimbursement against loss for their pro rata portion (allegedly 35%) of the
amount of USAT's capital deficiency and all imbedded losses as of the date of
USAT's receivership (allegedly $1.6 billion). The OTS also seeks civil money
penalties and a removal from, and prohibition against the Company and the other
remaining Respondents engaging in, the banking industry. The hearing on the
merits of this matter commenced on September 22, 1997 and concluded March 1,
1999. On February 10, 1999, the OTS and the FDIC settled with all of the
Respondents except Mr. Hurwitz, the Company and Federated for $1.0 million and
limited cease and desist orders.

      Post hearing briefing concluded on January 31, 2000. In its post-hearing
brief, the OTS claimed, among other things, that the remaining Respondents, Mr.
Hurwitz, the Company and Federated, were jointly and severally liable to pay
either $821.3 million in restitution or reimbursement of $362.6 million for
alleged unjust enrichment. The OTS also claimed that each remaining Respondent
should be required to pay $4.6 million in civil money penalties, and that Mr.
Hurwitz should be prohibited from engaging in the banking industry. The
Respondents' brief claimed that none of them had any liability in this matter.
On September 12, 2001, the administrative law judge issued a recommended
decision in favor of the Respondents on each claim made by the OTS. The OTS
Director may accept or change the judge's recommended decision, which the
Company expects will occur by the end of 2002. If changed, such a decision would
then be subject to appeal by any of the Respondents to the federal appellate
court.

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

      On May 31, 2000, the Company, Federated and Mr. Hurwitz filed a
counterclaim to the FDIC action (the "FDIC COUNTERCLAIM"). The FDIC Counterclaim
states that the FDIC illegally paid the OTS to bring claims against the Company,
Federated and Mr. Hurwitz. The Company, Federated and Mr. Hurwitz are asking
that the FDIC be ordered to not make any further payments to the OTS to fund the
administrative proceedings described above, and they are seeking reimbursement
of attorneys' fees and damages from the FDIC. As of December 31, 2001, such fees
were in excess of $35.0 million. The Company, Federated and Mr. Hurwitz intend
to pursue this claim vigorously. If the OTS Director accepts the recommended
decision issued by the administrative law judge in the OTS action, then the FDIC
may not pursue its claims under the FDIC action.

      With respect to the OTS action and the FDIC action, although the OTS
Director may change the judge's recommended decision, the Company believes that
the ultimate resolution of these matters should not have a material adverse
effect on its consolidated financial position, results of operations or
liquidity.

      On January 16, 2001, an action was filed against the Company, Federated
and certain of the Company's directors in the Court of Chancery of the state of
Delaware entitled Alan Russell Kahn v. Federated Development Co., MAXXAM Inc.,
et. al., Civil Action 18623NC (the "KAHN LAWSUIT"). The plaintiff purports to
bring this action as a stockholder of the Company derivatively on behalf of the
Company. The lawsuit concerns the FDIC and OTS actions, and the Company's
advancement of fees and expenses on behalf of Federated and certain of the
Company's directors in connection with these actions. It alleges that the
defendants have breached their fiduciary duties to the Company, and have wasted
corporate assets, by allowing the Company to bear all of the costs and expenses
of Federated and certain of the Company's directors related to the FDIC and OTS
actions. The plaintiff seeks to require Federated and certain of the Company's
directors to reimburse the Company for all costs and expenses incurred by the
Company in connection with the FDIC and OTS actions, and to enjoin the Company
from advancing to Federated or certain of the Company's directors any further
funds for costs or expenses associated with these actions. The parties have
agreed to an indefinite extension of the defendants' obligations to respond to
the plaintiffs' claims. Although it is impossible to assess the ultimate outcome
of the Kahn lawsuit, the Company believes that the resolution of this matter
should not result in a material adverse effect on its consolidated financial
position, results of operations or liquidity.

KAISER LITIGATION

   REORGANIZATION PROCEEDINGS

      During the pendency of the Cases, substantially all pending litigation
against the Debtors is stayed in accordance with Section 362 of the Code.
Generally, claims arising from actions or omissions prior to the Filing Date
will be settled in connection with the plan of reorganization.

   ASBESTOS-RELATED LITIGATION

      Kaiser is a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with Kaiser or exposure to products
containing asbestos produced or sold by Kaiser. The lawsuits generally relate to
products Kaiser has not manufactured for 20 years. For the year ended December
31, 2001, a total of approximately $118.1 million of asbestos-related
settlements and defense costs were paid, and partial insurance reimbursements
for asbestos-related matters totaling approximately $90.3 million were received.
For additional information, see Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition and Investing
and Financing Activities--Aluminum Operations--Commitments and Contingencies"
and Note 16 to the Consolidated Financial Statements under the headings
"Environmental Contingencies" and "Asbestos Contingencies."

   GRAMERCY LITIGATION

      On July 5, 1999, KACC's Gramercy, Louisiana, alumina refinery was
extensively damaged by an explosion in the digestion area of the plant. A number
of employees were injured in the incident, several of them severely. The
incident resulted in a significant number of individual and class action
lawsuits being filed against Kaiser and others alleging, among other things,
property damage, business interruption losses by other businesses and personal
injury. After these matters were consolidated, the individual claims against
Kaiser were settled for amounts which, after the application of insurance, were
not material to Kaiser. Further, an agreement has been reached with the class
plaintiffs for an amount which, after the application of insurance, is not
material to Kaiser. While the class settlement remains subject to court approval
and while certain plaintiffs may opt out of the settlement, the Company does not
currently believe that this presents any material risk to Kaiser. Finally,
Kaiser faces new claims from certain parties to the litigation regarding the
interpretation of and alleged claims concerning certain settlement and other
agreements made during the course of the litigation. The aggregate amount of
damages threatened in these claims could, in certain circumstances, be
substantial. However, Kaiser does not currently believe these claims will result
in any material liability to the Company. For further information regarding the
Gramercy incident and these lawsuits, see Item 1. "Business--Aluminum
Operations--Business Operations," Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Results of
Operations--Aluminum Operations--Recent Events and Developments--Incident at
Gramercy Facility" and Note 3 to the Consolidated Financial Statements.

   LABOR MATTERS

      In connection with the USWA strike and subsequent lock-out by Kaiser,
certain allegations of ULPs were filed by the USWA with the National Labor
Relations Board ("NLRB"). Twenty-two of the twenty-four allegations of ULPs
brought against KACC by the USWA have been dismissed. A trial on the remaining
two allegations before an administrative law judge concluded in September 2001.
A decision is not expected until sometime after the second quarter of 2002. Any
outcome from the trial would be subject to additional appeals by the general
counsel of the NLRB, the USWA or Kaiser. This process could take months or
years. This matter is currently not stayed by the Cases. Any liability
ultimately determined to exist in this matter will be dealt with in the overall
context of the Debtors' plan of reorganization. If these proceedings eventually
resulted in a final ruling against Kaiser, it could be liable for back pay to
USWA members and such amount could be significant. Kaiser continues to believe
the charges are without merit. While uncertainties are inherent in matters such
as this and it is presently impossible to determine the actual costs, if any,
that may ultimately arise in connection with this matter, Kaiser's management
does not believe that the outcome of this matter will have a material adverse
impact on Kaiser's liquidity or financial position. However, amounts paid, if
any, in satisfaction of this matter could be significant to the results of the
period in which they are recorded. For further information regarding the ULPs,
see Item 1. "Business--Aluminum Operations--Business Operations," Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Aluminum Operations--Labor Matters" and Note
16 to the Consolidated Financial Statements.

   OTHER MATTERS

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

PACIFIC LUMBER LITIGATION

   TIMBER HARVESTING LITIGATION

      On January 28, 1997, an action was filed against Pacific Lumber entitled
Ecological Rights Foundation, Mateel Environmental v. Pacific Lumber (the "ERF
LAWSUIT") in the U.S. District Court in the Northern District of California (No.
97-0292). This action alleges that Pacific Lumber has discharged pollutants into
federal waterways, and plaintiffs are seeking to enjoin Pacific Lumber from
continuing such actions, civil penalties of up to $25,000 per day for each
violation, remediation and other damages. This case was dismissed by the
District Court on August 19, 1999, but the dismissal was reversed by the U.S.
Court of Appeals for the Ninth Circuit on October 30, 2000 and the case was
remanded to the District Court. On September 26, 2001, the plaintiffs sent
Pacific Lumber a 60 day notice alleging that Pacific Lumber continues to violate
the Federal Clean Water Act by discharging pollutants into certain waterways.
Pacific Lumber has taken certain remedial actions since its receipt of the
notice. The Company believes that it has strong factual and legal defenses with
respect to the ERF lawsuit; however, there can be no assurance that it will not
have a material adverse effect on its financial position, results of operations
or liquidity.

      On December 2, 1997, a lawsuit entitled Kristi Wrigley, et al. v. Charles
Hurwitz, John Campbell, Pacific Lumber, MAXXAM Group Holdings Inc., Scotia
Pacific Holding Company, MAXXAM Group Inc., MAXXAM Inc., Scotia Pacific Company
LLC, et al. (No. 9700399) (the "WRIGLEY LAWSUIT") was filed in the Superior
Court of Humboldt County. This action alleges, among other things, that
defendants' logging practices have contributed to an increase in flooding and
damage to domestic water systems in a portion of the Elk River watershed.
Plaintiffs further allege that in order to have THPs approved in connection with
these areas, the defendants submitted false information to the CDF in violation
of California's business and professions code and the Racketeering Influence and
Corrupt Practices Act. The Company believes that it has strong factual and legal
defenses with respect to the Wrigley lawsuit; however, there can be no assurance
that it will not have a material adverse effect on its consolidated financial
position, results of operations or liquidity.

      On March 31, 1999, an action entitled Environmental Protection Information
Association, Sierra Club v. California Department of Forestry and Fire
Protection, California Department of Fish and Game, The Pacific Lumber Company,
Scotia Pacific Company LLC, Salmon Creek Corporation, et al. (No. 99CS00639)
(the "EPIC-SYP/PERMITS LAWSUIT") was filed alleging, among other things, that
the CDF and the CDFG violated the CEQA and the CESA, and challenging, among
other things the validity and legality of the SYP and the Permits issued by
California. This action is now pending in Humboldt County, California (No.
CV-990445). The plaintiffs seek, among other things, injunctive relief to set
aside the CDF's and the CDFG's decisions approving the SYP and the Permits
issued by California. The Court recently denied the plaintiffs' motion for
injunctive relief, and set a trial date of August 5, 2002. On March 31, 1999, an
action entitled United Steelworkers of America, AFL-CIO, CLC, and Donald Kegley
v. California Department of Forestry and Fire Protection, The Pacific Lumber
Company, Scotia Pacific Company LLC and Salmon Creek Corporation (No. 99CS00626)
(the "USWA LAWSUIT") was also filed challenging the validity and legality of the
SYP. This case is set for trial on June 10, 2002. The Company believes that
appropriate procedures were followed throughout the public review and approval
process concerning the Environmental Plans, and the Company is working with the
relevant government agencies to defend these challenges. Although uncertainties
are inherent in the final outcome of the EPIC-SYP/Permits lawsuit and the USWA
lawsuit, the Company believes that the resolution of these matters should not
result in a material adverse effect on its financial condition, results of
operations or the ability to harvest timber.

      With respect to a February 2001notice of intent to sue, the Company and
Pacific Lumber, on July 24, 2001, a lawsuit entitled Environmental Protection
Information Association v. Pacific Lumber, Scotia Pacific C ompany LLC (NO.
CD1-2821) was filed in the U.S. District Court in the Northern District of
California (the "BEAR CREEK LAWSUIT"). The lawsuit alleges that the Company and
Pacific Lumber's harvesting and other activities under certain of its approved
and proposed THPs will result in discharges of pollutants in violation of the
federal clean water act ("CWA"). The plaintiff asserts that the CWA requires the
defendants to obtain a permit from the North Coast Water Board before beginning
timber harvesting and road construction activities in the Bear Creek watershed,
and is seeking to enjoin these activities until such permit has been obtained.
The plaintiff also seeks civil penalties of up to $27,000 per day for the
defendant's alleged continued violation of the CWA. The Company believes that
the requirements under the HCP are adequate to ensure that sediment and
pollutants from its harvesting activities will not reach levels harmful to the
environment. Furthermore, EPA regulations specifically provide that such
activities are not subject to CWA permitting requirements. The Company continues
to believe that it has strong legal defenses in this matter; however, there can
be no assurance that this lawsuit will not have a material adverse impact on its
consolidated financial condition or results of operations.

OTHER MATTERS

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


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

      Not applicable.

                                     PART II


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

      The Company's common stock, $.50 par value ("COMMON STOCK"), is traded on
the American Stock Exchange. 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.


                                                                           2001                          2000
                                                                -----------------------------  -------------------------
                                                                   HIGH            LOW            HIGH            LOW
                                                                ----------     -----------     ----------     ----------
   First quarter..............................................  $  16.25       $  13.00        $  43.38       $  25.94
   Second quarter.............................................     27.48          11.60           29.88          17.38
   Third quarter..............................................     24.80          18.53           23.25          17.44
   Fourth quarter.............................................     20.25          17.02           20.25          13.94

      The following table sets forth the number of record holders of each class
of publicly owned securities of the Company at March 31, 2002:


                                                                                                      NUMBER OF
                                                                                                       RECORD
                                         TITLE OF CLASS                                               HOLDERS
------------------------------------------------------------------------------------------------     -----------
Common Stock....................................................................................           2,956
Class A $.05 Non-cumulative Participating Convertible Preferred Stock...........................              25

      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, 2001 is not reported upon herein by
independent public accountants and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto which are contained in
Item 8 herein.


                                                                         YEARS ENDED DECEMBER 31,
                                                       ------------------------------------------------------------
                                                        2001 (1)      2000        1999         1998        1997
                                                       ----------  ----------- -----------  ----------  -----------
                                                              (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS:
   Net sales.........................................  $ 2,018.2   $  2,448.0  $  2,350.7   $ 2,618.7   $  2,779.2
   Operating income (loss)...........................       45.4        130.6       (51.5)      125.6        236.4
   Income (loss) before extraordinary items(2).......     (459.6)        30.0        73.6       (14.7)        65.2
   Extraordinary items, net (3)......................        3.6          3.9           -       (42.5)           -
   Net income (loss).................................     (456.0)        33.9        73.6       (57.2)        65.2

CONSOLIDATED BALANCE SHEET AT END OF PERIOD:
   Total assets......................................    3,935.3      4,504.0     4,393.1     4,075.2      4,114.2
   Long-term debt, less current maturities...........    1,704.5      1,882.8     1,956.8     1,971.7      1,888.0
   Stockholders' equity (deficit) (4)................     (475.6)        49.1        27.8       (56.8)        (2.9)

PER SHARE INFORMATION:
   Basic: (5)
      Income (loss) before extraordinary items.......  $  (69.83)  $     3.95  $     9.58   $   (2.10)  $     7.23
      Extraordinary items, net.......................       0.55         0.52           -       (6.07)           -
                                                       ----------  ----------- -----------  ----------  -----------
      Net income (loss)..............................  $  (69.28)  $     4.47  $     9.58   $   (8.17)  $     7.23
                                                       ==========  =========== ===========  ==========  ===========
   Diluted:
      Income (loss) before extraordinary items.......  $  (69.83)  $     3.95  $     9.49   $   (2.10)  $     7.14
      Extraordinary items, net.......................       0.55         0.52           -       (6.07)           -
                                                       ----------  ----------- -----------  ----------  -----------
      Net income (loss)..............................  $  (69.28)  $     4.47  $     9.49   $   (8.17)  $     7.14
                                                       ==========  =========== ===========  ==========  ===========

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

(1)  Results for the Company's aluminum operations have been prepared on a
     "going concern" basis. See Note 1 to the Consolidated Financial Statements
     for a discussion of the impact of the Debtors filing for reorganization
     under Chapter 11 on the Company's results.
(2)  Income (loss) before extraordinary items for 2001 includes additional
     valuation allowances related to Kaiser's deferred tax assets of $505.4
     million (see Note 12 to the Consolidated Financial Statements), business
     interruption insurance recoveries of $36.6 million (see Note 3 to the
     Consolidated Financial Statements), a pre-tax gain of $163.6 million on the
     sale of an approximate 8.3% interest in QAL, a pre-tax gain of $16.7
     million ($9.9 million net of deferred taxes or $1.50 per share) on the sale
     of the Grizzly Creek grove (see Note 5 to the Consolidated Financial
     Statements), and a pre-tax charge of $57.2 million for asbestos-related
     claims, in addition to net gains on power sales and several other
     non-recurring items attributable to aluminum operations totaling $163.6
     million (see Note 2 to the Consolidated Financial Statements). 2000 results
     include estimated business interruption insurance recoveries of $110.0
     million, a pre-tax gain on the sale of the Owl Creek grove of $60.0 million
     ($35.6 million net of deferred taxes or $4.69 per share), and several
     non-recurring items attributable to aluminum operations totaling $48.9
     million (see Note 2 to the Consolidated Financial Statements). 1999 results
     include a pre-tax gain of $239.8 million ($142.1 million net of deferred
     taxes or $18.17 per share) on the sale of the Headwaters Timberlands, a
     pre-tax gain on the involuntary conversion at the Gramercy facility of
     $85.0 million, a pre-tax charge of $53.2 million for asbestos-related
     claims and a pre-tax gain of $50.5 million on the sale of AKW L.P. ("AKW").
(3)  The extraordinary gain for 2001 relates to the repurchase of MGHI Notes.
     The extraordinary gain for 2000 relates to the repurchase of Timber Notes.
     The extraordinary loss for 1998 relates to refinancing of long-term debt,
     net of an income tax benefit of $22.9 million.
(4)  MAXXAM Inc. has not declared or paid any cash dividends during the five
     year period ended December 31, 2001.
(5)  Basic earnings per share for 1997, 1999, and 2000 have been restated to
     reflect the dilutive effect of participating convertible preferred
     securities.  See Note 1 to the Consolidated Financial Statements.

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

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

RESULTS OF OPERATIONS

   ALUMINUM OPERATIONS

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

      Reorganization Proceedings
      On February 12, 2002, Kaiser, KACC and 13 of KACC's wholly owned
subsidiaries filed separate voluntary petitions in the United States Bankruptcy
Court for the District of Delaware for reorganization under Chapter 11 of the
United States Bankruptcy Code. On March 15, 2002, two additional subsidiaries of
KACC filed petitions. None of Kaiser's non-U.S. affiliates were included in the
Cases. The Cases are being jointly administered with the Debtors managing their
businesses in the ordinary course as debtors-in-possession subject to the
control and supervision of the Court.

      The necessity for filing the Cases was attributable to the liquidity and
cash flow problems of Kaiser arising in late 2001 and early 2002. Kaiser was
facing significant near-term debt maturities at a time of unusually weak
aluminum industry business conditions, depressed aluminum prices and a broad
economic slowdown that was further exacerbated by the events of September 11,
2001. In addition, Kaiser had become increasingly burdened by the asbestos
litigation (see Note 16 to the Consolidated Financial Statements for additional
information) and growing legacy obligations for retiree medical and pension
costs (see Note 13 to the Consolidated Financial Statements for additional
information). The confluence of these factors has created the prospect of
continuing operating losses and negative cash flow for Kaiser, resulting in
lower credit ratings and an inability to access the capital markets.

      Kaiser's objective is to achieve the highest possible recoveries for all
creditors and stockholders, consistent with the Debtors' abilities to pay and
the continuation of their businesses. However, there can be no assurance that
the Debtors will be able to attain these objectives or achieve a successful
reorganization. Further, there can be no assurance that the liabilities of the
Debtors will not be found in the Cases to exceed the fair value of their assets.
This could result in claims being paid at less than 100% of their face value and
the equity of Kaiser's stockholders being diluted or cancelled. At this time, it
is not possible to predict the outcome of the Cases, in general, or the effect
of the Cases on the businesses of the Debtors or on the interests of creditors
and stockholders.

      The accompanying financial information of the Company's aluminum segment
and related discussions of financial condition and results of operations are
based on the assumption that Kaiser will continue as a "going concern" which
contemplates the realization of assets and the liquidation of liabilities in the
ordinary course of business; however, as a result of the commencement of the
Cases, such realization of assets and liquidation of liabilities are subject to
a significant number of uncertainties. Specifically, but not all inclusive, the
financial information of Kaiser for the year ended December 31, 2001, which is
included in the Company's consolidated results, contained herein does not
present: (a) the classification of any long-term debt which is in default as a
current liability, (b) the realizable value of assets on a liquidation basis or
the availability of such assets to satisfy liabilities, (c) the amount which
will ultimately be paid to settle liabilities and contingencies which may be
allowed in the Cases, or (d) the effect of any changes which may be made in
connection with the Company's investment in Kaiser or with the Debtors'
operations resulting from a plan of reorganization. Because of the ongoing
nature of the Cases, the discussions and financial information of Kaiser
contained herein are subject to material uncertainties.

      Kaiser's financial results will be included in the Company's consolidated
results until the Filing Date. Under generally accepted accounting principles,
consolidation is generally required for investments of more than 50% of the
outstanding voting stock of an investee, except when control is not held by the
majority owner. Under these rules, legal reorganization or bankruptcy represent
conditions which can preclude consolidation in instances where control rests
with the bankruptcy court, rather than the majority owner. Hence, the Company
will be required to present its equity interest in the net assets of Kaiser at
the Filing Date as an investment in an unconsolidated subsidiary and will not
recognize any income or loss from Kaiser in its results of operations during the
reorganization period. The Company believes additional losses related to its
investment in Kaiser are not probable, and accordingly, it expects to reverse
its losses in excess of its investment in Kaiser on February 12, 2002. Any
subsequent recovery in the fair value of the investment will not be recognized
in earnings unless realized through a disposition of Kaiser shares by the
Company. In addition, the Company expects to record a charge of approximately
$65 million during the first quarter of 2002 related to the Company's equity
share of Kaiser's accumulated other comprehensive losses. Accumulated other
comprehensive losses attributable to Kaiser are primarily related to minimum
pension liability adjustments. See Note 1 to the Consolidated Financial
Statements for further discussion of the Company's investment in Kaiser and
Kaiser's bankruptcy. When and if Kaiser emerges from the jurisdiction of the
Court, the subsequent accounting will be determined based upon the facts and
circumstances at the time, including the terms of any plan of reorganization.

      The following unaudited pro forma financial data was derived from the
historical financial statements of the Company and are adjusted to reflect the
expected pro forma impact of the deconsolidation of Kaiser as of the periods
presented (in millions, except share data).


                                                                      YEAR ENDED
                                                                     DECEMBER 31,
                                                                         2001
                                                                    --------------
Revenues..........................................................  $       285.5
Costs and expenses................................................          311.0
                                                                    --------------
Operating income (loss)...........................................          (25.5)
Write-off of investment in Kaiser.................................          (51.6)
Other income (expenses) - net.....................................          (31.2)
Income tax benefit................................................           18.7
                                                                    --------------
Loss before extraordinary item....................................          (89.6)
Extraordinary item................................................            3.6
                                                                    --------------
Net loss..........................................................  $       (86.0)
                                                                    ==============
Net loss per share:
   Basic..........................................................  $      (13.07)
   Diluted........................................................         (13.07)


                                                                     DECEMBER 31,
                                                                         2001
                                                                    --------------
Current assets....................................................  $       398.2
Property, plant, and equipment (net)..............................          293.2
Investment in subsidiaries........................................            8.0
Other assets......................................................          538.1
                                                                    --------------
      Total assets................................................  $     1,237.5
                                                                    ==============
Current liabilities...............................................          133.8
Long-term debt, less current maturities...........................        1,003.6
Other liabilities.................................................          125.5
                                                                    --------------
      Total liabilities...........................................        1,262.9
Stockholders' deficit.............................................          (25.4)
                                                                    --------------
      Total liabilities and stockholders' deficit.................  $     1,237.5
                                                                    ==============

      The pro forma results of operations presented above is prepared as if
Kaiser had been deconsolidated on January 1, 2001, and includes a pro forma
adjustment to reflect $1.2 million of losses which were previously reported as a
component of stockholders' deficit (in other comprehensive income). The pro
forma balance sheet presented above is prepared as Kaiser had been deconsolidated
on December 31, 2001.

      On April 12, 2002, Kaiser filed with the Court a motion seeking an order
of the Court prohibiting the Company (or MGHI), without first seeking Court
relief, from making any disposition of its stock of Kaiser, including any sale,
transfer, or exchange of such stock or treating any of its Kaiser stock as
worthless for federal income tax purposes. Kaiser indicated in its Court filing
that it was concerned that such a transaction could have the effect of depriving
Kaiser of the ability to utilize the full value of its net operating losses,
foreign tax credits and minimum tax credits. The Company is in the process of
analyzing the motion and other materials which were filed with the Court.

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

      Kaiser's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree on the volume and mix of all products sold and on Kaiser's
hedging strategies. Primary aluminum prices have historically been subject to
significant cyclical price fluctuations. See Notes 1 and 17 to the Consolidated
Financial Statements for a discussion of Kaiser's hedging activities.

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

      During 2001, the Average Midwest United States transaction price ("AMT
PRICE") per pound of primary aluminum began the year at $.75 per pound and then
began a steady decrease ending 2001 at $.64 per pound. During 2000, the average
AMT price was $.75 per pound. During 1999, the AMT price declined to a low of
approximately $.57 per pound in February 1999 and then began a steady increase
ending 1999 at $.79 per pound. At February 28, 2002, the AMT price was
approximately $.66 per pound.

      The following table presents selected operational and financial
information with respect to the Company's aluminum operations for the years
ended December 31, 2001, 2000, and 1999. The following data should be read in
conjunction with the Consolidated Financial Statements and the notes thereto,
contained elsewhere herein. See Note 2 to the Consolidated Financial Statements
for further information regarding segments.


                                                                   YEARS ENDED DECEMBER 31,
                                                                --------------------------------
                                                                  2001      2000       1999
                                                                --------- ---------  ---------
                                                                   (IN MILLIONS OF DOLLARS,
                                                                 EXCEPT SHIPMENTS AND PRICES)
Shipments:(1)
   Alumina:(2)
      Third party.............................................   2,582.7   1,927.1    2,093.9
      Intersegment............................................     422.8     751.9      757.3
                                                                --------- ---------  ---------
        Total alumina.........................................   3,005.5   2,679.0    2,851.2
                                                                --------- ---------  ---------
   Primary aluminum:(3)
      Third party.............................................     244.7     345.5      295.6
      Intersegment............................................       2.3     148.9      171.2
                                                                --------- ---------  ---------
        Total primary aluminum................................     247.0     494.4      466.8
                                                                --------- ---------  ---------
   Flat-rolled products.......................................      74.4     162.3      217.9
                                                                --------- ---------  ---------
   Engineered products........................................     118.1     164.6      171.1
                                                                --------- ---------  ---------
Average realized third party sales price:(4)
   Alumina (per ton)..........................................  $    186  $    209   $    176
   Primary aluminum (per pound)...............................  $   0.67  $   0.74   $   0.66
Net sales:
   Bauxite and alumina: (2)
      Third party (includes net sales of bauxite).............  $  508.3  $  442.2   $  395.8
      Intersegment............................................      77.9     148.3      129.0
                                                                --------- ---------  ---------
        Total bauxite and alumina.............................     586.2     590.5      524.8
                                                                --------- ---------  ---------
   Primary aluminum:(3)
      Third party.............................................     358.9     563.7      432.9
      Intersegment............................................       3.8     242.3      240.6
                                                                --------- ---------  ---------
        Total primary aluminum................................     362.7     806.0      673.5
                                                                --------- ---------  ---------
   Flat-rolled products.......................................     308.0     521.0      591.3
   Engineered products........................................     429.5     564.9      556.8
   Commodities marketing .....................................      22.9     (25.4)      18.3
   Minority interests.........................................     105.1     103.4       88.5
   Eliminations...............................................     (81.7)   (390.6)    (369.6)
                                                                --------- ---------  ---------
        Total net sales.......................................  $1,732.7  $2,169.8   $2,083.6
                                                                ========= =========  =========
Operating income (loss)(5)....................................  $   70.8  $  145.2   $  (23.0)
                                                                ========= =========  =========
Income (loss) before income taxes and minority interests(6)...  $   92.6  $   31.3   $  (84.0)
                                                                ========= =========  =========
--------------------

(1)   Shipments are expressed in thousands of metric tons. A metric ton is
      equivalent to 2,204.6 pounds.
(2)   Shipments and net sales for 2001, 2000 and 1999 included approximately
      115,000 tons, 322,000 tons and 395,000 tons, respectively, of alumina
      purchased from third parties.
(3)   Beginning in the first quarter of 2001, as a result of the continuing
      curtailment of Kaiser's Northwest smelters, the flat-rolled products
      business unit began purchasing its own primary aluminum rather than
      relying on the primary aluminum business unit to supply its aluminum
      requirements through production or third party purchases. The engineered
      products business unit was already responsible for purchasing the majority
      of its primary aluminum requirements. During the years ended December 31,
      2001, 2000 and 1999, the primary aluminum business unit purchased
      approximately 27,300 tons, 56,100 tons and 12,000 tons, respectively, of
      primary aluminum from third parties to meet existing third party
      commitments.
(4)   Average realized prices for Kaiser's flat-rolled products and engineered
      products segments are not presented as such prices are subject to
      fluctuations due to changes in product mix.
(5)   Operating income (loss) for 2001, 2000 and 1999 included non-recurring
      items totaling $163.6 million, $41.9 million and $(24.1) million,
      respectively, as well as numerous unusual items as a result of the
      Gramercy incident. See Note 2 and 3 to the Consolidated Financial
      Statements. Operating income (loss) for 1999 included potline preparation
      and restart costs of $12.8 million.
(6)   In addition to the items described in (5) above, income (loss) before
      income taxes and minority interests included the impact of additional
      non-recurring items of $(31.0) million, $7.0 million and $(35.5) million
      for the years ended December 31, 2001, 2000 and 1999, respectively. See
      Note 2 to the Consolidated Financial Statements for further information.

      Significant Items

      Pension Plan
      The assets of Kaiser's pension plans are, to a substantial degree,
invested in the capital markets and managed by a third party. Given the
performance of the financial markets during 2001, Kaiser was required to
reflect an additional minimum pension liability of $65.1 million (net of income
tax benefit of $38.0 million) in its 2001 financial statements as a result of a
decline in the value of the assets held by Kaiser's pension plans. Kaiser also
anticipates that the decline in the value of the pension plans' assets will
unfavorably impact pension costs reflected in its 2002 operating results and
could, over the longer term, increase pension funding requirements. See Note 13
to the Consolidated Financial Statements for additional discussions of these
matters.

      Sale of 8.3% Interest in QAL
      In September 2001, Kaiser sold an approximate 8.3% interest in QAL and
recorded a pre-tax gain of approximately $163.6 million (included in other
income (expense) in the Consolidated Statements of Operations). As a result of
the transaction, Kaiser now owns a 20% interest in QAL. See Note 5 to the
Consolidated Financial Statements for additional discussion of the September
2001 sale.

      Start-up Related Costs at Gramercy Facility
      Initial production at Kaiser's Gramercy, Louisiana, alumina refinery,
which had been curtailed since July 1999 as a result of an explosion in the
digestion area of the plant, commenced during the middle of December 2000.
Construction at the facility was substantially completed during the third
quarter of 2001. During 2001, the Gramercy facility incurred abnormal related
start-up costs of approximately $64.9 million. These abnormal costs resulted
from operating the plant in an interim and less efficient mode pending the
completion of construction and reaching the plant's intended production rate and
efficiency. During the first nine months of 2001, the plant operated at
approximately 68% of its newly-rated estimated capacity of 1,250,000 tons.
During the fourth quarter of 2001, the plant operated at approximately 90% of
its newly-rated capacity. By the end of February 2002, the plant was operating
at just below 100% of its newly-rated capacity. The facility is now focusing its
efforts on achieving its full operating efficiency. See Note 3 to the
Consolidated Financial Statements for additional discussion of the incident at
the Gramercy facility and the financial statement impact of Gramercy-related
insurance recoveries.

      Labor Matters
      From September 1998 through September 2000, Kaiser and the USWA were
involved in a labor dispute as a result of the September 1998 USWA strike and
the subsequent "lock-out" by Kaiser in February 1999. Although the USWA dispute
has been settled and the workers have returned to the facilities, two
allegations of ULPs in connection with the USWA strike and subsequent lock-out
by Kaiser remain to be resolved. Kaiser believes that the remaining charges made
against Kaiser by the USWA are without merit. See Note 16 to the Consolidated
Financial Statements for additional discussion on the ULP charges.

      Pacific Northwest Power Sales and Operating Level
      During 2001, Kaiser kept its Northwest smelters curtailed and sold the
remaining power available that it had under contract through September 2001.
Kaiser has the right to purchase sufficient power from the BPA to operate its
Trentwood facility as well as approximately 40% of the capacity of its Northwest
aluminum smelting operations. Given recent primary aluminum prices and the
forward price of power in the Northwest, it is unlikely that Kaiser would
operate more than a portion of its Northwest smelting capacity in the near
future. Operating only a portion of the Northwest capacity would result in
production/cost inefficiencies such that operating results would, at best be
breakeven to modestly negative at long-term primary aluminum prices. However,
operating at such a reduced rate could, depending on prevailing economics,
result in improved cash flows as opposed to remaining curtailed and incurring
Kaiser's fixed and continuing labor and other costs. This is because Kaiser is
liable for certain severance, supplemental unemployment and early retirement
benefits for the USWA workers at the curtailed smelters. A substantial portion
of such costs have been accrued through early 2003. However, additional accruals
may be required depending on when the USWA workers are recalled and when the
smelting operations are restarted. Such amounts could be material with a present
value in the $50.0 million to $60.0 million range. However, most of such costs
would be related to pension and post-retirement medical benefits and would
likely be paid out over an extended period. Additionally, beginning October
2002, Kaiser could be liable for certain take-or-pay obligations under the BPA
contract and such amounts could be significant. See Note 4 to the Consolidated
Financial Statements for additional information on the power sales, Kaiser's
contract rights and obligations and additional detail regarding possible
incremental liabilities with respect to the USWA workers.

      Strategic Initiatives
      In May 2001, Kaiser announced that it had launched a performance
improvement initiative designed to increase operating cash flow, generate cash
from inventory reduction and improve Kaiser's financial flexibility. During
2001, Kaiser recorded charges of $35.2 million (see Note 2 to the Consolidated
Financial Statements) in connection with the program. Additional cash and
non-cash charges may be required in the future as the program continues. Such
additional charges could be material.

      Net Sales
      Net sales for the year ended December 31, 2001, decreased from the year
ago period primarily due to a decrease in average realized prices for alumina
and primary aluminum as well as a decline in shipments of primary aluminum,
flat-rolled products and engineered products. These decreases in prices and
shipments were partially offset by an increase in net shipments of bauxite and
alumina as well as an increase in average realized prices for flat-rolled and
engineered products. The decrease in average realized prices for alumina was due
to a decrease in primary aluminum market prices to which Kaiser's third-party
alumina sales contracts are linked. The decrease in shipments of primary
aluminum was primarily due to the complete curtailment of the Northwest smelters
during 2001. The decrease in shipments of flat-rolled products was primarily
due to reduced shipments of can body stock as a part of the planned exit from
this product line. Current period shipments for flat-rolled products were also
adversely affected by reduced general engineering heat-treat products and can
lid and tab stock due to weak market demand. These decreases were only modestly
offset by a strong aerospace demand during the first nine months of 2001.
However, after the events of September 11, 2001, aerospace demand and the price
for aerospace products declined substantially. The decrease in engineered
products shipments was the result of reduced transportation and electrical
product shipments due to weak U.S. market demand.

      Net sales for the year ended December 31, 2000, increased from the prior
year primarily due to an increase in average realized prices. The increase in
average realized prices for alumina, which is sold under contracts at prices
linked to the price of primary aluminum, and primary aluminum was a reflection
of the increase in market prices for primary aluminum during the period. Average
realized prices for flat-rolled products increased due to a favorable change in
product mix as a result of the exit from the can body stock product line, and
net sales for engineered products reflected an increase in prices for soft alloy
extrusions. In addition to higher average realized prices, net sales were
favorably impacted by higher shipments of primary aluminum due to an increase in
the operating rate for Valco. The improvement in net sales from these factors
was partially offset by: (i) lower shipments of alumina primarily due to the
timing of shipments, (ii) lower shipments of flat-rolled products due to
Kaiser's exit from the can body stock product line and (iii) lower shipments of
engineered products due to a softening in the ground transportation and
distribution markets.

      Operating Income (Loss)
      Operating income (loss) for 2001 and 2000 includes non-recurring income
$163.6 million and $41.9 million, respectively. These items as well as the
non-recurring items discussed below are described further in Note 2 to the
Consolidated Financial Statements. Excluding these items, operating income
(loss) decreased from $103.3 million for 2000 to $(92.8) million for 2001. In
addition to the decrease in average realized prices and shipments discussed
above, operating income for 2001 was adversely affected by abnormal Gramercy
related start-up costs and litigation costs, overhead and other fixed costs
associated with the curtailed Northwest smelting operations, and increased costs
due to a lag in the ability to scale back costs to reflect a revised product mix
and the substantial volume decline caused by weakened demand.

      Operating income for the year ended December 31, 2000 included a net
favorable impact from several non-recurring items totaling $41.9 million.
Operating income for the year ended December 31, 1999 included a net unfavorable
impact from non-recurring items totaling $24.1 million. After excluding these
items, operating income was $103.3 million for the year ended December 31, 2000
as compared to $1.1 million for the prior year. The increase in operating
income, after excluding non-recurring items, was primarily due to the
improvements in net sales for alumina and primary aluminum discussed above.
Higher energy costs, however, had an unfavorable impact on operating income for
2000.

      Income (Loss) Before Income Taxes and Minority Interests
      Income before income taxes and minority interests for the year ended
December 31, 2001, includes the $163.6 million gain on the sale of an interest
in QAL as discussed in Note 5 to the Consolidated Financial Statements as well
as the net impact of certain non-recurring amounts of $(31.0) million in
addition to the $163.6 million of non-recurring items included in operating
income as discussed in Note 2 to the Consolidated Financial Statements. Income
before income taxes and minority interests for the year ended December 31, 2000,
included non-recurring items totaling $7.0 million in addition to the $41.9
million in non-recurring items included in operating income as discussed above.
After excluding these items, aluminum operations had a loss before income taxes
and minority interests of $203.6 million for the year ended December 31, 2001, as
compared to a loss before income taxes and minority interests of $17.6 million
for the year ended December 31, 2000. The decline is a result of the decline in
operating income discussed above.

      The loss before income taxes and minority interests for the year ended
December 31, 1999, included non-recurring items totaling $(35.5) million in
addition to the items included in operating income as discussed above. After
excluding these items as well as the non-recurring items included in operating
income which were discussed above, the aluminum operations had a loss before
income taxes and minority interest of $6.3 million in 2000 as compared to a loss
of $109.0 million in 1999. This improvement is due to the increase in operating
income discussed above.

   FOREST PRODUCTS OPERATIONS

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

      The Company's forest products operations are conducted by MGI, through
Pacific Lumber and Britt. The segment's business is somewhat seasonal, and its
net sales have been historically higher in the months of April through November
than in the months of December through March. Management expects that MGI's
revenues and cash flows will continue to be somewhat seasonal. Accordingly,
MGI's results for any one quarter are not necessarily indicative of results to
be expected for the full year.

      Regulatory and environmental matters play a significant role in the
Company's forest products operations. See Item 1. "Business - Forest Products
Operations - Regulatory and Environmental Matters" and Note 16 to the
Consolidated Financial Statements for a discussion of these matters. Regulatory
compliance and related litigation have caused delays in obtaining approvals of
THPs and delays in harvesting on THPs once they are approved. This has resulted
in a decline in harvest, an increase in the cost of logging operations and lower
net sales.

      Since the consummation of the Headwaters Agreement in March 1999, there
has been a significant amount of work required in connection with the
implementation of the Environmental Plans, and this work is expected to continue
for several more years. During the implementation period, government agencies
had until recently failed to approve THPs in a timely manner. The rate of
approvals of THPs during 2001 improved over that for the prior year, and further
improvements have been experienced thus far in 2002. However, it continues to be
below levels which meet Pacific Lumber's expectations. Nevertheless, Pacific
Lumber anticipates that once the Environmental Plans are fully implemented, the
process of preparing THPs will become more streamlined, and the time to obtain
approval of THPs will potentially be shortened.

      While Pacific Lumber has experienced recent improvements in the THP
approval process, there can be no assurance that Pacific Lumber will not in the
future have difficulties in receiving approvals of its THPs similar to those
experienced in the past. Furthermore, there can be no assurance that certain
pending legal, regulatory and environmental matters or future governmental
regulations, legislation or judicial or administrative decisions, adverse
weather conditions or low selling prices, would not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
See Item 3. "Legal Proceedings" and Note 16 to the Consolidated Financial
Statements for further information regarding regulatory and legal proceedings
affecting the Company's forest products operations.

      During 2001, comprehensive external and internal reviews were conducted of
Pacific Lumber's business operations. These reviews were an effort to identify
ways in which Pacific Lumber could operate on a more efficient and cost
effective basis. Based upon the results of these reviews, Pacific Lumber, among
other things, indefinitely idled two of its four sawmills, eliminated certain of
its operations, including its soil amendment and concrete block activities,
began utilizing more efficient harvesting methods and adopted certain other cost
saving measures. Most of these changes were implemented by Pacific Lumber in the
last quarter of 2001, or the first quarter of 2002. Pacific Lumber also ended
its internal logging operations as of April 1, 2002, and intends to exclusively
rely on third party contract loggers to conduct these activities in the future.
In connection with the changes described above, Pacific Lumber recognized a
writedown of $2.2 million for impaired assets, a $2.6 million charge for
restructuring initiatives, and a $3.4 million charge for environmental
remediation costs during 2001 (see Note 2 to the Consolidated Financial
Statements). If business performance does not improve, additional restructuring
charges may be necessary, and Pacific Lumber could have a significant liquidity
issue.

      The following table presents selected operational and financial
information for the years ended December 31, 2001, 2000 and 1999 for the
Company's forest products operations, and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto, contained elsewhere
herein. See Note 2 to the Consolidated Financial statements for further
information regarding segments.


                                                                   YEARS ENDED DECEMBER 31,
                                                                ------------------------------
                                                                  2001      2000       1999
                                                                --------- ---------  ---------
                                                                   (IN MILLIONS OF DOLLARS,
                                                                 EXCEPT SHIPMENTS AND PRICES)
                                                                          ---------  ---------
Shipments:
   Lumber: (1)
      Redwood upper grades.....................................     16.2      15.8       24.6
      Redwood common grades....................................    165.0     143.8      137.4
      Douglas-fir upper grades.................................      8.8      11.5       10.4
      Douglas-fir common grades................................     50.5      76.1       61.5
      Other....................................................      3.9       5.9        8.7
                                                                --------- ---------  ---------
   Total lumber................................................    244.4     253.1      242.6
                                                                ========= =========  =========
   Wood chips (2)..............................................    104.9     169.5      163.7
                                                                ========= =========  =========
Average sales price:
   Lumber: (3)
      Redwood upper grades..................................... $  1,770  $  1,798   $  1,531
      Redwood common grades....................................      577       712        629
      Douglas-fir upper grades.................................    1,323     1,352      1,290
      Douglas-fir common grades................................      337       376        430
   Wood chips (4)..............................................       64        67         77
Net sales:
   Lumber, net of discount..................................... $  152.2  $  175.3   $  165.3
   Logs........................................................     10.6       3.5        0.3
   Wood chips..................................................      6.8      11.3       12.5
   Cogeneration power..........................................     11.7       6.0        3.8
   Other.......................................................      4.0       4.0        5.9
                                                                --------- ---------  ---------
      Total net sales ......................................... $  185.3  $  200.1   $  187.8
                                                                ========= =========  =========
Operating income (loss)(6)..................................... $  (27.5) $    7.6   $   (4.1)
                                                                ========= =========  =========
Operating cash flow............................................ $   (5.9) $   27.3   $   12.9
                                                                ========= =========  =========
Income (loss) before income taxes and minority interests(7).... $  (59.6) $   23.9   $  196.1
                                                                ========= =========  =========

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

(1)   Lumber shipments are expressed in millions of board feet.
(2)   Wood chip shipments are expressed in thousands of bone dry units of 2,400
      pounds.
(3)   Dollars per thousand board feet.
(4)   Dollars per bone dry unit.
(5)   Operating income before depletion and depreciation and asset impairment
      charges, also referred to as "EBITDA."
(6)   Operating loss for 2001 includes non-recurring charges totaling $8.2
      million.  See Note 2 to the Consolidated Financial Statements
      for further discussions.
(7)   In addition to the non-recurring charges referred to in (6), 2001 results
      include a $16.7 million pre-tax gain on the sale of the Grizzly Creek
      grove. 2000 results include a $60.0 million pre-tax gain on the sale of
      the Owl Creek grove, and 1999 results include a $239.8 million pre-tax
      gain on the sale of the Headwaters Timberlands.

      Net Sales
      Net sales for the year ended December 31, 2001 were negatively impacted by
lower lumber prices, with lower prices for common grade redwood lumber being the
primary contributor to the decline. In addition, shipments of lumber declined
slightly versus the comparable prior year period. The segment had higher sales
volumes for redwood common grade lumber; however, this was more than offset by
lower shipments of common grade Douglas fir lumber.

      Net sales for the year ended December 31, 2000, increased over the
comparable prior year period primarily due to higher prices for redwood lumber
and higher shipments of common grade redwood and Douglas-fir lumber. These
improvements were offset in part by lower shipments of upper grade redwood
lumber due to continuing reductions in the volume of old growth logs available
for the production of lumber.

      Operating Income (Loss)
      The segment experienced an operating loss for the year ended December 31,
2001, compared to operating income for the same period of 2000. Operating
results for the year ended December 31, 2001, include the impact of several non-
recurring charges totaling $8.2 million (see Note 2 to the Consolidated
Financial Statements). In addition to the non-recurring items, gross margins on
lumber sales declined year to year as a result of higher costs associated with
lumber production and logging operations.

      The forest products segment had operating income for the year ended
December 31, 2000, as compared to an operating loss for the comparable 1999
period, primarily due to the increase in net sales discussed above.

      Income (Loss) Before Income Taxes and Minority Interests
      The segment had a loss before income taxes for the year ended December 31,
2001, as compared to income before income taxes for the year ago period. In
addition to the operating loss discussed above, 2001 had lower gains on sales of
timberlands. 2001 included a $16.7 million gain on the sale of a portion of the
Grizzly Creek grove ($9.9 million net of deferred taxes), whereas 2000 included
a gain on the sale of the Owl Creek grove of $60.0 million ($35.6 million net of
deferred taxes).

      Income before income taxes and minority interests for the year ended
December 31, 2000, decreased from the comparable prior year period principally
due to the 1999 gain on the sale of the Headwaters Timberlands of $239.8 million
($142.1 million net of deferred taxes or $18.17 per share). Included in 2000 is
a gain on the sale of the Owl Creek grove of $60.0 million discussed above.

   REAL ESTATE OPERATIONS

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


                                                                     YEARS ENDED DECEMBER 31,
                                                                 ---------------------------------
                                                                    2001       2000        1999
                                                                 ----------  ---------  ----------
                                                                     (IN MILLIONS OF DOLLARS)

Net sales......................................................  $    69.1   $   47.2   $    52.0
Operating income (loss)........................................       10.9       (7.8)       (5.2)
Income before income taxes and minority interests..............       14.8       14.5        13.7

      Net Sales
      Net sales for the real estate segment include revenues from sales of
developed lots, bulk acreage and real property associated with the Company's
real estate developments and resort and other commercial operations conducted at
these real estate developments, in addition to lease revenues from the Lake
Pointe Plaza office complex.

      Net sales for the year ended December 31, 2001, increased from the same
period of 2000 primarily due to the sale of a 354 acre parcel to the town of
Fountain Hills for $13.7 million as well as increased sales of real estate
acreage at the Company's Palmas del Mar development project, and rental income
from the Lake Pointe Plaza office complex. The improvement in real estate sales
was somewhat offset by lower revenues from commercial operations at Fountain
Hills as a result of the sale of a water utility in October 2000.

      Net sales for the year ended December 31, 2000, decreased from the same
prior year period primarily due to lower sales of real estate at the Company's
Palmas del Mar and Mirada development projects.

      Operating Income (Loss)
      The real estate segment had operating income for the year ended December
31, 2001, compared to an operating loss for the year ended December 31, 2000,
primarily due to the increases in net sales discussed above.

      The operating loss increased for the year ended December 31, 2000, from
the same period in 1999 primarily due to the write-down of certain receivables.

      Income Before Income Taxes and  Minority Interests
      Income before income taxes and minority interests was substantially
unchanged when comparing the year ended December 31, 2001 to the prior year.
Offsetting the $18.7 million increase in operating income discussed above was a
$12.2 million decline in interest and other income as well as a $6.3 million
increase in interest expense. Results for 2000 included the impact of an $11.3
million gain in 2000 on the sale of a water company in Arizona. Results for 2001
included interest on the debt issued in connection with the LakePointe Plaza
acquisition as well as a full year of interest on certain debt secured by Palmas
del Mar's golf courses.

      Income before income taxes and minority interests for the year ended
December 31, 2000, increased when compared to the same period in 1999 primarily
due to the gain on the sale of the water company discussed above offset by the
impact of a $7.4 million gain in 1999 from insurance recoveries from property
damage resulting from the 1998 hurricane in Puerto Rico.

   RACING OPERATIONS

      Industry Overview
      The Company, through its subsidiaries, has a 99.9% ownership interest in
SHRP, Ltd., a Texas limited partnership, which owns and operates the Sam Houston
Race Park, a Class 1 horse racing facility in Houston, Texas, and Valley Race
Park, a greyhound racing facility located in Harlingen, Texas, which began
operations in March of 2000. Results of operations between periods are generally
not comparable due to the timing, varying lengths and types of racing meets
held. Historically, the Sam Houston Race Park has derived a significant amount
of its annual net pari-mutuel commissions from live racing and simulcasting. Net
pari-mutuel commissions have typically been highest during the first and fourth
quarters of the year, the time during which live thoroughbred racing has
historically been conducted. Beginning in the fourth quarter of 2000 and
continuing into the first quarter of 2001, live greyhound racing contributed to
higher net pari-mutuel commissions. Live greyhound racing is expected to
contribute to higher net pari-mutuel commissions in the first and fourth
quarters of the year.


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                   --------------------------------
                                                                                     2001       2000        1999
                                                                                   ---------  ---------  ----------
                                                                                       (IN MILLIONS OF DOLLARS)

Net sales........................................................................  $   31.1   $   30.9   $    27.3
Operating income.................................................................       0.9        2.1         3.8
Income before income taxes and minority interests................................       1.0        2.1         3.1

      Net Sales
      Net sales for the racing segment increased in the year ended December 31,
2001, compared to the year ended December 31, 2000, due to a full year of
operations for Valley Race Park. This improvement was partially offset by lower
net pari-mutuel commissions at Sam Houston Race Park. Net sales for the year
ended December 31, 2000, were higher compared to the same period in 1999 due to
the opening of Valley Race Park.

      Operating Income
      Operating income for the racing segment for the year ended December 31,
2001, decreased from the same period in 2000 due to the decrease in net
commissions at Sam Houston Race Park discussed above. Operating income decreased
for the year ended December 31, 2000, from the same period in 1999 due to
increases in marketing-related expenses at Sam Houston Race Park and due to
start-up expenses at Valley Race Park.

      Income Before Income Taxes and Minority Interests
      The decrease in income before income taxes and minority interests for this
segment for the year ended December 31, 2001, as compared to the year ended
December 31, 2000, as well as the decrease in income before income taxes and
minority interests for the year ended December 31, 2000 versus the same period
of 1999, are both attributable to the decreases in operating income for the
respective periods discussed above.

   OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS


                                                                                      YEARS ENDED DECEMBER 31,


                                                                                     2001       2000        1999
                                                                                  ----------  ---------  ----------
                                                                                      (IN MILLIONS OF DOLLARS)
Operating loss..................................................................  $    (9.7)  $  (16.5)  $   (23.0)
Loss before income taxes and minority interests.................................      (12.8)     (11.5)      (34.4)

      Operating Loss
      The operating loss represents corporate general and administrative
expenses that are not attributable to the Company's industry segments. Changes
in the operating loss between 2001, 2000 and 1999 were due to: (i) accruals for
certain legal contingencies, which were $0.9 million, $6.6 million and $0.5
million in 2001, 2000 and 1999, respectively (see Note 16 to the Consolidated
Financial Statements) and (ii) an $11.7 million non-cash charge in 1999 related
to a bonus awarded in the form of restricted stock.

      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 2001 increased from 2000 due to a
decrease in earnings from the investments described in Note 6 to the
Consolidated Financial Statements offset in part by the decrease in operating
losses described above. The loss for 2000 decreased from 1999 principally due to
the lower operating losses described above, offset by higher earnings from
marketable securities.

   PROVISION FOR INCOME TAXES

      The Company's provision for income taxes differs from the federal
statutory rate due principally to (i) increases in valuation allowances and
revision of prior years' tax estimates, (ii) percentage depletion, and (iii)
foreign, state and local taxes, net of related federal tax benefits. In light of
the Cases, Kaiser has provided $530.4 million in valuation allowances for all of
its net deferred tax assets because the "more likely than not" recognition
criteria has not been met. See Note 12 to the Consolidated Financial Statements
for a discussion of these and other income tax matters.

   MINORITY INTERESTS

      Minority interests represent the minority stockholders' interest in the
Company's aluminum operations.

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

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

   OVERVIEW

      The Company conducts its operations primarily through its subsidiaries.
Creditors of 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 a result of the filing of the Cases, claims against the Debtors for
principal and accrued interest on secured and unsecured indebtedness existing on
the Filing Date are stayed while the Debtors continue business operations as
debtors-in-possession, subject to the control and supervision of the Court. See
Note 1 to the Consolidated Financial Statements for additional discussion of the
Cases. At this time, it is not possible to predict the effect of the Cases on
the businesses of the Debtors.

      Certain of the Company's other subsidiaries, principally MGHI, MGI,
Pacific Lumber and Scotia LLC, are restricted by their various debt instruments
as to the amount of funds that can be paid in the form of dividends or loaned to
affiliates. MGHI and the Forest Products companies are highly leveraged and have
significant debt service requirements. Notes 11 and 16 to the Consolidated
Financial Statements contain additional information concerning the Company's
indebtedness, certain restrictive debt covenants and a discussion of material
commitments and contingencies affecting MGHI and the Forest Products companies'
liquidity and capital resources. "MAXXAM PARENT" is used in this section to
refer to the Company on a stand-alone basis without its subsidiaries.

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



                                               FOREST PRODUCTS
                                            ------------------------
                                            SCOTIA   PACIFIC MGI AND   REAL                      MAXXAM
                                  ALUMINUM    LLC    LUMBER   OTHER   ESTATE   RACING   MGHI     PARENT    TOTAL
                                 ---------- ------- -------- ------- --------- ------- ------- ---------- --------
                                                             (IN MILLIONS OF DOLLARS)
Debt and credit facilities (not
   including intercompany notes)
Short-term borrowings and current
   maturities of long-term debt:
   December 31, 2001(1)......... $   173.5  $ 14.9  $  17.8  $  0.6  $   10.4  $    -  $    -  $       -  $ 217.2
   December 31, 2000............      31.6    14.2     37.1       -       2.1       -       -       13.4     98.4

Long-term debt, excluding current
   maturities:
   December 31, 2001(1)......... $   700.8  $754.5  $   0.5  $    -  $  162.6  $  0.2  $ 88.2  $       -  $1,706.8
   December 31, 2000............     957.8   769.4      0.6       -      38.2     0.2   118.8          -   1,885.0

Revolving credit facilities:
   Facility commitment
      amounts (5)............... $   300.0  $ 60.9  $  50.0  $  2.5  $   23.6  $    -  $    -  $       -  $ 437.0
   December 31, 2001:
      Borrowings................         -       -     17.7     0.6       4.8       -       -          -     23.1
      Letters of credit.........      26.7       -     11.5       -       2.4       -       -          -     40.6
      Unused and available
        credit..................     146.3    60.9     12.2     1.9       5.2       -       -          -    226.5

Cash, cash equivalents, marketable
   securities and other investments
December 31, 2001:
   Current amounts restricted for
      debt service.............. $       -  $ 35.3  $     -  $    -  $    0.4  $  3.7  $    -  $       -  $  39.4
   Other current amounts........     153.3    19.6      2.3    26.6      16.0     3.8    35.7      128.3    385.6
                                 ---------- ------- -------- ------- --------- ------- ------- ---------- --------
                                     153.3    54.9      2.3    26.6      16.4     7.5    35.7      128.3    425.0
                                 ---------- ------- -------- ------- --------- ------- ------- ---------- --------

   Long-term amounts restricted
      for debt service(1).......         -    87.6        -       -       1.3       -       -          -     88.9
   Other long-term restricted
      amounts...................         -       -        -     2.2       7.4       -       -          -      9.6
                                 ---------- ------- -------- ------- --------- ------- ------- ---------- --------
                                         -    87.6        -     2.2       8.7       -       -          -     98.5
                                 ---------- ------- -------- ------- ----------------- ------- ---------- --------
                                 $   153.3  $142.5  $   2.3  $ 28.8  $   25.1  $  7.5  $ 35.7  $   128.3  $ 523.5
                                 ========== ======= ======== ======= ========= ======= ======= ========== ========

December 31, 2000:
   Current amounts restricted for
      debt service.............. $       -  $ 45.8  $     -  $    -  $    0.9  $    -  $    -  $       -  $  46.7
   Other current amounts........      23.4    68.6      0.2    61.7      18.7     9.0    54.3      115.2    351.1
                                 ---------- ------- -------- ------- --------- ------- ------- ---------- --------
                                      23.4   114.4      0.2    61.7      19.6     9.0    54.3      115.2    397.8
                                 ---------- ------- -------- ------- --------- ------- ------- ---------- --------

   Long-term amounts restricted for
      debt service(1)...........         -    92.1        -       -       1.3       -       -          -     93.4
   Other long-term restricted
      amounts...................       0.1     2.5        -     2.0       8.3       -       -          -     12.9
                                 ---------- ------- -------- ------- --------- ------- ------- ---------- --------
                                       0.1    94.6        -     2.0       9.6       -       -          -    106.3
                                 ---------- ------- -------- ------- ----------------- ------- ---------- --------
                                 $    23.5  $209.0  $   0.2  $ 63.7  $   29.2  $  9.0  $ 54.3  $   115.2  $ 504.1
                                 ========== ======= ======== ======= ========= ======= ======= ========== ========

                                                FOREST PRODUCTS
                                            ------------------------
                                            SCOTIA  PACIFIC  MGI AND   REAL                      MAXXAM
                                  ALUMINUM    LLC   LUMBER    OTHER   ESTATE   RACING   MGHI     PARENT    TOTAL
                                 ---------- ------- -------- ------- --------- ------- ------- ---------- --------
                                                             (IN MILLIONS OF DOLLARS)
Changes in cash and cash
   equivalents
Capital expenditures:
   December 31, 2001 (2)........ $   183.3  $  6.2  $   5.9  $  1.3  $  133.9  $  2.0  $    -  $     0.7  $ 333.3
   December 31, 2000(2).........     261.9     8.2      4.1     1.7       6.9     4.5       -        1.0    288.3
   December 31, 1999(2).........      68.4    19.2      2.6     1.3       3.1     0.6       -        0.6     95.8

Net proceeds from dispositions of
   property and investments:
   December 31, 2001(3)......... $   171.7  $  1.3  $  18.6  $    -  $      -  $    -  $    -  $       -  $ 191.6
   December 31, 2000(3).........     166.9    67.0      0.3       -      18.0       -       -          -    252.2
   December 31, 1999(3).........      74.8     0.3        -   298.0       2.0       -       -          -    375.1

Borrowings (repayments) of debt
   and credit facilities, net of
   financing costs:
   December 31, 2001(1)......... $  (105.1) $(14.2) $ (19.5) $  0.6  $  126.9  $    -  $(25.1) $   (13.4) $ (49.8)
   December 31, 2000(1).........      15.2   (16.0)    37.0       -      22.6    (0.3)   (5.8)      (5.2)    47.5
   December 31, 1999(1).........       9.8    (9.0)    (0.1)   (4.7)     (1.8)   (1.2)      -          -     (7.0)

Dividends and advances received
   (paid):
   December 31, 2001(4)......... $       -  $(79.9) $  89.2  $(26.4) $  (17.8) $ (4.0) $ 17.1  $    21.8  $     -
   December 31, 2000(4).........         -       -     23.7  (132.1)    (33.7)      -    63.4       78.7        -
   December 31, 1999............         -       -        -   (18.7)    (15.0)      -    18.7       15.0        -
------------------

(1)  The increase in Kaiser's short-term borrowings and current maturities of
     long-term debt between December 31, 2000, and December 31, 2001, reflects
     the current maturity of the KACC 9 7/8% Senior Notes. See Note 11 to the
     Consolidated Financial Statements for additional information. The decrease
     between December 31, 2000, and December 31, 2001, in Scotia LLC's long-term
     debt was the result of principal payments on the Timber Notes of $14.2
     million. The decrease in MGHI's long-term debt between December 31, 2000
     and December 31, 2001, and the repayments reflected in 2001 and 2000 are
     the result of repurchases of debt. The decrease in MGHI's and Scotia LLC's
     long-term debt between December 31, 1999, and December 31, 2000, was due
     primarily to repurchases of debt. With respect to Scotia LLC, such
     repurchases were made using proceeds from the SAR Account, resulting in a
     decrease in long-term cash restricted for debt service. In addition, Scotia
     LLC made principal payments on the Timber Notes of $15.9 million and $8.2
     million during the years ended December 31, 2000 and 1999, respectively.
     The increase in Real Estate long-term debt between 2000 and 2001was due
     primarily to borrowings made in connection with the purchase of the Lake
     Pointe Plaza office complex. The increase in long-term debt for Real Estate
     between 1999 and 2000 is a result of a subsidiary of PDMPI issuing $30
     million in bonds to finance certain golf and resort related activities.
(2)  Aluminum: Capital expenditures in 2001and 2000 included $78.6 million and
     $239.1 million, respectively, spent with respect to rebuilding the Gramercy
     facility. In addition, the capital expenditures in 2000 included $13.3
     million spent with respect to the purchase of the non-working capital
     assets of the Chandler, Arizona, drawn tube aluminum fabricating operation.
     Scotia LLC: Included in capital expenditures for 2000 and 1999 is $1.1
     million and $13.2 million, respectively, for timberland acquisitions. Real
     Estate: Capital expenditures for 2001 include $131.3 million for the
     purchase of Lake Pointe Plaza. Racing: Capital expenditures for racing
     operations for the year ended December 31, 2000 include $2.8 million for
     the acquisition of Valley Race Park.
(3)  Kaiser net proceeds from dispositions of property and investments in 2001
     includes primarily $159.0 million for the sale of an approximate 8.3%
     interest in QAL while 2000 proceeds include $51.6 million for the
     Pleasanton office complex and $100.0 million related to Gramercy property
     damage insurance recoveries. Proceeds from dispositions of property and
     investments includes $19.8 million of proceeds in 2001 for Pacific Lumber's
     sale of a portion of the Grizzly Creek grove, $67.0 million of proceeds in
     2000 for Scotia LLC's sale of the Owl Creek grove and $299.9 million of gross
     proceeds in 1999 for Pacific Lumber's sale of the Headwaters Timberlands.
(4)  For the year ended December 31, 2001, $79.9 million of dividends were paid
     by Scotia LLC to Pacific Lumber, $63.9 million of which was made using
     proceeds from the sale of Scotia LLC's Owl Creek grove. In addition to the
     $79.9 million of dividends from Scotia LLC, Pacific Lumber received $9.3
     million from MGI related to repayment of intercompany debt. For the year
     ended December 31, 2000, $90.0 million of the dividends paid from MGI to
     MGHI were made using proceeds from the sale of the Headwaters Timberlands.
     MGHI in turn paid a $45.0 million dividend to MAXXAM Parent. With respect
     to real estate operations, $33.7 million of the dividends paid to MAXXAM
     Parent in 2000 were made by Real Estate subsidiaries. In addition to cash
     generated by real estate sales, funds for making these dividends were
     provided by proceeds from the sale of a water utility company in Arizona
     and proceeds from a bond offering by a subsidiary of PDMPI.
(5)  In connection with the Cases, Kaiser currently has a DIP Facility to
     provide for borrowings during the reorganization period.

   MAXXAM PARENT

      MAXXAM Parent realized a substantial portion of its cash flows during 2001
from dividends and other distributions from subsidiaries in the real estate and
racing segments. As of December 31, 2001, MAXXAM Parent's other subsidiaries
(principally real estate) had an aggregate of nonrestricted cash and unused
borrowing availability of approximately $15.8 million which could have been paid
to the Company. With respect to MGHI, MAXXAM Parent does not expect to receive
any dividends or distributions during 2002.

      MAXXAM Parent owns 22,061,750 shares of the common stock of Kaiser,
representing a 27% interest. As a result of the Cases, the value of Kaiser
common stock has declined since December 31, 2001, and the market value of the
Kaiser shares owned by MAXXAM Parent based on the price per share quoted at the
close of business on April 10, 2002, was $3.1 million. There can be no
assurance that such value would be realized should MAXXAM Parent dispose of its
investment in these shares, and it is possible that all or a portion of MAXXAM
Parent's interest may be diluted or cancelled as a part of a plan of
reorganization.

      MAXXAM Parent expects that its general and administrative costs, net of
cost reimbursements from subsidiaries and excluding expenses related to legal
contingencies, will range from $8.0 million to $11.0 million for the next year.
There can be no assurance, however, that MAXXAM Parent's cash requirements for
its corporate general and administrative expenses will not increase.

      With respect to the OTS and FDIC matters, although the OTS Director may
change the administrative law judge's recommended decision, the Company believes
that the ultimate resolution of the OTS and FDIC matters should not have a
material adverse effect on MAXXAM Parent's financial position, results of
operations or liquidity. See Note 16 to the Consolidated Financial Statements
for further discussion of the OTS and FDIC matters. Any adverse outcome of the
other litigation or the regulatory and environmental matters described in Note
16 to the Consolidated Financial Statements could materially adversely affect
the Company's consolidated financial position, results of operations or
liquidity.

      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. During 2001, the Company purchased
220,800 shares of its common stock for $2.9 million.

      MAXXAM Parent believes that its existing resources, together with the cash
available from subsidiaries, will be sufficient to fund its working capital
requirements for the next year. With respect to its long-term liquidity, MAXXAM
Parent believes that its existing cash and cash resources, together with
distributions from its real estate and racing segments, should be sufficient to
meet its working capital requirements. However, there can be no assurance that
MAXXAM Parent's cash resources, together with distributions from its real estate
and racing segments, will be sufficient for such purposes.

   MGHI

      Subsequent to December 31, 2001, MGHI repurchased $16.9 million of the 12%
MGHI Senior Secured Notes ("MGHI NOTES") resulting in an extraordinary gain of
$1.9 million (net of tax). MGHI expects that interest payments on the remaining
$71.3 million of MGHI Notes will be paid with its existing cash and/or payments
on an intercompany note between MGHI and MAXXAM Parent.

      MGHI owns 27,938,250 shares of the common stock of Kaiser, representing a
35% interest. As a result of the Cases, the value of Kaiser common stock has
declined since December 31, 2001, and the market value of the Kaiser shares
owned by MGHI based on the price per share quoted at the close of business on
April 10, 2002, was $3.9 million. There can be no assurance that such value
would be realized should MGHI dispose of its investment in these shares, and it
is possible that all or a portion of MGHI's interest may be diluted or cancelled
as a part of a plan of reorganization.

      MGHI believes that its existing resources will be sufficient to fund its
debt service and working capital requirements for the next year. With respect to
its long-term liquidity, MGHI believes that its existing cash and cash
resources, together with payments by MAXXAM Parent on the Intercompany Note,
should be sufficient to meet its debt service and working capital requirements,
although there can be no assurance that this will be the case. MAXXAM Parent
expects to pay MGHI the amount of the Intercompany Note necessary to retire the
MGHI Notes which are due in 2003. The regulatory and environmental matters
described under "--Results of Operations - Forest Products Operations" above
have adversely affected cash available from subsidiaries, and therefore the
distributions to MGHI. Distributions from MGHI's subsidiaries may continue to be
minimal, if any, over the next one to two years.

   ALUMINUM OPERATIONS

      Operating Activities
      The increase in cash flows from operating activities between 2001 and 2000
resulted primarily from the impact of improved 2001 operating results, excluding
non-cash items, driven primarily by power sales and a decline in Gramercy-
related receivables. The increase in cash flows from operating activities
between 2000 and 1999 resulted primarily from the impact of the improved 2000
operating results, driven primarily by the 2000 power sales and a decline in
inventories, offset in part by an increase in receivables. The decrease in
inventories was primarily due to improved inventory management and the exit from
the can body product line at the flat-rolled products business unit. The
increase in receivables was primarily due to power sale proceeds that were
received in the first quarter of 2001 and Gramercy-related items.

      Capital Expenditures
      Total consolidated capital expenditures are expected to be between $40.0
million and $75.0 million per year in each of 2002 and 2003 (of which
approximately 15% is expected to be funded by Kaiser's minority partners in
certain foreign joint ventures). Kaiser's management continues to evaluate
numerous projects, all of which would require substantial capital, both in the
United States and overseas. The level of capital expenditures may be adjusted
from time to time depending on Kaiser's price outlook for primary aluminum and
other products, Kaiser's ability to assure future cash flows through hedging or
other means, Kaiser's financial position and other factors.

      Financial Activities and Liquidity
      On February 12, 2002, Kaiser entered into the DIP Facility which provides
for a secured, revolving line of credit through the earlier of February 12,
2004, the effective date of a plan of reorganization or voluntary termination by
Kaiser. Kaiser is able to borrow under the DIP Facility by means of revolving
credit advances and letters of credit (up to $125.0 million) in an aggregate
amount equal to the lesser of $300.0 million or a borrowing base relating to
eligible accounts receivable, eligible inventory and eligible fixed assets
reduced by certain reserves, as defined in the DIP Facility agreement. The DIP
Facility is guaranteed by Kaiser and certain significant subsidiaries of Kaiser.
Interest on any outstanding balances will bear a spread over either a base rate
or LIBOR, at Kaiser's option. The Court signed a final order approving of the
DIP Facility on March 19, 2002.

      Kaiser's management believes that the cash and cash equivalents of $153.3
million at December 31, 2001, cash flows from operations and cash available from
the DIP Facility will provide sufficient working capital to allow Kaiser to meet
its obligations during the pendency of the Cases. At March 31, 2002, there were
no outstanding borrowings under the revolving credit facility and there were
outstanding letters of credit of approximately $54.1 million. As of March 31,
2002, $121.0 million (of which $70.9 million could be used for additional
letters of credit) was available to Kaiser under the DIP Facility. Kaiser
expects that the borrowing base amount will increase by approximately $50.0
million once certain appraisal information is provided to the lenders.

      Commitments and Contingencies
      During the pendency of the Cases, substantially all pending litigation,
except that relating to certain environmental matters, against the Debtors is
stayed. Generally, claims arising from actions or omissions prior to the Filing
Date will be settled in connection with the plan of reorganization.

      Kaiser is subject to a number of environmental laws, to fines or penalties
assessed for alleged breaches of the environmental laws, and to claims and
litigation based upon such laws. Based on Kaiser's evaluation of these and other
environmental matters, Kaiser has established environmental accruals of $61.2
million at December 31, 2001. However, Kaiser believes that it is reasonably
possible that changes in various factors could cause costs associated with these
environmental matters to exceed current accruals by amounts that could range, in
the aggregate, up to an estimated $27.0 million.

      Kaiser is also a defendant in a number of asbestos-related lawsuits that
generally relate to products Kaiser has not sold for more than 20 years. Based
on past experience and reasonably anticipated future activity, Kaiser has
established a $621.3 million accrual at December 31, 2001, for estimated
asbestos-related costs for claims filed and estimated to be filed through 2011,
before consideration of insurance recoveries. However, Kaiser believes that
substantial recoveries from insurance carriers are probable. Kaiser reached this
conclusion based on prior insurance-related recoveries in respect of
asbestos-related claims, existing insurance policies and the advice of outside
counsel with respect to applicable insurance coverage law relating to the terms
and conditions of these policies. Accordingly, Kaiser has recorded an estimated
aggregate insurance recovery of $501.2 million (determined on the same basis as
the asbestos-related cost accrual) at December 31, 2001. Although Kaiser has
settled asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements and disputes with
certain carriers exist. The timing and amount of future recoveries from these
insurance carriers will depend on the pendency of the Cases and on the
resolution of disputes regarding coverage under the applicable insurance
policies.

      In connection with the USWA strike and subsequent lock-out by Kaiser which
was settled in September 2000, certain allegations of ULPs have been filed with
the NLRB by the USWA. Kaiser believes that all such allegations are without
merit. Twenty-two of twenty-four allegations of ULPs previously brought against
Kaiser by the USWA have been dismissed. A trial before an administrative law
judge for the two remaining allegations concluded in September 2001. A decision
is not expected until sometime after the second quarter of 2002. Any outcome
from the trial before an administrative judge would be subject to additional
appeals by the general counsel of the NLRB, the USWA or Kaiser. This matter is
currently not stayed by the Cases. If these proceedings eventually resulted in a
final ruling against Kaiser with respect to either allegation, it could be
obligated to provide back pay to USWA members at the five plants and such amount
could be significant. Any liability ultimately determined to exist in this
matter will be dealt with in the overall context of the Debtors' plan of
reorganization.

      While uncertainties are inherent in the final outcome of these matters and
it is presently impossible to determine the actual costs that ultimately may be
incurred and insurance recoveries that ultimately may be received, Kaiser's
management currently believes that the resolution of these uncertainties and the
incurrence of related costs, net of any related insurance recoveries, should not
have a material adverse effect on Kaiser's consolidated financial position or
liquidity. However, amounts paid, if any, in satisfaction of these matters could
be significant to the results of the period in which they are recorded. See Note
16 to the Consolidated Financial Statements for a more detailed discussion of
these contingencies and the factors affecting Kaiser management's beliefs.

   FOREST PRODUCTS OPERATIONS

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

      On August 14, 2001, Pacific Lumber's revolving credit agreement (the
"PACIFIC LUMBER CREDIT AGREEMENT") was renewed. The new facility provides for up
to a $50.0 million two-year revolving line of credit as compared to a $60.0
million line of credit under the expired facility. On each anniversary date, and
subject to the consent of the lender, the Pacific Lumber Credit Agreement may be
extended by one year. The other terms and conditions are substantially the same
as those under the expired facility. Borrowings, letters of credit and unused
availability at December 31, 2001, are reflected in the table above.

      Scotia LLC has an agreement with a group of banks which allows it to
borrow up to one year's interest on the Timber Notes (the "SCOTIA LLC LINE OF
CREDIT"). On June 1, 2001, this facility was extended for an additional year to
July 12, 2002. Annually, Scotia LLC will request that the Scotia LLC Line of
Credit be extended for a period of not less than 364 days. If not extended,
Scotia LLC may draw upon the full amount available. The amount drawn would be
repayable in 12 semiannual installments on each note payment date (after the
payment of certain other items, including the Aggregate Minimum Principal
Amortization Amount, as defined, then due), commencing approximately two and
one-half years following the date of the draw.

      On March 5, 2002, Scotia LLC notified the trustee for the Timber Notes
that it had met all of the requirements of the SAR Reduction Date, as defined in
the Indenture. Accordingly, on March 20, 2002, Scotia LLC released $29.4 million
from the SAR Account and distributed this amount to Pacific Lumber.

      During the year ended December 31, 2001, Scotia LLC used $67.3 million set
aside in the note payment account to pay the $57.4 million of interest due as
well as $9.9 million of principal. Scotia LLC repaid an additional $4.3 million
of principal on the Timber Notes using funds held in the SAR Account, resulting
in total principal payments of $14.2 million, an amount equal to Scheduled
Amortization. In addition, Scotia LLC made distributions in the amount of $79.9
million to its parent, Pacific Lumber, $63.9 million of which was made using
funds from the December 2000 sale of the Owl Creek grove and $13.5 million of
which was made using excess funds released from the SAR Account.

      On the note payment date in January 2002, Scotia LLC had $33.9 million set
aside in the note payment account to pay the $28.4 million of interest due as
well as $5.5 million of principal. Scotia LLC repaid an additional $6.1 million
of principal on the Timber Notes using funds held in the SAR Account, resulting
in a total principal payment of $11.6 million, an amount equal to Scheduled
Amortization (as defined in the Indenture).

      With respect to the note payment due in July 2002, Scotia LLC expects that
it will require funds from the Scotia LLC Line of Credit to pay a portion of the
interest due and that all of the funds used to pay the Scheduled Amortization
amount will be provided from the SAR Account.

      Capital expenditures were made during the past three years to improve
production efficiency, reduce operating costs and acquire additional
timberlands. Capital expenditures, excluding expenditures for timberlands and
real estate, are estimated to be between $8.0 million and $9.0 million per year
for the 2002 - 2003 period. Pacific Lumber and Scotia LLC may purchase
additional timberlands from time to time as appropriate opportunities arise.

      Due to its highly leveraged condition, MGI is more sensitive than less
leveraged companies to factors affecting its operations, including governmental
regulation and litigation affecting its timber harvesting practices (see
"--Results of Operations - Forest Products Operations" above and Note 16 to the
Consolidated Financial Statements), increased competition from other lumber
producers or alternative building products and general economic conditions.

      Pacific Lumber's 2001 cash flows from operations were adversely affected
by operating inefficiencies, lower lumber prices, an inadequate supply of logs
and a related slowdown in lumber production. During 2001, comprehensive external
and internal reviews were conducted of Pacific Lumber's business operations.
These reviews were an effort to identify ways in which Pacific Lumber could
operate on a more efficient and cost effective basis. Based upon the results of
these reviews, Pacific Lumber has, among other things, indefinitely curtailed
two of its four operating sawmills, eliminated certain of its operations,
including its soil amendment and concrete block manufacturing operations, begun
utilizing more efficient harvesting methods and adopted certain other cost
saving measures. Most of these operational changes were implemented by Pacific
Lumber during the last quarter of 2001, or during the first quarter of 2002.
Pacific Lumber also terminated its internal logging operations as of April 1,
2002, and intends to rely on third party contract loggers to conduct these
activities. The adverse resulting impact on liquidity of its poor operating
results was offset by $79.9 million in distributions made by Scotia LLC to
Pacific Lumber (principally from the sale of the Owl Creek grove), $9.3 million
in repayments on an intercompany loan by MGI, and $18.5 million of proceeds
received from the sale of a portion of the Grizzly Creek grove. The $29.4
million release from the SAR Account discussed above will also improve Pacific
Lumber's liquidity. However, Pacific Lumber may require funds available under
the Pacific Lumber Credit Agreement, additional repayments by MGI of an
intercompany loan and/or capital contributions from MGI to enable it to meet its
working capital and capital expenditure requirements for the next year.

      With respect to long-term liquidity, although MGI and its subsidiaries
expect that their existing cash and cash equivalents, lines of credit and
ability to generate cash flows from operations should provide sufficient funds to
meet their debt service, working capital and capital expenditure requirements,
until such time as Pacific Lumber has adequate cash flows from operations and/or
dividends from Scotia LLC, there can be no assurance that this will be the case.

   REAL ESTATE OPERATIONS

      In June 2001, Lakepointe Assets purchased Lake Pointe Plaza, an office
complex located in Sugar Land, Texas, for a purchase price of $131.3 million.
The transaction was financed with proceeds of $117.3 million, net of $5.2
million in deferred financing costs, from the Lakepointe Notes ($122.5 million
principal amount with a final maturity date of June 8, 2021, and an interest
rate of 7.56%), and with a cash payment of $14.0 million. Lakepointe Assets
acquired the property subject to two leases to existing tenants while
simultaneously leasing a majority of the premises, representing all of the
remaining space, to an affiliate of the seller. The office complex is fully
leased for a period of 20 years under these three leases.

      Capital expenditures are expected to be approximately $5 million in 2002.
The Company expects that these expenditures will be funded by existing cash and
available credit facilities.

      PDMPI and its subsidiaries have required advances during 2001 to fund
their operations. Although PDMPI may require such advances in the future, the
Company believes that the existing cash and credit facilities of its real estate
subsidiaries are sufficient to fund the working capital and capital expenditure
requirements of such subsidiaries for the next year. With respect to the
long-term liquidity of such subsidiaries, the Company believes that their
ability to generate cash from the sale of their existing real estate, together
with their ability to obtain financing and joint venture partners should provide
sufficient funds to meet their working capital and capital expenditure
requirements.

   RACING OPERATIONS

      Capital expenditures and investments in new ventures are expected to be
approximately $1 million in 2002.

      With respect to long-term liquidity, SHRP, Ltd expects that it will
generate cash flows from operations sufficient to satisfy its working capital
and capital expenditure requirements.

CRITICAL ACCOUNTING POLICIES

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

      The discussion and analysis of the Company's financial condition and
results of operations is based upon the Company's consolidated financial
statements, which have been prepared in accordance with generally accepted
accounting principles. The preparation of these consolidated financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. Estimates are based on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. The result of this process forms the basis
for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. The Company reevaluates its estimates
and judgments on a regular, ongoing basis. Actual results may differ from these
estimates under different assumptions and conditions.

      The following accounting policies are considered critical in light of the
potentially material impact that the estimates, judgments and uncertainties
affecting the application of these policies might have on the Company's reported
financial information.

      Principles of Consolidation - Kaiser
      Under generally accepted accounting principles, consolidation is generally
required for investments of more than 50% of the outstanding voting stock of an
investee, except when control is not held by the majority owner. Under these
rules, legal reorganization or bankruptcy represent conditions which can
preclude consolidation in instances where control rests with the bankruptcy
court, rather than the investor.

      At December 31, 2001, the conditions that represent limitations to
consolidation described above did not exist with respect to the Company's
investment in Kaiser. The Company exercised control over Kaiser, and any
possible loss of control in the near term was not deemed to be the result of a
probable occurrence of events that were outside the Company's control, since
Kaiser's decision to file for bankruptcy was made on a voluntary basis. As a
result, the consolidated financial statements as of and for the year ended
December 31, 2001, include the accounts of Kaiser. Due to the Filing, effective
February 12, 2002, the Company will no longer consolidate Kaiser's financial
results in its consolidated financial statements, and will report its investment
in Kaiser under the cost method. When and if Kaiser emerges from bankruptcy, the
subsequent accounting will be determined based on the applicable circumstances
and facts at such time, including the terms of any plan of reorganization. See
Note 1 to the Consolidated Financial Statements for further discussion of
Kaiser's reorganization proceedings.

      Loss Contingencies
      The Company is involved in various claims, lawsuits and other proceedings
discussed in Note 16 to the Consolidated Financial Statements. Such litigation
involves uncertainty as to possible losses to the Company that will ultimately
be realized when one or more future events occur or fail to occur. The Company
accrues and charges to income estimated losses from contingencies when it is
probable (at the balance sheet date) that an asset has been impaired or
liability incurred and the amount of loss can be reasonably estimated.
Differences between estimates recorded and actual amounts determined in
subsequent periods are treated as changes in accounting estimates (i.e., they
are reflected in the financial statements in the period in which they are
determined to be losses, with no retroactive restatement).

      The Company estimates the probability of losses on legal contingencies
based on the advice of internal and external counsel, the outcomes from similar
litigation, the status of lawsuits (including settlement initiatives),
legislative developments, and other factors. Risks and uncertainties are
inherent with respect to the ultimate outcome of litigation.

      Impairment of Noncurrent Assets
      The Company recorded charges of $19.9 million in 2001 to write-down the
carrying amount of certain buildings, machinery and equipment to estimated fair
value (see Note 2 to the Consolidated Financial Statements). The Company reviews
noncurrent assets for impairment when circumstances indicate that the carrying
amount of such assets may not be recoverable. Impairment is indicated if the
expected total undiscounted future cash flows are less than the carrying amount
of the assets. Assets are written down to fair value and a loss is recognized
upon impairment. Fair value increases on assets previously written down for
impairment losses are not recognized.

      Considerable judgment is exercised in the Company's assessment of the need
for an impairment write-down. Indicators of impairment must be present. In some
instances, situations might exist where impairments are the result of changes in
economic conditions or other factors that develop over time.

      Deferred Tax Asset Valuation Allowances
      As of December 31, 2001, the Company had $62.3 million of net deferred tax
assets. The deferred tax assets and liabilities reported in the Company's
balance sheet reflect the amount of taxes that the Company has prepaid or
received a tax benefit for (an asset) or will have to pay in the future (a
liability) because of temporary differences that result from differences in
timing of revenue recognition or expense deductibility between generally
accepted accounting principles and the Internal Revenue Code. Accounting rules
require that a deferred tax asset be reduced by a valuation allowance if, based
on the weight of available evidence, it is more likely than not (a likelihood of
more than 50%) that some portion or all of the deferred tax asset will not be
realized. The Company considers all available evidence, both positive and
negative, to determine whether a valuation allowance is needed. The need for a
valuation allowance ultimately depends on the existence of sufficient taxable
income necessary to receive the benefit of a future deductible amount.

      Assessing the need for and amount of a valuation allowance for deferred
tax assets requires significant judgment. The fact that a benefit may be
expected for a portion but not all of a deferred tax asset increases the
judgmental complexity. Projections of future taxable income, by their very
nature, require estimates and judgments about future events that, although they
might be predictable, are far less certain than events that have already
occurred and can be objectively measured.

      Uncertainties that might exist with respect to the realization of the
Company's deferred tax assets relate to future taxable income. See Note 12 to
the Consolidated Financial Statements for further discussion of the Company's
valuation allowances on deferred tax assets.

      Obligations Related to Pension and Other Postretirement Benefit Plans
      As of December 31, 2001, the Company had $951.6 million in accrued
liabilities related to pension and other postretirement benefit plans. The
Company estimates its liability under these benefit plans based on an actuarial
analysis. The actuarial analysis is based on certain assumptions about the
expected future return on plan assets, the expected rate of compensation
increase and the discount rate.

NEW ACCOUNTING PRONOUNCEMENTS

      See Note 1 to the Consolidated Financial Statements for a discussion of
new accounting pronouncements and their potential impact on the Company.

ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Kaiser's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold. As discussed
more fully in Notes 1 and 17 to the Consolidated Financial Statements, Kaiser
utilizes hedging transactions to lock-in a specified price or range of prices
for certain products which it sells or consumes in its production process and to
mitigate Kaiser's exposure to changes in foreign currency exchange rates.

SENSITIVITY

      ALUMINA AND PRIMARY ALUMINUM
      Alumina and primary aluminum production in excess of internal requirements
is sold in domestic and international markets, exposing Kaiser to commodity
price opportunities and risks. Kaiser's hedging transactions are intended to
provide price risk management in respect of the net exposure of earnings
resulting from (i) anticipated sales of alumina, primary aluminum and fabricated
aluminum products, less (ii) expected purchases of certain items, such as
aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with the
price of primary aluminum. On average, before consideration of hedging
activities, any fixed price contracts with fabricated aluminum products
customers, variations in production and shipment levels, and timing issues
related to price changes, Kaiser estimates that each $.01 increase (decrease) in
the market price per price-equivalent pound of primary aluminum increases
(decreases) Kaiser's annual pre-tax earnings by approximately $10.0 million,
based on recent fluctuations in operating levels.

      FOREIGN CURRENCY
      Kaiser enters into forward exchange contracts to hedge material cash
commitments for foreign currencies. Kaiser's primary foreign exchange exposure
is related to Kaiser's Australian Dollar (A$) commitments in respect of
activities associated with its 20.0%-owned affiliate, QAL. Kaiser estimates
that, before consideration of any hedging activities, a US $0.01 increase
(decrease) in the value of the A$ results in an approximate $1.0 - $2.0 million
(decrease) increase in Kaiser's annual pre-tax operating income.

      ENERGY
      Kaiser is exposed to energy price risk from fluctuating prices for natural
gas, fuel oil and diesel oil consumed in the production process. Kaiser
estimates that each $1.00 change in natural gas prices (per mcf) impacts
Kaiser's pre-tax operating results by approximately $20.0 million. Further,
Kaiser estimates that each $1.00 change in fuel oil prices (per barrel) impacts
Kaiser's pre-tax operating results by approximately $3.0 million.

HEDGING POSITIONS

      Because the agreements underlying Kaiser's hedging positions provided that
the counterparties to the hedging contracts could liquidate Kaiser's hedging
positions if Kaiser filed for reorganization, Kaiser chose to liquidate these
positions in advance of the February 12, 2002 Filing Date. Proceeds from the
liquidation totaled approximately $42.2 million. Gains or losses associated with
these liquidated positions have been deferred and are being recognized over the
original hedging periods as the underlying purchases/sales are still expected to
occur. The amount of gains/losses deferred are as follows: gains of $30.2
million for aluminum contracts, losses of $5.0 million for Australian dollars
and losses of $1.9 million for energy contracts.

      Kaiser anticipates that, subject to the approval of the Court and
prevailing economic conditions, it may reinstitute an active hedging program.
However, no assurance can be given as to when or if the appropriate Court
approval will be obtained or when or if such hedging activities will restart.

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, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
2001. These consolidated financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MAXXAM Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

As discussed in Note 1 to the consolidated financial statements, on February 12,
2002, Kaiser Aluminum Corporation (Kaiser), a majority owned consolidated
subsidiary of MAXXAM Inc., and certain of its subsidiaries filed for
reorganization under Chapter 11 of the United States Bankruptcy Code. As
a result, Kaiser's financial results will be deconsolidated beginning February
12, 2002 and MAXXAM Inc. will begin reporting its investment in Kaiser using the
cost method. Kaiser and subsidiaries represent 69 percent and 73 percent of
MAXXAM Inc.'s total consolidated assets at December 31, 2001 and 2000, and 86
percent, 87 percent and 87 percent of its total consolidated revenues for the
years ended December 31, 2001, 2000 and 1999, respectively. See Note 1 for a
discussion of the impact on MAXXAM Inc.'s consolidated financial statements.

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
April 12, 2002


                          MAXXAM INC. AND SUBSIDIARIES

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001         2000
                                                                                            -----------  ----------
ASSETS
Current assets:
   Cash and cash equivalents............................................................... $    272.2   $   353.2
   Marketable securities...................................................................      152.8        44.6
   Receivables:
      Trade, net of allowance for doubtful accounts of $10.0 and $6.4, respectively........      140.5       202.3
      Other................................................................................       91.6       251.6
   Inventories.............................................................................      364.7       451.3
   Prepaid expenses and other current assets...............................................      134.2       203.1
                                                                                            -----------  ----------
        Total current assets...............................................................    1,156.0     1,506.1
Property, plant and equipment, net of accumulated depreciation of $1,094.7 and
   $1,033.0, respectively..................................................................    1,499.5     1,331.3
Timber and timberlands, net of accumulated depletion of $193.6 and $183.8, respectively....      235.1       244.3
Investments in and advances to unconsolidated affiliates...................................       70.9        85.5
Deferred income taxes......................................................................      109.6       553.1
Restricted cash, marketable securities and other investments...............................       98.5       106.3
Long-term receivables and other assets.....................................................      765.7       677.4
                                                                                            -----------  ----------
                                                                                            $  3,935.3   $ 4,504.0
                                                                                            ===========  ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
   Accounts payable........................................................................ $    180.4   $   248.7
   Accrued interest........................................................................       66.1        70.1
   Accrued compensation and related benefits...............................................      168.3       180.8
   Other accrued liabilities...............................................................      248.6       313.5
   Payable to affiliates...................................................................       52.9        78.3
   Short-term borrowings and current maturities of long-term debt, excluding $2.3 and
      $2.2, respectively, of repurchased Timber Notes held in the SAR Account..............      217.2        98.4
                                                                                            -----------  ----------
        Total current liabilities..........................................................      933.5       989.8
Long-term debt, less current maturities and excluding $55.4 and $57.7, respectively, of
   repurchased Timber Notes held in the SAR Account........................................    1,706.8     1,885.0
Accrued postretirement medical benefits....................................................      652.4       667.4
Other noncurrent liabilities...............................................................      999.7       779.9
                                                                                            -----------  ----------
        Total liabilities..................................................................    4,292.4     4,322.1
                                                                                            -----------  ----------
Commitments and contingencies (see Note 16)
Minority interests.........................................................................      118.5       132.8
Stockholders' equity (deficit):
   Preferred stock, $0.50 par value; 12,500,000 shares authorized; Class A $0.05
      Non-Cumulative Participating Convertible Preferred Stock; 669,235 and
      669,355
      shares issued, respectively..........................................................        0.3         0.3
   Common stock, $0.50 par value; 28,000,000 shares authorized;
      10,063,359 shares issued.............................................................        5.0         5.0
   Additional capital......................................................................      225.3       225.3
   Accumulated deficit.....................................................................     (524.2)      (68.2)
   Accumulated other comprehensive loss....................................................      (66.3)       (0.5)
    Treasury stock, at cost (shares held:  preferred - 845; common - 3,535,688
      and 3,315,008, respectively).........................................................     (115.7)     (112.8)
                                                                                            -----------  ----------
        Total stockholders' equity (deficit)...............................................     (475.6)       49.1
                                                                                            -----------  ----------
                                                                                            $  3,935.3   $ 4,504.0
                                                                                            ===========  ==========
                          MAXXAM INC. AND SUBSIDIARIES

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


                                                                                    YEARS ENDED DECEMBER 31,
                                                                             --------------------------------------
                                                                                2001         2000          1999
                                                                             -----------  -----------  ------------
Net sales:
   Aluminum................................................................  $  1,732.7   $  2,169.8   $   2,083.6
   Forest products.........................................................       185.3        200.1         187.8
   Real estate.............................................................        69.1         47.2          52.0
   Racing..................................................................        31.1         30.9          27.3
                                                                             -----------  -----------  ------------
                                                                                2,018.2      2,448.0       2,350.7
                                                                             -----------  -----------  ------------
Cost and expenses:
   Cost of sales and operations:
      Aluminum.............................................................     1,457.1      1,798.3       1,898.5
      Forest products......................................................       170.3        157.4         159.5
      Real estate..........................................................        28.4         24.1          29.7
      Racing...............................................................        20.4         19.5          15.9
   Selling, general and administrative expenses............................       163.6        168.7         170.4
   Impairment of assets....................................................        19.9         51.2          19.8
   Depreciation, depletion and amortization................................       113.1         98.2         108.4
                                                                             -----------  -----------  ------------
                                                                                1,972.8      2,317.4       2,402.2
                                                                             -----------  -----------  ------------

Operating income (loss)....................................................        45.4        130.6         (51.5)

Other income (expense):
   Gains on sale of an interest in QAL.....................................       163.6            -             -
   Gains on sales of timberlands...........................................        16.7          60.0        239.8
   Gain on involuntary conversion at Gramercy facility.....................           -            -          85.0
   Investment, interest and other income (expense), net....................         1.0         62.7          18.3
   Interest expense........................................................      (182.9)      (185.9)       (190.1)
   Amortization of deferred financing costs................................        (7.8)        (7.1)         (7.0)
                                                                             -----------  -----------  ------------
Income before income taxes, minority interests and extraordinary items.....        36.0         60.3          94.5
Provision for income taxes.................................................      (533.7)       (27.1)        (43.7)
Minority interests.........................................................        38.1         (3.2)         22.8
                                                                             -----------  -----------  ------------
Income (loss) before extraordinary items...................................      (459.6)        30.0          73.6
Extraordinary items:
   Gains on repurchases of debt, net of income tax provision of $2.0
      and $2.4, respectively...............................................         3.6          3.9             -
                                                                             -----------  -----------  ------------
Net income (loss)..........................................................  $   (456.0)  $     33.9   $      73.6
                                                                             ===========  ===========  ============

Basic earnings (loss) per common share:
   Income (loss) before extraordinary items................................  $   (69.83)  $     3.95   $      9.58
   Extraordinary items.....................................................        0.55         0.52             -
                                                                             -----------  -----------  ------------
   Net income (loss).......................................................  $   (69.28)  $     4.47   $      9.58
                                                                             ===========  ===========  ============

Diluted earnings (loss) per common and common equivalent share:
   Income (loss) before extraordinary items................................  $   (69.83)  $     3.95   $      9.49
   Extraordinary items.....................................................        0.55         0.52             -
                                                                             -----------  -----------  ------------
   Net income (loss).......................................................  $   (69.28)  $     4.47   $      9.49
                                                                             ===========  ===========  ============



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



                          MAXXAM INC. AND SUBSIDIARIES

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


                                                                                     ACCUMU-
                                                                                     LATED
                                              COMMON STOCK                           OTHER
                                              ------------                           COMPRE-                       COMPRE-
                                 PREFERRED                        ADDI-    ACCUMU-   HENSIVE                       HENSIVE
                                   STOCK                         TIONAL     LATED    INCOME   TREASURY             INCOME
                                 ($.50 PAR)  Shares  ($.50 Par)  CAPITAL   DEFICIT   (LOSS)    STOCK     TOTAL     (LOSS)
                                 ---------   ------  ----------  -------  --------- -------- --------- --------- ---------
Balance, December 31, 1998...... $    0.3       7.0  $    5.0    $ 222.8   $ (175.7) $     -  $ (109.2) $  (56.8)
   Net income...................        -         -         -          -       73.6        -         -      73.6 $    73.6
   Minimum pension liability
       adjustment...............        -         -         -          -          -     (0.7)        -      (0.7)     (0.7)
                                                                                                                 ---------
   Comprehensive income.........                                                                                 $   72.9
                                                                                                                 =========
   Treasury stock issuances.....        -         -         -        2.5          -        -       9.2      11.7
                                 ---------   ------- ----------  -------  --------- -------- --------- ---------

Balance, December 31, 1999......      0.3       7.0       5.0      225.3     (102.1)    (0.7)   (100.0)     27.8
   Net income...................        -         -         -          -       33.9        -         -      33.9 $    33.9
   Minimum pension liability
       adjustment...............        -         -         -          -          -     (0.4)        -      (0.4)     (0.4)
     Change in value of
     available-for-sale
     investments................        -         -         -          -          -      0.6         -       0.6       0.6
                                                                                                                 ---------
   Comprehensive income.........                                                                                 $    34.1
                                                                                                                 =========
   Treasury stock purchases.....        -         -         -          -          -        -     (12.8)    (12.8)
                                 ---------   ------- ----------  -------  --------- -------- --------- ---------

Balance, December 31, 2000......      0.3       7.0       5.0      225.3      (68.2)    (0.5)   (112.8)     49.1
   Net loss.....................        -         -         -          -     (456.0)       -         -    (456.0)$  (456.0)
   Minimum pension liability
     adjustment.................        -         -         -          -          -    (65.1)        -     (65.1)    (65.1)

   Cumulative effect of
     accounting change..........        -         -         -          -          -      1.8         -       1.8       1.8

   Unrealized net gain on
     derivative instruments
     arising during the period..        -         -         -          -          -     33.1         -      33.1      33.1
   Reclassification
     adjustment for realized
     net gain on derivative
     instruments included
     in net income..............        -         -         -          -          -    (10.9)        -     (10.9)    (10.9)
   Adjustment of valuation
     allowances for net deferred
     income tax assets provided
     in respect of items
     reflected in other
     comprehensive income.......        -         -         -          -          -    (25.0)        -     (25.0)    (25.0)
   Change in value of
     available-for-sale
     investments................        -         -         -          -          -      0.3         -       0.3       0.3
                                                                                                                 ---------
   Comprehensive loss...........                                                                                 $  (521.8)
                                                                                                                 =========
   Treasury stock purchases.....        -         -         -          -          -        -      (2.9)     (2.9)
                                 ---------   ------- ----------  -------  --------- -------- --------- ---------
Balance, December 31, 2001...... $    0.3       7.0  $    5.0    $ 225.3   $ (524.2) $ (66.3) $ (115.7) $ (475.6)
                                 =========   ======= ==========  =======  ========= ======== ========= =========

                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN MILLIONS OF DOLLARS)


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                      -----------------------------
                                                                                        2001       2000      1999
                                                                                      ---------  --------  --------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)................................................................  $ (456.0)  $  33.9   $  73.6
   Adjustments to reconcile net income (loss) to net cash provided
      by (used for) operating activities:
      Depreciation, depletion and amortization......................................     113.1      98.2     108.4
      Non-cash impairments and restructuring charges................................      49.9      63.2      19.8
      Extraordinary gains on repurchases of debt, net...............................      (3.6)     (3.9)        -
      Stock-based compensation expense..............................................         -         -      11.7
      Gain on sale of QAL interest..................................................    (163.6)        -         -
      Gains on sales of timberlands.................................................     (16.7)    (60.0)   (239.8)
      Gain on involuntary conversion at Gramercy facility...........................         -         -     (85.0)
      Net gains on marketable securities............................................      (8.0)    (27.9)    (18.2)
      Net gains on other asset dispositions.........................................      (9.6)    (51.9)    (45.3)
      Minority interests............................................................     (38.1)      3.2     (22.8)
      Amortization of deferred financing costs and discounts on long-term debt......       7.8       7.1       7.3
      Equity in earnings (loss) of unconsolidated affiliates, net of
        dividends received                                                                 0.8      18.7      (4.6)
      Other.........................................................................       7.0         -         -
      Increase (decrease) in cash resulting from changes in:
        Receivables.................................................................     228.1    (167.5)     24.4
        Inventories.................................................................      69.8     113.7      (4.7)
        Prepaid expenses and other assets...........................................      21.1      18.2     (60.4)
        Accounts payable............................................................     (36.2)    (29.1)     59.9
        Accrued and deferred income taxes...........................................     505.2       5.3      19.7
        Payable to affiliates and other accrued liabilities.........................     (49.0)     66.9      16.8
        Accrued interest............................................................      (4.1)     (2.3)        -
        Long-term assets and long-term liabilities..................................     (21.6)    (66.0)     20.7
      Other.........................................................................      12.3      19.0      (6.6)
                                                                                      ---------  --------  --------
        Net cash provided by (used for) operating activities........................     208.6      38.8    (125.1)
                                                                                      ---------  --------  --------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net proceeds from dispositions of property and investments.......................     191.6     252.2     375.1
   Net sales (purchases) of marketable securities and other investments.............     (99.4)     42.0      (4.8)
   Capital expenditures.............................................................    (333.3)   (288.3)    (95.8)
   Restricted cash withdrawals used to acquire timberlands..........................         -       0.8      12.9
   Other............................................................................       2.4       0.1      (3.3)
                                                                                      ---------  --------  --------
        Net cash provided by (used for) investing activities........................    (238.7)      6.8     284.1
                                                                                      ---------  --------  --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuances of long-term debt........................................     136.2      32.4       2.9
   Redemptions, repurchases of and principal payments on long-term debt.............    (131.1)    (44.6)    (19.6)
   Borrowings (repayments) under revolving and short-term credit facilities.........     (49.5)     62.2      10.4
   Incurrence of deferred financing costs...........................................      (5.4)     (2.5)     (0.7)
   Redemption of Kaiser preference stock............................................      (5.6)        -         -
   Restricted cash deposits (withdrawals), net......................................       7.4       0.2    (170.3)
   Treasury stock repurchases.......................................................      (2.9)    (12.8)        -
   Other............................................................................         -      (3.0)     (0.2)
                                                                                      ---------  --------  --------
        Net cash provided by (used for) financing activities........................     (50.9)     31.9    (177.5)
                                                                                      ---------  --------  --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................     (81.0)     77.5     (18.5)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................................     353.2     275.7     294.2
                                                                                      ---------  --------  --------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................................  $  272.2   $ 353.2   $ 275.7
                                                                                      =========  ========  ========


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


                          MAXXAM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PRESENTATION

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

      The Company is a holding company and, as such, conducts substantially all
of its operations through its subsidiaries. The Company operates in four
principal industries:

-     Aluminum, through its majority owned subsidiary, Kaiser Aluminum
      Corporation ("KAISER", 62% owned as of December 31, 2001), an aluminum
      producer. Kaiser, through its wholly owned principal operating subsidiary,
      Kaiser Aluminum & Chemical Corporation ("KACC"), operates in several
      principal aspects of the aluminum industry - the mining of bauxite (the
      major aluminum-bearing ore), the refining of bauxite into alumina (the
      intermediate material), the production of aluminum and the manufacture of
      fabricated and semi-fabricated aluminum products. Kaiser's production
      levels of alumina (before consideration of the Gramercy incident described
      in Note 3) and primary aluminum exceed its internal processing needs,
      which allows it to be a major seller of alumina and primary aluminum to
      domestic and international third parties. A substantial portion of the
      Company's consolidated assets, liabilities, revenues, results of
      operations and cash flows are attributable to Kaiser (see Note 2).

-     Forest products, through MAXXAM Group Inc. ("MGI") and MGI's wholly owned
      subsidiaries, The Pacific Lumber Company ("PACIFIC LUMBER") and Britt
      Lumber Co., Inc. ("BRITT"). MGI operates in several principal aspects of
      the lumber industry - the growing and harvesting of redwood and
      Douglas-fir timber, the milling of logs into lumber and the manufacture of
      lumber into a variety of finished products. Housing, construction and
      remodeling are the principal markets for the Company's lumber products.

-     Real estate investment and development, managed through its wholly owned
      subsidiary, MAXXAM Property Company. The Company, principally through its
      wholly owned subsidiaries, is engaged in the business of residential and
      commercial real estate investment and development, primarily in Arizona,
      Puerto Rico, California, and Texas.

-     Racing operations, through Sam Houston Race Park, Ltd. ("SHRP, LTD."), a
      Texas limited partnership, in which the Company currently owns a 100%
      interest. SHRP, Ltd. owns and operates a Class 1 pari-mutuel horse racing
      facility in the greater Houston metropolitan area and a pari-mutuel
      greyhound racing facility in Harlingen, Texas.

Results and activities for MAXXAM Inc. (excluding its subsidiaries) and for
MAXXAM Group Holdings Inc. ("MGHI") are not included in the above segments. MGHI
owns 100% of MGI and is a wholly owned subsidiary of the Company.

      Principles of Consolidation - Kaiser
      Under generally accepted accounting principles, consolidation is generally
required for investments of more than 50% of the outstanding voting stock of an
investee, except when control is not held by the majority owner. Under these
rules, legal reorganization or bankruptcy represent conditions which can
preclude consolidation in instances where control rests with the bankruptcy
court, rather than the majority owner. As discussed below, on February 12, 2002,
Kaiser and certain of its subsidiaries filed for reorganization under Chapter 11
of the United States Bankruptcy Code. As a result, Kaiser's financial results
were deconsolidated beginning February 12, 2002, and the Company began reporting
its investment in Kaiser using the cost method. As a result, the Company is
required to recognize amounts previously reported as Other Comprehensive Income
(a component of stockholders' deficit) in its income statement upon
deconsolidation. Those amounts are expected to be approximately $65 million. The
Company's losses recognized in excess of its investment in Kaiser are
significant ($450.2 million at December 31, 2001). The Company believes
additional losses related to its investment in Kaiser are not probable and,
accordingly, it expects to reverse its losses in excess of its investment in
Kaiser on February 12, 2002. Since Kaiser's results are no longer consolidated
as of February 12, 2002, any adjustments made to Kaiser's financial statements
subsequent to February 12, 2002 (relating to the recoverability and
classification of recorded asset amounts and classification of liabilities or
the effects on existing stockholders' equity as well as adjustments made to
Kaiser's financial information for loss contingencies and other matters
discussed in the notes to consolidated financial statements) are not expected to
impact the Company's financial results. No assurances can be given that the
Company's ownership interest in Kaiser will not be significantly diluted or
cancelled.

      The following condensed pro forma financial information reflects Kaiser's
results on a deconsolidated basis, but does not reflect the impact of reporting
the Company's investment in Kaiser on the cost method (in millions).

                                                                      YEAR ENDED
                                                                     DECEMBER 31,
                                                                         2001
                                                                    --------------
Revenues..........................................................  $       285.5
Costs and expenses................................................          311.0
                                                                    --------------
Operating income (loss)...........................................          (25.5)
MAXXAM's equity in Kaiser's losses................................         (421.6)
Other income (expenses) - net.....................................          (31.2)
Income tax benefit................................................           18.7
                                                                    --------------
Loss before extraordinary item....................................         (459.6)
Extraordinary item................................................            3.6
                                                                    --------------
Net loss..........................................................  $      (456.0)
                                                                    ==============



                                                                     DECEMBER 31,
                                                                         2001
                                                                    --------------
Current assets....................................................  $       398.2
Property, plant, and equipment (net)..............................          293.2
Investment in subsidiaries........................................            8.0
Other assets......................................................          538.1
                                                                    --------------
      Total assets................................................  $     1,237.5
                                                                    ==============
Current liabilities...............................................          133.8
Long-term debt, less current maturities...........................        1,003.6
Other liabilities.................................................          125.5
Losses recognized in excess of investment in Kaiser...............          450.2
                                                                    --------------
      Total liabilities...........................................        1,713.1
Stockholders' deficit.............................................         (475.6)
                                                                    --------------
      Total liabilities and stockholders' deficit.................  $     1,237.5
                                                                    ==============

      Reorganization Proceedings
      On February 12, 2002, Kaiser, KACC and 13 of KACC's wholly owned
subsidiaries filed separate voluntary petitions in the United States Bankruptcy
Court for the District of Delaware (the "COURT") for reorganization under
Chapter 11 of the United States Bankruptcy Code (the "CODE"). On March 15, 2002,
two additional wholly owned subsidiaries of KACC filed similar petitions.
Kaiser, KACC and the 15 subsidiaries of KACC that have filed petitions are
collectively referred to herein as the "Debtors" and the Chapter 11 proceedings
of these entities are collectively referred to herein as the "Cases." For
purposes of these financial statements, the term "Filing Date" shall mean with
respect to any particular Debtor, the date on which such Debtor filed its Case.
The wholly owned subsidiaries of KACC included in the Cases are: Kaiser Bellwood
Corporation, Kaiser Aluminium International, Inc., Kaiser Aluminum Technical
Services, Inc., Kaiser Alumina Australia Corporation (and its wholly owned
subsidiary, Kaiser Finance Corporation) and ten other entities with limited
balances or activities. None of Kaiser's non-U.S. affiliates were included in
the Cases. The Cases are being jointly administered with the Debtors managing
their businesses in the ordinary course as debtors-in-possession subject to the
control and supervision of the Court.

      The necessity for filing the Cases was attributable to the liquidity and
cash flow problems of Kaiser arising in late 2001 and early 2002. Kaiser was
facing significant near-term debt maturities at a time of unusually weak
aluminum industry business conditions, depressed aluminum prices and a broad
economic slowdown that was further exacerbated by the events of September 11,
2001. In addition, Kaiser had become increasingly burdened by the asbestos
litigation (see Note 16) and growing legacy obligations for retiree medical and
pension costs (see Note 13). The confluence of these factors created the
prospect of continuing operating losses and negative cash flow, resulting in
lower credit ratings and an inability to access the capital markets.

      The outstanding principal of, and accrued interest on, all long-term debt
of Kaiser became immediately due and payable as a result of the commencement of
the Cases. However, the vast majority of the claims in existence at the Filing
Date (including claims for principal and accrued interest and substantially all
legal proceedings) are stayed (deferred) while Kaiser continues to manage the
businesses. The Court has, however, upon motion by the Debtors, permitted the
Debtors to pay or otherwise honor certain unsecured pre-Filing Date claims,
including employee wages and benefits and customer claims in the ordinary course
of business, subject to certain limitations, and to fund, on an interim basis
pending a final determination of the issue by the Court, its joint ventures in
the ordinary course of business. The Debtors also have the right to assume or
reject executory contracts, subject to Court approval and certain other
limitations. In this context, "assumption" means that the Debtors agree to
perform their obligations and cure certain existing defaults under an executory
contract and "rejection" means that the Debtors are relieved from their
obligations to perform further under an executory contract and are subject only
to a claim for damages for the breach thereof. Any claim for damages resulting
from the rejection of an executory contract is treated as a general unsecured
claim in the Cases.

      Generally, pre-Filing Date claims against the Debtors will fall into two
categories: secured and unsecured, including certain contingent or unliquidated
claims. Under the Code, a creditor's claim is treated as secured only to the
extent of the value of the collateral securing such claim, with the balance of
such claim being treated as unsecured. Unsecured and partially secured claims do
not accrue interest after the Filing Date. A fully secured claim, however, does
accrue interest after the Filing Date until the amount due and owing to the
secured creditor, including interest accrued after the Filing Date, is equal to
the value of the collateral securing such claim. The amount and validity of
pre-Filing Date contingent or unliquidated claims, although presently unknown,
ultimately may be established by the Court or by agreement of the parties. As a
result of the Cases, additional pre-Filing Date claims and liabilities may be
asserted, some of which may be significant. No provision has been included in
the accompanying financial statements or the financial data and information of
Kaiser included herein for such potential claims and additional liabilities that
may be filed on or before a date to be fixed by the Court as the last day to
file proofs of claim.

      The following table sets forth certain 2001 financial information for the
Debtors compared to the consolidated financial information of Kaiser (in
millions).

                        CONDENSED BALANCE SHEET OF KAISER
                                DECEMBER 31, 2001


                                                         DEBTORS        KAISER
                                                      ------------   -------------

Current assets......................................  $     607.6    $      759.2
Investments in subsidiaries.........................      1,390.4            63.0
Intercompany receivables (payables).................     (1,004.0)              -
Property and equipment, net.........................        825.5         1,215.4
Deferred income taxes...............................        (66.6)              -
Other assets........................................        696.9           706.1
                                                      ------------   -------------
                                                      $   2,449.8    $    2,743.7
                                                      ============   =============

Current liabilities.................................  $     702.0    $      803.4
Other long-term liabilities.........................      1,510.2         1,562.1
Long-term debt......................................        678.7           700.8
Minority interests..................................            -           118.5
Stockholders' deficit...............................       (441.1)         (441.1)
                                                      ------------   -------------
                                                      $   2,449.8    $    2,743.7
                                                      ============   =============

                     CONDENSED STATEMENT OF INCOME OF KAISER
                      FOR THE YEAR ENDED DECEMBER 31, 2001


                                                           DEBTORS          KAISER
                                                        ------------  -------------

Net sales.............................................  $   1,252.8   $    1,732.7
Costs and expenses:
   Operating costs and expenses.......................      1,354.0        1,831.4
   Non-recurring operating items......................       (167.2)        (163.6)
                                                        ------------  -------------
Operating income......................................          66.0          64.9
Interest expense......................................       (106.5)        (109.0)
Other income (expense), net...........................        131.8          130.8
Provision for income tax..............................       (548.9)        (550.2)
Minority interests....................................            -            4.1
Equity in income of subsidiaries......................         11.7              -
                                                        ------------  -------------
Net loss..............................................  $    (445.9)  $     (459.4)
                                                        ============  =============


      Kaiser's objective is to achieve the highest possible recoveries for all
creditors and stockholders, consistent with the Debtors' abilities to pay and
the continuation of their businesses. However, there can be no assurance that
the Debtors will be able to attain these objectives or achieve a successful
reorganization. Further, there can be no assurance that the liabilities of the
Debtors will not be found to exceed the fair value of their assets. This could
result in claims being paid at less than 100% of their face value and the equity
of Kaiser's stockholders, including the Company, being diluted or cancelled.

      Under the Code, the rights of and ultimate payments to pre-Filing Date
creditors and stockholders may be substantially altered. At this time, it is not
possible to predict the outcome of the Cases, in general, or the effect of the
Cases on the businesses of the Debtors or on the interests of creditors and
stockholders.

      Two creditors' committees, one representing the unsecured creditors and
the other representing the asbestos claimants, have been appointed as official
committees in the Cases and, in accordance with the provisions of the Code, will
have the right to be heard on all matters that come before the Court. The
Debtors expect that the appointed committees, together with a legal
representative of potential future asbestos claimants to be appointed by the
Court, will play important roles in the Cases and the negotiation of the terms
of any plan or plans of reorganization. The Debtors are required to bear certain
of the committees' costs and expenses, including those of their counsel and
other advisors.

      The Debtors anticipate that substantially all liabilities of the Debtors
as of the date of the Filing will be resolved under one or more plans of
reorganization to be proposed and voted on in the Cases in accordance with the
provisions of the Code. Although the Debtors intend to file and seek
confirmation of such a plan or plans, there can be no assurance as to when the
Debtors will file such a plan or plans, or that such plan or plans will be
confirmed by the Court and consummated.

      As provided by the Code, the Debtors initially have the exclusive right to
propose a plan of reorganization for 120 days following the Filing Date. If the
Debtors fail to file a plan of reorganization during such period or any
extension thereof, or if such plan is not accepted by the requisite number of
creditors and equity holders entitled to vote on the plan, other parties in
interest in the Cases may be permitted to propose their own plan(s) of
reorganization for the Debtors.

      In March 2002, the Company filed a suit with the Court asking the Court to
find that it has no further obligations to the Debtors under certain tax
allocation agreements. The Company's suit is based on the assertion that the
agreements are personal contracts and financial accommodations which cannot be
assumed under the Code.

      On April 12, 2002, Kaiser filed with the Court a motion seeking an order
of the Court prohibiting the Company (or MGHI), without first seeking Court
relief, from making any disposition of its stock of Kaiser, including any sale,
transfer, or exchange of such stock or treating any of its Kaiser stock as
worthless for federal income tax purposes. Kaiser indicated in its Court filing
that it was concerned that such a transaction could have the effect of depriving
Kaiser of the ability to utilize the full value of its net operating losses,
foreign tax credits and minimum tax credits. The Company is in the process of
analyzing the motion and other materials which were filed with the Court.

      The financial information of Kaiser contained herein and consolidated with
the Company's results has been prepared on a "going concern" basis which
contemplates the realization of assets and the liquidation of liabilities in the
ordinary course of business; however, as a result of the commencement of the
Cases, such realization of assets and liquidation of liabilities are subject to
a significant number of uncertainties. Specifically, but not all inclusive, the
financial information of Kaiser for the year ended December 31, 2001, contained
herein does not present: (a) the classification of any long-term debt which is
in default as a current liability, (b) the realizable value of assets on a
liquidation basis or the availability of such assets to satisfy liabilities, (c)
the amount which will ultimately be paid to settle liabilities and contingencies
which may be allowed in the Cases, or (d) the effect of any changes which may be
made in connection with the Company's investment in Kaiser or with the Debtors'
operations resulting from a plan of reorganization. Because of the ongoing
nature of the Cases, the discussions and financial information of Kaiser
contained herein are subject to material uncertainties. However, since Kaiser's
results will no longer be consolidated with the Company's results and the
Company believes additional losses related to its investment in Kaiser are not
probable, the material uncertainties related to Kaiser (and disclosed herein)
are not expected to impact the Company's financial results subsequent to the
Filing Date.

      Use of Estimates and Assumptions
      The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) the
disclosure of contingent assets and liabilities known to exist as of the date
the financial statements are published and (iii) the reported amount of revenues
and expenses recognized during each period presented. The Company reviews all
significant estimates affecting its consolidated financial statements on a
recurring basis and records the effect of any necessary adjustments prior to
filing the consolidated financial statements with the Securities and Exchange
Commission. Adjustments made using estimates often relate to improved
information not previously available. Uncertainties regarding such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, actual results could differ from estimates,
and it is possible that the subsequent resolution of any one of the contingent
matters described in Note 16 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.

      Reclassifications and Other Matters
      Certain reclassifications have been made to prior years' consolidated
financial statements to be consistent with the current year's presentation.

   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

      Timber and Timberlands
      Timber and timberlands are stated at cost, net of accumulated depletion.
Depletion is computed utilizing the unit-of-production method based upon
estimates of timber quantities. Periodically, the Company will reassess its
depletion rates considering currently estimated merchantable timber and will
adjust depletion rates prospectively.

      Concentrations of Credit Risk
      Cash equivalents and restricted marketable securities are invested
primarily in investment grade debt instruments as well as other types of
corporate and government debt obligations. The Company mitigates its
concentration of credit risk with respect to these investments by generally
purchasing high grade investments (ratings of A1/P1 short-term or at least AA/aa
long-term debt). No more than 10% is invested in the same issue. Unrestricted
marketable securities are invested in debt securities, corporate common stocks
and option contracts. These investments are held in a limited partnership
interest managed by a financial institution.

      Revenue Recognition
      The Company recognizes revenues for alumina, primary aluminum and
fabricated aluminum products when title, ownership and risk of loss pass to the
buyer. Rental revenue on operating leases is recognized on a straight-line basis
over the term of the lease.

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

      The Company recognizes income from land sales in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real
Estate" ("SFAS NO. 66"). In accordance with SFAS No. 66, certain real estate
sales are accounted for under the percentage of completion method, whereby
income is recognized based on the estimated stage of completion of individual
contracts. The unrecognized income associated with such sales has been recorded
as deferred real estate sales and is reflected in other noncurrent liabilities
on the balance sheet. Additionally, in certain circumstances the cost recovery
or installment method is used whereby the gross profit associated with these
transactions is deferred and recognized when appropriate. The unrecognized
income associated with such sales is reflected as a reduction of long-term
receivables and other assets in the balance sheet.

      The Company recognizes revenues from net pari-mutuel commissions received
on live and simulcast horse and greyhound racing in the period in which the
performance occurred. These revenues are net of certain payments determined in
accordance with state regulations and contracts. The Company also receives
revenues in the form of fees paid by other racetracks for the broadcast of the
Company's live races to the offsite locations. Other sources of revenue include
food and beverage sales, admission and parking fees, corporate sponsorships and
advertising, club memberships, suite rentals and other miscellaneous items.

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

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

      Derivative Financial Instruments
      Kaiser utilizes derivative financial instruments primarily to mitigate its
exposure to changes in prices for certain of the products which Kaiser sells and
consumes and, to a lesser extent, to mitigate its exposure to changes in foreign
currency exchange rates. Kaiser does not utilize derivative financial
instruments for trading or other speculative purposes. Kaiser's derivative
activities are initiated within guidelines established by management and
approved by Kaiser's Board of Directors. Hedging transactions are executed
centrally on behalf of all of Kaiser's business segments to minimize transaction
costs, monitor consolidated net exposures and allow for increased responsiveness
to changes in market factors. See Note 17.

      Accounting standards in place through December 31, 2000, provided that any
interim fluctuations in option prices prior to the settlement date were deferred
until the settlement date of the underlying hedged transaction, at which time
they were recorded in net sales or cost of sales and operations (as applicable)
together with the related premium cost. No accounting recognition was accorded
to interim fluctuations in prices of forward sales contracts. Hedge (deferral)
accounting would have been terminated (resulting in the applicable derivative
positions being marked-to-market) if the level of underlying physical
transactions ever fell below the net exposure hedged. This did not occur in 1999
or 2000.

      Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Financial Instruments and Hedging Activities" ("SFAS NO. 133")
which requires companies to recognize all derivative instruments as assets or
liabilities in the balance sheet and to measure those instruments at fair value
by "marking-to-market" all of their hedging positions at each period-end (see
Note 17). This contrasts with pre-2001 accounting principles, which generally
only require certain "non-qualifying" hedging positions to be marked-to-market.
Changes in the market value of the open hedging positions resulting from the
mark-to-market process instruments represent unrealized gains or losses. Such
unrealized gains or losses will fluctuate, based on prevailing market prices at
each subsequent balance sheet date, until the transaction occurs. Under SFAS No.
133, these changes are recorded as an increase or reduction in stockholders'
equity through either other comprehensive income or net income, depending on the
facts and circumstances with respect to the hedge and its documentation. To the
extent that changes in the market values of Kaiser's hedging positions are
initially recorded in other comprehensive income, such changes are reclassified
from other comprehensive income (offset by any fluctuations in other "open"
positions) and are recorded in net income (included in net sales or cost of
sales and operations, as applicable) when the subsequent physical transactions
occur. Additionally, under SFAS No. 133, if the level of physical transactions
ever falls below the net exposure hedged, "hedge" accounting must be terminated
for such "excess" hedges. In such an instance, the mark-to-market changes on
such excess hedges would be recorded in income rather than in other
comprehensive income. This did not occur during 2001.

      SFAS No. 133 requires that, as of the date of initial adoption, the
difference between the market value of derivative instruments recorded on the
Company's consolidated balance sheet and the previous carrying amount of those
derivatives be reported in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle. Based
on authoritative accounting literature issued during the first quarter of 2001,
it was determined that all of the cumulative impact of adopting SFAS No. 133
should be recorded in other comprehensive income. The cumulative effect amount
was reclassified to earnings during 2001. As a result of losses reported with
respect to the Company's investment in Kaiser, no significant additional amounts
relating to Kaiser's derivative activities are expected to be recorded by the
Company in 2002.

      Per Share Information
      Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period, including the weighted average impact of the shares of Common Stock
issued and treasury stock acquired during the year from the date of issuance or
repurchase and the dilutive effect of Class A Preferred Stock (which is
convertible into Common Stock). Prior to 2001, the dilutive effect of the Class
A Preferred Stock was not included in the determination of basic earnings per
share. However, in April 2001, the Financial Accounting Standards Board ("FASB")
clarified that securities which are convertible into common stock and
participate in common stock dividends should be used in computing basic earnings
per share if the effect is dilutive. Therefore the Class A Preferred Stock is
included in the weighted average number of common and common equivalent shares
for purposes of computing basic earnings per share for the periods in which the
effect is dilutive. Basic earnings per share for the years ended December 31,
2000 and 1999, have been restated from that which was previously reported to
reflect the new guidance. Diluted earnings per share calculations also include
the dilutive effect of common and preferred stock options.


                                                                             2001            2000           1999
                                                                         -------------    -----------    -----------
Weighted average shares outstanding:
   Common Stock.........................................................    6,581,979      6,910,358      7,013,547
   Effect of dilution:
      Class A Preferred Stock...........................................            - (2)    668,510        668,590
                                                                         -------------    -----------    -----------
Weighted average number of common and common equivalent
    shares - Basic......................................................    6,581,979      7,578,868       7,682,137
   Effect of dilution:
      Stock options.....................................................            - (2)      1,568 (1)      73,010(1)
                                                                         -------------    -----------    -----------
Weighted average number of common and common equivalent
    shares - Diluted....................................................    6,581,979       7,580,436      7,755,147
                                                                         =============    ===========    ===========
------------------

(1)  Options to purchase 482,475, 483,575 and 239,275 shares of Common Stock
     outstanding during the years ended December 31, 2001, 2000 and 1999,
     respectively, were not included in the computation of diluted earnings per
     share because the options' exercise prices were greater than the average
     market price of the Common Stock.
(2)  The Company had a loss for the year ended December 31, 2001; the Class A
     Preferred Stock and options were therefore not included in the computation
     of earnings per share for the period.


      New Accounting Standards
      In June 2001, the Financial Accounting Standards Board issued SFAS Nos.
141, "Business Combinations" ("SFAS NO. 141") and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS NO. 142"). SFAS No. 141 requires all business
combinations initiated after June 30, 2001, to be accounted for using the
purchase method. Under SFAS No. 142, goodwill is no longer subject to
amortization over its estimated useful life. Instead, goodwill will be subject
to at least an annual assessment for impairment by applying a fair-value-based
test. Separable intangible assets that have finite lives will continue to be
amortized over their useful lives. The provisions of SFAS No. 142 apply to all
business combinations initiated after June 30, 2001, and are required to be
implemented effective January 1, 2002. Through the year ended December 31, 2001,
the goodwill associated with Kaiser's acquisition of the Chandler, Arizona
facility (see Note 5) was being amortized on a straight-line basis over 20
years. Beginning with the first quarter of 2002, Kaiser discontinued the
amortization of goodwill consistent with SFAS No. 142. However, the
discontinuance of amortization of goodwill will not have a material effect on
the Company's results). In addition, the Company will review goodwill for
impairment at least annually. As of December 31, 2001, unamortized goodwill
(which was attributable solely to subsidiaries of Kaiser) was approximately
$11.4 million and was included in long-term receivables and other assets in the
accompanying consolidated balance sheets. This unamortized goodwill will be
eliminated at deconsolidation on February 12, 2002. The Company does not
currently expect the adoption of SFAS No. 141 and 142 to have a material impact
on its financial statements.

      In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS NO. 143"), which
addresses accounting and reporting standards for obligations associated with the
retirement of tangible long-lived assets and the related asset retirement costs.
The Company is required to adopt SFAS No. 143 beginning on January 1, 2003. In
general, SFAS No. 143 requires the recognition of a liability resulting from
anticipated asset retirement obligations, offset by an increase in the value of
the associated productive asset for such anticipated costs. Over the life of the
asset, depreciation expense is to include the ratable expensing of the
retirement cost included with the asset value. The statement applies to all
legal obligations associated with the retirement of a tangible long-lived asset
that results from the acquisition, construction, or development and (or) the
normal operation of a long-lived asset, except for certain lease obligations.
Excluded from this statement are obligations arising solely from a plan to
dispose of a long-lived asset and obligations that result from the improper
operation of an asset (i.e. the type of environmental obligations discussed in
Note 16).

      The Company's consolidated financial statements already reflect
reclamation obligations by Kaiser's bauxite mining operations in accordance with
accounting policies consistent with SFAS No. 143. At December 31, 2001, the
amount of the accrued reclamation obligations included in the consolidated
financial statements was approximately $3.1 million after considering
expenditures in 2001 of approximately $3.0 million. The Company is continuing
its evaluation of SFAS No. 143. A decision as to the formal adoption of SFAS No.
143 has not been made with respect to any other items that may be applicable.
However, the Company does not currently expect the adoption of SFAS No. 143 to
have a material impact on its future financial statements.

      In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS NO.
144"), which sets forth new guidance for accounting and reporting for impairment
or disposal of long-lived assets. The provisions of SFAS 144 are effective for
the Company beginning on January 1, 2002. Based on presently available
estimates, the new impairment and disposal rules are not expected to result in
the recognition of material impairment losses in 2002 beyond those reported as
of December 31, 2001 (See Note 2). In addition to the new guidance on
impairments, SFAS No. 144 broadens the applicability of the provisions of
Accounting Principles Board Opinion 30 for the presentation of discontinued
operations in the income statement to include a component of an entity (rather
than a segment of a business). A component of an entity comprises operations and
cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. Effective after December 31,
2001, when the Company commits a plan of sale of a component of an entity, such
component will be presented as a discontinued operation if the operations and
cash flows of the component will be eliminated from the ongoing operations of
the entity and the entity will not have any significant continuing involvement
in the operations of the component. Although this provision will not affect the
total amount reported for net income, the income statements of prior periods
will be reclassified to report the results of operations of the component
separately when a component of an entity is reported as a discontinued
operation. The Company does not currently expect the adoption of SFAS No. 144 to
have a material impact on its financial statements.

2.    SEGMENT INFORMATION AND SPECIAL CHARGES

      Reportable Segments
      As discussed in Note 1, the Company is a holding company with four
reportable segments; its operations are organized and managed as distinct
business units which offer different products and services and are managed
separately through the Company's subsidiaries.

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

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



                                                      FOREST       REAL       RACING                  CONSOLIDATED
                          DECEMBER 31,   ALUMINUM    PRODUCTS     ESTATE    OPERATIONS    CORPORATE       TOTAL
                          -----------  ------------ -----------  --------  ------------ ------------ --------------
Net sales to unaffiliated
   customers                 2001      $   1,732.7  $    185.3   $  69.1   $      31.1  $         -  $     2,018.2
                             2000          2,169.8       200.1      47.2          30.9            -        2,448.0
                             1999          2,083.6       187.8      52.0          27.3            -        2,350.7

Operating income (loss)      2001             70.8       (27.5)     10.9           0.9         (9.7)          45.4
                             2000            145.2         7.6      (7.8)          2.1        (16.5)         130.6
                             1999            (23.0)       (4.1)     (5.2)          3.8        (23.0)         (51.5)

Investment, interest and
   other income (expense),
   net                       2001            (32.8)       11.3      12.5           0.1          9.9            1.0
                             2000             (4.3)       20.5      24.7             -         21.8           62.7
                             1999            (35.9)       26.9      21.1          (0.2)         6.4           18.3

Interest expense             2001            109.0        60.1       8.6             -         13.0          190.7
                             2000            109.6        64.2       2.4             -         16.8          193.0
                             1999            110.1        66.5       2.2           0.5         17.8          197.1

Depreciation, depletion
   and amortization          2001             84.3        19.4       7.6           1.5          0.3          113.1
                             2000             71.0        19.7       5.5           1.4          0.6           98.2
                             1999             83.6        17.0       6.2           1.1          0.5          108.4

Income (loss) before
   income taxes, minority
   interests and
   extraordinary items       2001             92.6       (59.6)     14.8           1.0        (12.8)          36.0
                             2000             31.3        23.9      14.5           2.1        (11.5)          60.3
                             1999            (84.0)      196.1      13.7           3.1        (34.4)          94.5

Capital expenditures         2001            148.7        13.4     133.9           2.0          0.7          298.7
                             2000            296.5        14.0       6.9           4.5          1.0          322.9
                             1999             68.4        23.1       3.1           0.6          0.6           95.8

Investments in aadvances
   to unconsolidated
   affiliates                2001             63.0           -       7.9             -            -           70.9
                             2000             77.8           -       7.7             -            -           85.5

Total assets                 2001          2,699.1       610.8     300.0          40.4        285.0        3,935.3
                             2000          3,292.5       726.3     165.4          40.8        279.0        4,504.0

      Operating income (loss) in the column entitled "Corporate" represents
general and administrative expenses not directly attributable to the reportable
segments. This column also serves to reconcile the total of the reportable
segments' amounts to totals in the Company's consolidated financial statements.

      Non-recurring Items

      Aluminum
      The aluminum segment's operating income (loss) for the years ended
December 31, 2001, 2000 and 1999 includes the impact of certain non-recurring
items as shown in the following table. These items are included in cost of sales
and operations and in impairment of assets in the Consolidated Statement of
Operations.

                                                                                     YEARS ENDED DECEMBER 31,
                                                                               ------------------------------------
                                                                                  2001         2000        1999
                                                                               -----------  ----------  -----------
Net gains on power sales (Note 4)............................................  $    229.2   $   159.5   $        -
Restructuring charges........................................................       (35.2)       (9.4)           -
Contractual labor costs related to smelter curtailments......................       (12.7)          -            -
Labor settlement charge......................................................           -       (38.5)           -
Impairment charges:
   Washington smelters (Note 4)..............................................           -       (33.0)           -
   Charges associated with product line exits................................           -       (18.2)           -
   Trentwood equipment (Note 8)..............................................       (17.7)          -            -
   Micromill (Note 5)........................................................           -           -        (19.1)
Gramercy related items (Note 3):
   Incremental maintenance...................................................           -       (11.5)           -
   Insurance deductibles, etc................................................           -           -         (5.0)
   LIFO inventory charge.....................................................           -        (7.0)           -
                                                                               -----------  ----------  -----------
                                                                               $    163.6   $    41.9   $    (24.1)
                                                                               ===========  ==========  ===========

      During 2001, Kaiser launched a performance improvement initiative. The
program resulted in restructuring charges totaling $35.2 million which consisted
of $17.9 million of employee benefit and related costs for a group of
approximately 355 salaried and hourly job eliminations, an inventory charge of
$5.6 million (see Note 7) and third party consulting costs of $11.7 million. As
of December 31, 2001, approximately 340 of the job eliminations had occurred. It
is anticipated that the remaining job eliminations will occur during the first
quarter of 2002 or soon thereafter. Approximately $7.7 million of the employee
benefit and related costs were cash costs that have been incurred or will be
incurred during the first quarter of 2002. The balance of the employee benefit
and related costs represent increased pension and post-retirement medical costs
that will be funded over longer periods. Additional cash and non-cash charges
may be required in the future as the program continues. Such additional charges
could be material.

      The 2000 restructuring charges were associated with Kaiser's primary
aluminum and corporate business units. During 2000, these initiatives resulted
in restructuring charges for employee benefit and other costs for approximately
50 job eliminations at Kaiser's Tacoma facility and approximately 50 employee
eliminations due to consolidation or elimination of certain corporate staff
functions. At December 31, 2001, all job eliminations associated with these
initiatives had occurred.

      From September 1998 through September 2000, Kaiser and the United
Steelworkers of America ("USWA") were involved in a labor dispute as a result of
the September 1998 USWA strike and the subsequent "lock-out" by Kaiser in
February 1999. The labor dispute was settled in September 2000. Under the terms
of the settlement, USWA members generally returned to the affected plants during
October 2000. Kaiser recorded a one-time pre-tax charge of $38.5 million in 2000
to reflect the incremental, non-recurring impacts of the labor settlement,
including severance and other contractual obligations for non-returning workers.

      The impairment charges reflected in 2000 of $18.2 million associated with
product exits relate to the exit from the can body stock product line and the
exit from a marginal product line within the engineered products operations. The
charges include $12.0 million in LIFO inventory charges and $6.2 million in
charges to reduce the carrying amount of certain assets.

      The aluminum segment's income (loss) before income taxes and minority
interests for the years ended December 31, 2001, 2000 and 1999 includes the net
impact of certain non-recurring amounts included in investment, interest and
other income (expense), net, as shown in the following table:


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000         1999
                                                                                ----------  ----------   ----------
Asbestos-related charges (Note 16)..............................................$   (57.2)  $   (43.0)   $   (53.2)
Gain on sale of real estate (Note 5)............................................      6.9        22.0            -
Mark-to-market gains (losses) (Note 17).........................................     35.6        11.0        (32.8)
Adjustment to environmental liabilities (Note 16)...............................    (13.5)          -            -
MetalSpectrum Investment write-off (Note 5).....................................     (2.8)          -            -
Lease obligation adjustment (Note 16)...........................................        -        17.0            -
Gain on sale of interests in AKW (Note 5).......................................        -           -         50.5
                                                                                ----------  ----------   ----------
                                                                                $   (31.0)  $      7.0   $   (35.5)
                                                                                ==========  ==========   ==========
      Forest Products
      During 2001, comprehensive external and internal reviews were conducted of
Pacific Lumber's business operations. These reviews were an effort to identify
ways in which Pacific Lumber could operate on a more efficient and cost
effective basis. Based upon the results of these reviews, Pacific Lumber has,
among other things, indefinitely curtailed two of its four operating sawmills,
eliminated certain of its operations, including its soil amendment and concrete
block manufacturing operations, begun utilizing more efficient harvesting
methods and adopted certain other cost saving measures. Most of these
operational changes were implemented by Pacific Lumber during the last quarter
of 2001, or during the first quarter of 2002. Pacific Lumber also terminated its
internal logging operations as of April 1, 2002, and intends to rely on third
party contract loggers to conduct these activities.

      In connection with the idling of two of the Company's sawmills discussed
above, the Company recorded a charge to operating costs of $0.8 million to
write-down the carrying amount of the buildings to estimated fair value. AS OF
December 31, 2001, the Company had not committed to a plan to dispose of the
buildings. In addition, the Company identified machinery and equipment with a
carrying amount of $2.0 million that it no longer needed for its current or
future operations and committed to a plan in 2001 to dispose of it during 2002.
The appraised fair value of the machinery and equipment, net of related costs to
sell, is $0.6 million. Accordingly, the Company recorded an impairment charge to
operating costs of $1.4 million in 2001 for assets to be disposed of.

      A $2.6 million restructuring charge was recorded in 2001 reflecting cash
termination benefits associated with the separation of approximately 305
employees as part of an involuntary termination plan. As of December 31, 2001,
168 of the affected employees had left the Company. The remainder are expected
to leave by the second quarter of 2002. Cash termination benefits of $0.6
million were paid in the fourth quarter of 2001, and are included in operating
costs. The remaining balance of $2.0 million is expected to be paid by the
second quarter of 2002.

      Additionally, the Company recorded an environmental remediation charge of
$3.4 million in 2001. The environmental accrual represents the Company's
estimate of costs reasonably expected to be incurred based on presently enacted
laws and regulations, currently available facts, existing technology, and the
Company's assessment of the likely remediation actions to be taken. The Company
expects that $0.7 million of this remediation liability will be incurred during
2002. Based on management's best estimates given the current facts and
circumstances, the remaining $2.7 million is expected to be incurred from 2003
through 2005.

      The forest products segment's income (loss) before income taxes and
minority interests included non-recurring, non-operating pre-tax gains on the
sale of a portion of the Grizzly Creek grove of $16.7 million in November 2001,
$60.0 million on the sale of the Owl Creek grove in December 2000, and $239.8
million on the sale of the Headwaters Timberlands in March 1999. See Note 5.

      Real Estate
      Investment, interest and other income (expense) for real estate includes
net gains from sales of operating assets and equity in earnings from real estate
joint ventures of $5.5 million, $19.2 million and $8.9 million for the years
ended December 31, 2001, 2000 and 1999, respectively. investment, interest and
other income (expense) for real estate also includes $11.3 million related to
the gain on the sale of a water company in Arizona in 2000.

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

                                                                 YEARS ENDED DECEMBER 31,
                                                            -----------------------------------
                                                               2001        2000        1999
                                                            ----------  ----------  -----------
Aluminum:
   Bauxite and alumina....................................  $   586.2   $   590.5   $    524.8
   Primary aluminum.......................................      362.7       806.0        673.5
   Flat-rolled products...................................      308.0       521.0        591.3
   Engineered products....................................      429.5       564.9        556.8
   Commodities marketing..................................       22.9       (25.4)        18.3
   Minority interests and eliminations....................       23.4      (287.2)      (281.1)
                                                            ----------  ----------  -----------
      Total aluminum sales................................  $ 1,732.7   $ 2,169.8   $  2,083.6
                                                            ==========  ==========  ===========

Forest products:
   Lumber.................................................  $   152.2   $   175.3   $    165.3
   Other forest products..................................       33.1        24.8         22.5
                                                            ----------  ----------  -----------
      Total forest product sales..........................  $   185.3   $   200.1   $    187.8
                                                            ==========  ==========  ===========

Real estate:
   Real estate and development............................  $    48.2   $    26.5   $     34.2
   Resort and other commercial operations.................       20.9        20.7         17.8
                                                            ----------  ----------  -----------
      Total real estate sales.............................  $    69.1   $    47.2   $     52.0
                                                            ==========  ==========  ===========

Racing operations:
   Net commissions from wagering..........................  $    20.5   $    20.3   $     18.1
   Other..................................................       10.6        10.6          9.2
                                                            ----------  ----------  -----------
      Total racing sales..................................  $    31.1   $    30.9   $     27.3
                                                            ==========  ==========  ===========

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


                                                       UNITED                                  OTHER
                                     DECEMBER 31,      STATES       JAMAICA       GHANA       FOREIGN      TOTAL
                                    ---------------  ----------- ------------- -----------  ----------  -----------
Net sales to unaffiliated customers      2001        $  1,302.8  $      219.4  $    221.3   $   274.7   $  2,018.2
                                         2000           1,628.3         298.5       237.5       283.7      2,448.0
                                         1999           1,706.7         233.1       153.2       257.7      2,350.7

Long-lived assets                        2001           1,417.7         303.8        83.3        58.8      1,863.6
                                         2000           1,266.4         290.3        80.8        73.8      1,711.3

      Major Customers and Export Sales
      For the years ended December 31, 2001, 2000 and 1999, sales to any one
customer did not exceed 10% of consolidated revenues. export sales were less
than 10% of total revenues in 2001, 2000 and 2000

3.    INCIDENT AT GRAMERCY FACILITY

      In July 1999, Kaiser's Gramercy, Louisiana, alumina refinery was
extensively damaged by an explosion in the digestion area of the plant. A number
of employees were injured in the incident, several of them severely. As a result
of the incident, alumina production at the facility was completely curtailed.
Construction on the damaged part of the facility began during the first quarter
of 2000. Initial production at the plant commenced during the middle of December
2000. However, construction was not substantially completed until the third
quarter of 2001. During the first nine months of 2001, the plant operated at
approximately 68% of its newly-rated estimated capacity of 1,250,000 tons.
During the fourth quarter of 2001, the plant operated at approximately 90% of
its newly-rated capacity. By the end of February 2002 the plant was operating at
just below 100% of its newly-rated capacity. The facility is now focusing its
efforts on achieving its full operating efficiency.

      Property Damage
      Kaiser's insurance policies provided that it would be reimbursed for the
costs of repairing or rebuilding the damaged portion of the facility using new
materials of like kind and quality with no deduction for depreciation. In 1999,
based on discussions with the insurance carriers and their representatives and
third party engineering reports, Kaiser recorded a pre-tax gain of $85.0
million, representing the difference between the minimum expected property
damage reimbursement amount of $100.0 million and the net carrying value of the
damaged property of $15.0 million. The reimbursement amount was collected in
2000.

      Clean-up, Site Preparation and Other Costs/Losses
      The following table recaps clean-up, site preparation and other
costs/losses associated with the Gramercy incident (in millions):


                                                                     2001       2000      1999      TOTAL
                                                                 ------------ --------  --------  ---------
Clean-up and site preparation................................... $         -  $  10.0   $  14.0   $   24.0
Business interruption costs.....................................        36.6    110.0      41.0      187.6
Abnormal start-up costs.........................................        64.9        -         -       64.9
Litigation costs................................................         6.5        -         -        6.5
                                                                 ------------ --------  --------  ---------
                                                                       108.0    120.0      55.0      283.0
Offsetting business interruption insurance recoveries
   reflected in cost of sales and operations....................       (36.6)  (120.0)    (55.0)    (211.6)
                                                                 ------------ --------  --------  ---------
Net impacts reflected in cost of sales and operations........... $      71.4  $     -   $     -   $   71.4
                                                                 ============ ========  ========  =========

      During July 2001, Kaiser and its insurers reached a global settlement
agreement in respect of all of Kaiser's business interruption and property
damage claims attributable to the Gramercy incident. As a result, Kaiser does
not expect any additional insurance recoveries in respect of the Gramercy
incident.

      Depreciation expense for the first six months of 1999 was approximately
$6.0 million. Kaiser suspended depreciation at the facility starting in July
1999 since production was completely curtailed. However, in accordance with an
agreement with Kaiser's insurers, during 2000, Kaiser recorded a depreciation
charge of $14.3 million, representing the previously unrecorded depreciation
related to the undamaged portion of the facility for the period from July 1999
through November 2000. However, this charge did not have any impact on Kaiser's
operating results as Kaiser had reflected (as a reduction of depreciation
expense) an equal and offsetting insurance receivable (incremental to the
amounts discussed in the preceding paragraph) since the insurers agreed to
reimburse Kaiser for this amount. Since production at the facility was partially
restored during December 2000, normal depreciation commenced in December 2000.

      Contingencies
      The Gramercy incident resulted in a significant number of individual and
class action lawsuits being filed against Kaiser and others alleging, among
other things, property damage, business interruption losses by other businesses
and personal injury. After these matters were consolidated, the individual
claims against Kaiser were settled for amounts which, after the application of
insurance, were not material to Kaiser. Further, an agreement has been reached
with the class plaintiffs for an amount which, after the application of
insurance, is not material to Kaiser. While the class settlement remains subject
to court approval and while certain plaintiffs may opt out of the settlement,
Kaiser does not currently believe that this presents any material risk to
Kaiser. Finally, Kaiser faces new claims from certain parties to the litigation
regarding the interpretation of and alleged claims concerning certain settlement
and other agreements made during the course of the litigation. The aggregate
amount of damages threatened in these claims could, in certain circumstances, be
substantial. However, Kaiser's management does not believe these claims will
result in any material liability to Kaiser.

      Kaiser currently believes that any amount from unsettled workers'
compensation claims from the Gramercy incident in excess of the coverage
limitations will not have a material effect on Kaiser's consolidated financial
position or liquidity. However, while unlikely, it is possible that as
additional facts become available, additional charges may be required and such
charges could be material to the period in which they are recorded.

4.    PACIFIC NORTHWEST POWER SALES AND OPERATING LEVEL

      Power Sales
      In response to the unprecedented high market prices for power in the
Pacific Northwest, Kaiser (first partially and then fully) curtailed the primary
aluminum production at its Tacoma and Mead, Washington, smelters during the last
half of 2000 and all of 2001. As a result of the curtailments, and as permitted
under the BPA contract, Kaiser sold the power that it had under contract through
September 30, 2001 (the end of the contract period). In connection with such
power sales, Kaiser recorded net pre-tax gains of approximately $229.2 million
in 2001 and $159.5 million in 2000. Gross proceeds were offset by
employee-related expenses, a non-cash LIFO inventory charge and other fixed
commitments. The resulting net gains have been reflected as non-recurring items
(see Note 2). The net gain amounts were composed of gross proceeds of $259.5
million in 2001 and $207.8 million in 2000, of which $347.5 million was received
in 2001 and $119.8 million was received in 2000 (although a portion of such
proceeds represent a replacement of the profit that would have otherwise been
generated through operations).

      Future Power Supply and its Impact on Future Operating Rate
      During October 2000, Kaiser signed a new power contract with the BPA under
which the BPA, starting October 1, 2001, was to provide Kaiser's operations in
the State of Washington with approximately 290 megawatts of power through
September 2006. The contract provides Kaiser with sufficient power to fully
operate its Trentwood facility (which requires up to an approximate 40
megawatts) as well as approximately 40% of the combined capacity of Kaiser's
Mead and Tacoma aluminum smelting operations. The BPA has announced that it
currently intends to set rates under the contract in six month increments. The
rate for the initial period (from October 1, 2001 through March 31, 2002) was
approximately 46% higher than power costs under the prior contract. Power prices
for the April 2002 through September 2002 period are essentially unchanged from
the prior six-month rate. Kaiser cannot predict what rates will be charged in
future periods. Such rates will be dependent on such factors as the availability
of and demand for electrical power, which are largely dependent on weather, the
price for alternative fuels, particularly natural gas, as well as general and
regional economic and ecological factors. The contract also includes a
take-or-pay requirement and clauses under which Kaiser's power allocation could
be curtailed, or its costs increased, in certain instances. Under the contract,
Kaiser can only remarket its power allocation to reduce or eliminate take-or-pay
requirements. Kaiser is not entitled to receive any profits from any such
remarketing efforts. During October 2001, Kaiser and the BPA reached an
agreement whereby: (i) Kaiser would not be obligated to pay for potential
take-or-pay obligations in the first year of the contract; and (ii) Kaiser
retained its rights to restart its smelter operations at any time. In return for
the foregoing, Kaiser granted the BPA certain limited power interruption rights
in the first year of the contract if Kaiser is operating its Northwest smelters.
The Department of Energy acknowledged that capital spending in respect of the
Gramercy refinery was consistent with the contractual provisions of the prior
contract with respect to the use of power sale proceeds. Beginning in October
2002, unless there is a further amendment of Kaiser's obligations, Kaiser could
be liable for take-or-pay costs under the BPA contract, and such amounts could
be significant. Kaiser is reviewing its rights and obligations in respect of the
BPA contract in light of the Cases.

      Subject to the limited interruption rights granted to the BPA (described
above), or any impact resulting from the Cases, Kaiser has sufficient power
under contract, and retains the ability, to restart up to 40% (4.75 potlines) of
its Northwest smelting capacity. Were Kaiser to restart additional capacity (in
excess of 4.75 potlines), it would have to purchase additional power from the
BPA or other suppliers. For Kaiser to make such a decision, it would have to be
able to purchase such power at a reasonable price in relation to current and
expected market conditions for a sufficient term to justify its restart costs,
which could be significant depending on the number of lines restarted and the
length of time between the shutdown and restart. Given recent primary aluminum
prices and the forward price of power in the Northwest, it is unlikely that
Kaiser would operate more than a portion of its Northwest smelting capacity in
the near future. Were Kaiser to restart all or a portion of its Northwest
smelting capacity, it would take between three to six months to reach the full
operating rate for such operations, depending upon the number of lines
restarted. Even after achieving the full operating rate, operating only a
portion of the Northwest capacity would result in production/cost inefficiencies
such that operating results would, at best, be breakeven to modestly negative at
long-term primary aluminum prices. However, operating at such a reduced rate
could, depending on prevailing economics, result in improved cash flows as
opposed to remaining curtailed and incurring Kaiser's fixed and continuing labor
and other costs. This is because Kaiser is contractually liable for certain
severance, supplemental unemployment benefits and early retirement benefits for
laid-off workers under Kaiser's contract with the USWA during periods of
curtailment. As of December 31, 2001, all such contractual compensation costs
have been accrued for all USWA workers in excess of those expected to be
required to run the Northwest smelters at a rate up to the above stated 40%
smelter operating rate. These costs are expected to be incurred periodically
through September 2002. Costs associated with the USWA workers that Kaiser
estimates would be required to operate the smelters at an operating rate of up
to 40% ($12.7 million in 2001) have been accrued through early 2003, as Kaiser
does not expect to restart the Northwest smelters prior to that date. If such
workers are not recalled prior to the end of the first quarter of 2003, Kaiser
could become liable for additional early retirement costs. Such costs could be
significant and could adversely impact Kaiser's consolidated operating results
and liquidity. The present value of such costs could be in the $50.0 million to
$60.0 million range. However, such costs would likely be paid out over an
extended period.

5.    SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

      Kaiser's Acquisitions and Disposition
      In September 2001, Kaiser sold an approximate 8.3% interest in Queensland
Alumina Limited ("QAL") and recorded a pre-tax gain of approximately $163.6
million. As a result of the transaction, Kaiser now owns a 20% interest in QAL.
The total value of the transaction was approximately $189.0 million, consisting
of a cash payment of approximately $159.0 million plus the purchaser's
assumption of approximately $30.0 million of off-balance sheet QAL indebtedness
guaranteed by Kaiser prior to the sale.

      Kaiser's share of QAL's production for the first eight months of 2001 and
for the years ended December 31, 2000 and 1999 was approximately 668,000 tons,
1,064,000 tons and 1,033,000 tons, respectively. Had the sale of the QAL
interest been effective as of the beginning of 1999, Kaiser's share of QAL's
production for 2001, 2000 and 1999 would have been reduced by approximately
196,000 tons, 312,000 tons and 304,000 tons, respectively. Historically, Kaiser
has sold about half of its share of QAL's production to third parties and has
used the remainder to supply its Northwest smelters, which are temporarily
curtailed (see Note 4). The reduction in Kaiser's alumina supply associated with
this transaction is expected to be substantially offset by the expected return
of its Gramercy alumina refinery to full operations during the first quarter of
2002 at a higher capacity and by planned increases during 2003 in capacity at
its Alpart alumina refinery in Jamaica. The QAL transaction is not expected to
have an adverse impact on Kaiser's ability to satisfy existing third-party
alumina customer contracts.

      In June 2001, KACC wrote-off its investment of $2.8 million in
MetalSpectrum, LLC, a start-up, e-commerce entity in which Kaiser was a founding
partner (in 2000). MetalSpectrum ceased operations during the second quarter of
2001.

      During 2001, as part of its ongoing initiatives to generate cash benefits,
Kaiser sold certain non-operating real estate for net proceeds totaling
approximately $7.9 million, resulting in a pre-tax gain of $6.9 million
(included in investment, interest and other income (expense), net; see Note 2).

      During 2000, Kaiser sold (i) its Pleasanton, California, office complex,
because the complex had become surplus to Kaiser's needs, for net proceeds of
approximately $51.6 million, which resulted in a net pre-tax gain of $22.0
million (included in investment, interest and other income (expense), net; see
Note 2); (ii) certain non-operating properties, in the ordinary course of
business, for total proceeds of approximately $12.0 million; and (iii) the
Micromill assets and technology for a nominal payment at closing and possible
future payments based on subsequent performance and profitability of the
Micromill technology. The sale of the non-operating properties and Micromill
assets did not have a material impact on Kaiser's 2000 operating results.

      In May 2000, Kaiser acquired the assets of a drawn tube aluminum
fabricating operation in Chandler, Arizona. Total consideration for the
acquisition was $16.1 million ($1.1 million of property, plant and equipment,
$2.8 million of accounts receivables, inventory and prepaid expenses and $12.2
million of goodwill).

      In 1999, Kaiser sold its 50% interest in AKW L.P. ("AKW") to its partner
for $70.4 million, which resulted in Kaiser recognizing a net pre-tax gain of
$50.5 million (included in other income (expense)). Kaiser's equity in earnings
of AKW was $2.5 million for the year ended December 31, 1999.

      Headwaters Transactions
      In March 1999, the United States and California acquired approximately
5,600 acres of timberlands containing a significant amount of virgin old growth
timber, from Salmon Creek and Pacific Lumber (the "HEADWATERS TIMBERLANDS").
Salmon Creek received $299.9 million for its 4,900 acres, and for its 700 acres
Pacific Lumber received the 7,700 acre Elk River Timberlands, which Pacific
Lumber contributed to Scotia LLC in June 1999. See Note 16 below for a
discussion of additional arrangements entered into at the time.

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

      Scotia Pacific Company LLC (a wholly owned subsidiary of Pacific Lumber,
"SCOTIA LLC") and Pacific Lumber also entered into agreements with California
for the sale of two timber properties known as the Owl Creek grove and the
Grizzly Creek grove. On December 29, 2000, Scotia LLC sold the Owl Creek grove
to California for $67.0 million, resulting in a pre-tax gain of $60.0 million.
On November 15, 2001, Pacific Lumber sold the Grizzly Creek grove to California
for $19.8 million, resulting in a pre-tax gain of $16.7 million.

      LakePointe Plaza
      In June 2001, Lakepointe Assets Holdings LLC, a limited liability company,
and its subsidiaries, all of which are wholly owned subsidiaries of Salmon Creek
("LAKEPOINTE ASSETS") purchased Lake Pointe Plaza, an office complex located in
Sugar Land, Texas, for a purchase price of $131.3 million. The transaction was
financed with proceeds of $117.3 million, net of $5.2 million in deferred
financing costs, from the "LAKEPOINTE NOTES" ($122.5 million principal amount
with a final maturity date of June 8, 2021, and an interest rate of 7.56%), and
with a cash payment of $14.0 million. Lakepointe Assets acquired the property
subject to two leases to existing tenants while simultaneously leasing a
majority of the premises, representing all of the remaining space, to an
affiliate of the seller. The office complex is fully leased for a period of 20
years under these three leases. Lakepointe Assets is accounting for these leases
as operating leases. The Lakepointe Notes are secured by the leases, Lake Pointe
Plaza and a $60.0 million residual value insurance contract.

      Sale of Water Utility
      On October 11, 2000, Chaparral City Water Company, a water utility company
in Arizona and a wholly owned subsidiary of MCO Properties Inc., a real estate
subsidiary of the Company, was sold for $22.4 million resulting in a pre- tax
gain of approximately $11.3 million.

6.    CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS

      Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less. As of December 31, 2001 and 2000,
the carrying amounts approximated fair value.

      Marketable securities consist primarily of investments in debt securities.
The Company determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Debt securities are classified as "held-to-maturity" when
the Company has the positive intent and ability to hold the securities to
maturity. Debt securities which the Company does not have the intent or ability
to hold to maturity are classified as "available-for-sale." "Held-to-maturity"
securities are stated at amortized cost. Debt securities classified as
"held-to-maturity" as of December 31, 2001 and 2000, totaled $11.9 million and
$18.9 million, respectively, and had a fair market value of $11.9 million and
$18.9 million, respectively. "Available-for-sale" securities are carried at fair
market value, with the unrealized gains and losses included in other
comprehensive income and reported in stockholders' equity. The fair value of
substantially all securities is determined by quoted market prices. Marketable
securities which are considered "trading" securities consist of long and short
positions in corporate common stocks and option contracts and are carried at
fair value. The cost of the securities sold is determined using the first-in,
first-out method. Included in investment, interest and other income (expense),
net, for each of the three years in the period ended December 31, 2001 were:
2001 - net unrealized gains of $9.2 million and net realized losses of $1.9
million; 2000 - net unrealized gains of $1.0 million and net realized gains of
$24.5 million; and 1999 - net unrealized losses of $1.4 million and net realized
gains of $18.8 million.

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


                                                                                               DECEMBER 31,
                                                                                       ----------------------------
                                                                                           2001           2000
                                                                                       ------------- --------------
Current assets:
   Cash and cash equivalents:
      Amounts held as security for short positions in marketable securities..........  $          -  $        30.9
      Other restricted cash and cash equivalents.....................................          42.8           36.7
                                                                                       ------------- --------------
                                                                                               42.8           67.6
                                                                                       ------------- --------------
   Marketable securities, restricted:
      Amounts held in SAR Account....................................................          17.1           16.3
                                                                                       ------------- --------------

Long-term restricted cash, marketable securities and other investments:
   Amounts held in SAR Account.......................................................         137.8          144.4
   Other amounts restricted under the Timber Notes Indenture.........................           2.8            2.9
   Other long-term restricted cash...................................................          10.9           11.7
   Less: Amounts attributable to Timber Notes held in SAR Account....................         (53.0)         (52.7)
                                                                                       ------------- --------------
                                                                                               98.5          106.3
                                                                                       ------------- --------------

Total restricted cash and marketable securities......................................  $      158.4  $       190.2
                                                                                       ============= ==============

      Amounts in the Scheduled Amortization Reserve Account (the "SAR ACCOUNT")
are being held by the trustee under the indenture (the "TIMBER NOTES INDENTURE")
to support principal payments on Scotia LLC's Class A-1, Class A-2 and Class A-3
Timber Collateralized Notes due 2028 (the "TIMBER NOTES"). See Note 11 for
further discussion on the SAR Account. The current portion of the SAR Account is
determined based on the liquidity needs of Scotia LLC which corresponds directly
with the current portion of Scheduled Amortization.

      On March 5, 2002, Scotia LLC notified the trustee for the Timber Notes
that it had met all of the requirements of the SAR Reduction Date, as defined in
the Indenture. Accordingly, on March 20, 2002, Scotia LLC released $29.4 million
from the SAR Account and distributed this amount to Pacific Lumber.

      Cash, marketable securities and other investments include a limited
partnership interest in a partnership investing in equity securities (the
"EQUITY FUND PARTNERSHIP"), which invests in a diversified portfolio of common
stocks and other equity securities whose issuers are involved in merger, tender
offer, spin-off or recapitalization transactions. This investment is not
consolidated, but is accounted for under the equity method. The following table
shows the Company's investment in the Equity Fund Partnership, including
restricted amounts held in the SAR Account, and the ownership interest (dollars
in millions).


                                                                                                 December 31,
                                                                                        ------------------------------
                                                                                            2001             2000
                                                                                        -------------   --------------
Investment in Equity Fund Partnership:
   Restricted........................................................................   $       10.6    $        10.1
   Unrestricted......................................................................          130.6               -
                                                                                        -------------   --------------
                                                                                        $      141.2    $        10.1
                                                                                        =============   ==============

Percentage of ownership held.........................................................           41.0%            10.8%
                                                                                        =============   ==============


      The Equity Fund Partnership commenced operations on June 1, 2000. The
following tables contain summarized financial information of the Equity Fund
Partnership (in millions).


                                                                                                   DECEMBER 31,
                                                                                               --------------------
                                                                                                 2001       2000
                                                                                               ---------  ---------

Investments, at market value.................................................................. $  331.7   $   93.5
Due from brokers..............................................................................    273.7       72.8
Other assets..................................................................................     24.7        5.2
                                                                                               ---------  ---------
   Total assets............................................................................... $  630.1   $  171.5
                                                                                               =========  =========

Investments sold, not yet purchased, at market value.......................................... $  283.6   $   76.5
Other liabilities.............................................................................      7.8        0.9
Partners' capital.............................................................................    338.7       94.1
                                                                                               ---------  ---------
   Total liabilities and partners' capital.................................................... $  630.1   $   171.5
                                                                                               =========  =========



                                                                                                      PERIOD FROM
                                                                                      YEAR-ENDED    JUNE 1, 2000 TO
                                                                                     DECEMBER 31,    DECEMBER 31,
                                                                                         2001            2000
                                                                                    --------------  ---------------

Investment income.................................................................  $        13.2   $          1.9
Operating expenses................................................................          (11.8)            (1.4)
Net realized and unrealized gains  on investments.................................           14.3              4.9
                                                                                    --------------  ---------------
   Net increase in partners' capital resulting from operations....................  $        15.7   $          5.4
                                                                                    ==============  ===============

      As of December 31, 2001, long-term restricted cash, marketable securities
and other investments also included $10.0 million related to an investment in a
limited partnership which invests in, among other things, debt and equity
securities associated with developed and emerging markets.

7.    INVENTORIES

   Inventories are stated at the lower of cost or market. Cost for the aluminum
and forest products operations inventories is primarily determined using the
last-in, first-out ("LIFO") method not in excess of market value. Replacement
cost is not in excess of LIFO cost. Other inventories of the aluminum
operations, principally operating supplies and repair and maintenance parts, are
stated at the lower of average cost or market. Inventory costs consist of
material, labor and manufacturing overhead, including depreciation and
depletion.

      Inventories consist of the following (in millions):


                                                                                                   DECEMBER 31,
                                                                                               --------------------
                                                                                                 2001       2000
                                                                                               ---------  ---------
Aluminum operations:
   Finished fabricated products............................................................... $   30.4   $   54.6
   Primary aluminum and work in process.......................................................    108.3      126.9
   Bauxite and alumina........................................................................     77.7       88.6
   Operating supplies and repair and maintenance parts........................................     96.9      126.1
                                                                                               ---------  ---------
                                                                                                  313.3      396.2
                                                                                               ---------  ---------
Forest products operations:
   Lumber.....................................................................................     29.3       34.0
   Logs.......................................................................................     22.1       21.1
                                                                                               ---------  ---------
                                                                                                   51.4       55.1
                                                                                               ---------  ---------
                                                                                               $  364.7   $  451.3
                                                                                               =========  =========

      Kaiser's inventories at December 31, 2001, have been reduced by (i) a $5.6
million charge (in cost of sales and operations - aluminum) to write-down
certain excess operating supplies and repair and maintenance parts that will be
sold, rather than used in production, and (ii) $8.2 million of LIFO inventory
charges (in cost of sales and operations - aluminum) as reductions of inventory
volumes in inventory layers with higher costs than current market prices. See
Note 2.

      Kaiser's inventories at December 31, 2000 were reduced by LIFO inventory
charges totaling $24.1 million. These charges result primarily from the
Washington smelters' curtailment ($4.5 million), Kaiser's exit from the can body
stock product line ($11.1 million) and the delayed restart of the Gramercy
facility ($7.0 million). See Note 2.

      Forest products' inventories at December 31, 2001, have been reduced by a
$1.6 million charge (in cost of sales and operations - Forest Products) due to a
decline in current market prices below the cost of such inventory.

8.    PROPERTY, PLANT AND EQUIPMENT

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

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


                                                                                                  DECEMBER 31,
                                                                         ESTIMATED USEFUL   -----------------------
                                                                               LIVES           2001        2000
                                                                         -----------------  ----------  -----------
Land and improvements...................................................     5 - 30 years   $   228.8   $    207.9
Buildings...............................................................     5 - 45 years       395.8        278.4
Machinery and equipment.................................................     3 - 22 years     1,918.6      1,744.1
Construction in progress................................................                         51.0        133.9
                                                                                            ----------  -----------
                                                                                              2,594.2      2,364.3
Less:  accumulated depreciation.........................................                     (1,094.7)    (1,033.0)
                                                                                            ----------  -----------
                                                                                            $ 1,499.5   $  1,331.3
                                                                                            ==========  ===========

      Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $103.9 million, $88.8 million, and $101.5 million, respectively.

      Kaiser concluded that the profitability of its Trentwood facility can be
enhanced by further focusing resources on its core, heat-treat business and by
exiting lid and tab stock product lines used in the beverage container market
and brazing sheet for the automotive market. As a result of this decision,
Kaiser plans to sell or idle several pieces of equipment, resulting in an
impairment charge of approximately $17.7 million at December 31, 2001 (which
amount was reflected in impairment of assets in the Consolidated Statement of
Operations). Additional charges are likely as Kaiser works through all of the
operational impacts of this decision to exit the lid, tab and brazing sheet
product lines.

      During 2000, Kaiser evaluated the recoverability of the approximate $200.0
million carrying value of its Washington smelters as a result of the change in
the economic environment of the Pacific Northwest associated with the reduced
power availability and higher power costs for Kaiser's Washington smelters under
the terms of the new contract with the BPA starting in October 2001 (see Note
4). Kaiser determined that the expected future undiscounted cash flows of the
Washington smelters were below their carrying value. Accordingly, during 2000,
Kaiser adjusted the carrying value of its Washington smelting assets to their
estimated fair value, which resulted in a non-cash impairment charge of
approximately $33.0 million (see Note 2). The estimated fair value was based on
anticipated future cash flows discounted at a rate commensurate with the risk
involved.

      In 1999, based on negotiations with third parties, Kaiser concluded to
sell the Micromill assets and technology for less than the then existing
carrying value. Accordingly, the carrying value of the Micromill assets were
reduced by recording an impairment charge of $19.1 million in 1999 (see Note 2).

      As discussed in Note 2, the Company recorded $2.2 million for asset
impairments related to forest products operations in 2001.

9.    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. These investees include QAL (20.0% owned), Anglesey Aluminium Limited
("ANGLESEY") (49.0% owned) and Kaiser Jamaica Bauxite Company (49.0% owned).
Kaiser's equity in earnings (loss) before income taxes of such operations is
treated as a reduction (increase) in cost of sales and operations. At December
31, 2001 and 2000, Kaiser's net receivables from these affiliates were not
material. In addition, the1999 summary income statement information includes
results for AKW which was sold on April 1, 1999 (see Note 5). Kaiser's equity in
earnings of AKW was $2.5 million for the year ended December 31, 1999.


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001        2000
                                                                                            ----------  -----------
                                                                                            (In millions of dollars)
Current assets............................................................................  $   362.4   $    350.1
Long-term assets (primarily property, plant and equipment, net)...........................      345.7        327.3
                                                                                            ----------  -----------
   Total assets...........................................................................  $   708.1   $    677.4
                                                                                            ==========  ===========

Current liabilities.......................................................................  $   237.6   $    144.1
Long-term liabilities (primarily long-term debt)..........................................      271.2        331.4
Stockholders' equity......................................................................      199.3        201.9
                                                                                            ----------  -----------
   Total liabilities and stockholders' equity.............................................  $   708.1   $    677.4
                                                                                            ==========  ===========


                                                                                     YEARS ENDED DECEMBER 31,
                                                                               ------------------------------------
                                                                                  2001         2000        1999
                                                                               -----------  ----------  -----------
                                                                                     (In millions of dollars)
Net sales..................................................................... $    633.5   $   602.9   $    594.9
Costs and expenses............................................................     (621.5)     (617.1)      (582.9)
Credit (provision) for income taxes...........................................       (3.9)       (4.5)         0.8
                                                                               -----------  ----------  -----------
Net income (loss)............................................................. $      8.1   $   (18.7)  $     12.8
                                                                               ===========  ==========  ===========

Kaiser's equity in earnings (loss)............................................ $      1.7   $    (4.8)  $      4.9
                                                                               ===========  ==========  ===========

Dividends received............................................................ $      2.8   $     8.3   $        -
                                                                               ===========  ==========  ===========

      Kaiser's equity in earnings differs from the summary net income (loss) due
to varying percentage ownerships in the entities and equity method accounting
adjustments. Prior to December 31, 2000, Kaiser's investment in its
unconsolidated affiliates exceeded its equity in their net assets and such
excess was being amortized to depreciation, depletion and amortization. At
December 31, 2000, the excess investment had been fully amortized. Such
amortization was approximately $10.0 million for each of the years ended
December 31, 2000 and 1999.

      Kaiser and its affiliates have interrelated operations. Kaiser provides
some of its affiliates with services such as management and engineering.
Significant activities with affiliates include the acquisition and processing of
bauxite, alumina, and primary aluminum. Purchases from these affiliates were
$266.0 million, $235.7 million, and $223.7 million in the years ended December
31, 2001, 2000, and 1999, respectively.

      Other Investees
      The Company and Westbrook Firerock LLC each holds a 50% interest in a
joint venture which develops and manages a real estate project in Arizona
("FIREROCK, LLC"). At December 31, 2001, the joint venture had assets of $37.6
million, liabilities of $21.0 million and equity of $16.6 million. At December
31, 2000, the joint venture had assets of $41.7 million, liabilities of $25.3
million and equity of $16.4 million. For the years ended December 31, 2001, 2000
and 1999, the joint venture had income of $10.1 million, $9.7 million, and $3.7
million, respectively.

      The Company and SunCor Development Company each hold a 50% interest in a
joint venture which develops and manages a real estate project in Arizona
("SUNRIDGE CANYON L.L.C."). At December 31, 2001, the joint venture had assets
of $10.5 million, liabilities of $8.3 million and equity of $2.2 million. At
December 31, 2000, the joint venture had assets of $11.3 million, liabilities of
$8.5 million and equity of $2.8 million. For the years ended December 31, 2001,
2000 and 1999, the joint venture had income (loss) of $(0.2) million, $1.3
million and $4.8 million, respectively.


10.   SHORT-TERM BORROWINGS

      During 2001 and 2000, the Company had average short-term borrowings
outstanding of $10.2 million and $14.7 million, respectively, under the debt
instruments described below. The weighted average interest rate during 2001 and
2000 was 7.0% and 8.4%, respectively.

      MAXXAM Loan Agreement (the "CUSTODIAL TRUST AGREEMENT")
      The Company repaid $7.7 million of borrowings outstanding under the
Custodial Trust Agreement on October 22, 2001, the maturity date. The Company
did not renew this short-term borrowing facility.

      Pacific Lumber Credit Agreement
      The "PACIFIC LUMBER CREDIT AGREEMENT" was renewed on August 14, 2001. The
new facility provides for a $50.0 million two-year revolving line of credit as
compared to a $60.0 million line of credit under the expired facility. On each
anniversary date (subject to the consent of the lender), the Pacific Lumber
Credit Agreement may be extended by one year. Borrowings are secured by all of
Pacific Lumber's domestic accounts receivable and inventory. As of December 31,
2001, borrowings of $17.7 million and letters of credit of $11.5 million were
outstanding. Unused availability was limited to $12.2 million at December 31,
2001.

      Scotia LLC Line of Credit Agreement
      Pursuant to certain liquidity requirements under the Timber Notes
Indenture, Scotia LLC has entered into an agreement (the "SCOTIA LLC LINE OF
CREDIT") with a group of banks pursuant to which Scotia LLC may borrow to pay
interest on the Timber Notes. The maximum amount Scotia LLC may borrow is equal
to one year's interest on the aggregate outstanding principal balance of the
Timber Notes (the "REQUIRED LIQUIDITY AMOUNT"). At December 31, 2001, the
Required Liquidity Amount was $60.9 million. On June 1, 2001, the Scotia LLC
Line of Credit was extended for an additional year to July 12, 2002. Annually,
Scotia LLC will request that the banks extend the Scotia LLC Line of Credit for
a period of not less than 364 days. If not extended, Scotia LLC may draw upon
the full amount available. The amount drawn would be repayable in 12 semiannual
installments on each note payment date (after the payment of certain other
items, including the Aggregate Minimum Principal Amortization Amount, as
defined, then due), commencing approximately two and one-half years following
the date of the draw. Borrowings under the Scotia LLC Line of Credit generally
bear interest at the Base Rate (as defined in the agreement) plus 0.25% or at a
one month or six month LIBOR rate plus 1% at any time the borrowings have not
been continually outstanding for more than six months. As of December 31, 2001,
Scotia LLC had no borrowings outstanding under the Scotia LLC Line of Credit.

11.     LONG-TERM DEBT

      Long-term debt (before considering any impacts of the Cases as discussed
below) consists of the following (in millions):

                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001        2000
                                                                                            ----------  -----------
KACC Credit Agreement.....................................................................  $       -   $     30.4
9 7/8% KACC Senior Notes due February 15, 2002, net of discount...........................      172.8        224.8
10 7/8% KACC Senior Notes due October 15, 2006, including premium.........................      225.4        225.5
12 3/4% KACC Senior Subordinated Notes due February 1, 2003...............................      400.0        400.0
Alpart CARIFA Loans.......................................................................       22.0         56.0
Other aluminum operations debt............................................................       54.1         52.7
12% MGHI Senior Secured Notes due August 1, 2003..........................................       88.2        118.8
6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028..................      120.3        136.7
7.11% Scotia LLC Class A-2 Timber Collateralized Notes due July 20, 2028..................      243.2        243.2
7.71% Scotia LLC Class A-3 Timber Collateralized Notes due July 20, 2028..................      463.3        463.3
7.56% Lakepointe Notes (see Note 5).......................................................      121.7            -
Other notes and contracts, primarily secured by receivables, buildings,
     real estate and equipment                                                                   52.4         41.5
                                                                                            ----------  -----------
                                                                                              1,963.4      1,992.9
      Less: current maturities............................................................     (198.9)       (48.0)
           Timber Notes held in SAR Account...............................................      (57.7)       (59.9)
                                                                                            ----------  -----------
                                                                                            $ 1,706.8   $  1,885.0
                                                                                            ==========  ===========

      The amount attributable to the Timber Notes held in the SAR Account of
$53.0 million reflected in Note 6 above represents $57.7 million of principal
amount of Timber Notes, net of $4.7 million of unamortized discount.

      At December 31, 2001, the estimated fair value of the Company's current
and long-term debt, excluding amounts attributable to Kaiser, was $1,009.0
million. Given the fact that the fair value of substantially all of Kaiser's
outstanding indebtedness will be determined as part of the plan of
reorganization, it is impracticable and inappropriate to estimate the fair value
of these financial instruments at December 31, 2001. At December 31, 2000, the
estimated fair value of debt, including current maturities and Kaiser
indebtedness, was $1,636.8 million. The estimated fair value of debt is
determined based on the quoted market prices for the publicly traded issues and
on the current rates offered for borrowings similar to the other debt. Some of
the Company's publicly traded debt issues are thinly traded financial
instruments; accordingly, their market prices at any balance sheet date may not
be representative of the prices which would be derived from a more active
market.

      DIP Facility
      On February 12, 2002, Kaiser entered into a post-petition credit agreement
with a group of lenders for debtor-in-possession financing (the "DIP FACILITY")
which provides for a secured, revolving line of credit through the earlier of
February 12, 2004, the effective date of a plan of reorganization or voluntary
termination by Kaiser. The DIP Facility contains substantially similar terms and
conditions to those that were included in the KACC Credit Agreement (defined
below). Kaiser is able to borrow under the DIP Facility by means of revolving
credit advances and letters of credit (up to $125.0 million) in an aggregate
amount equal to the lesser of $300.0 million or a borrowing base relating to
eligible accounts receivable, eligible inventory and eligible fixed assets
reduced by certain reserves, as defined in the DIP Facility agreement. The DIP
Facility is guaranteed by Kaiser, the Debtor subsidiaries and two non-Debtor
wholly owned subsidiaries, Kaiser Jamaica Corporation and Alpart Jamaica, Inc.
Interest on any outstanding balances will bear a spread over either a base rate
or LIBOR, at Kaiser's option. The Court signed a final order approving the DIP
Facility on March 19, 2002. At March 31, 2002, there were no outstanding
borrowings under the revolving credit facility and there were outstanding
letters of credit of approximately $54.1 million. As of March 31, 2002, $121.0
million (of which $70.9 million could be used for letters of credit) was
available to Kaiser under the DIP Facility. Kaiser expects that the borrowing
base amount will increase by approximately $50.0 million once certain appraisal
information is provided to the lenders.

      1994 KACC Credit Agreement (as amended)
      Prior to the February 12, 2002 Filing Date, KACC had a credit agreement,
as amended (the "KACC CREDIT AGREEMENT") which provided a secured, revolving
line of credit. The KACC Credit Agreement was secured by, among other things,
(i) mortgages on Kaiser's major domestic plants (excluding Kaiser's Gramercy
alumina plant); (ii) subject to certain exceptions, liens on the accounts
receivable, inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of Kaiser and certain of its
subsidiaries; (iii) a pledge of all 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. The KACC Credit Agreement terminated on the Filing Date and was
replaced by the DIP Facility discussed above. During the last six months of
2001, there were no borrowings under the KACC Credit Agreement. During the first
six months of 2001, month-end borrowings under the KACC Credit Agreement were as
high as approximately $94.0 million, which occurred in February 2001, primarily
as a result of costs incurred and capital spending related to the Gramercy
rebuild, net of insurance reimbursements. The average amount of borrowings
outstanding under the KACC Credit Agreement during 2001 was approximately $11.8
million. The average interest rate on loans outstanding under the KACC Credit
Agreement during 2001 was approximately 10.0% per annum. As of the Filing Date,
outstanding letters of credit were approximately $43.3 million, and there were
no borrowings outstanding under the KACC Credit Agreement.

      KACC 9 7/8% Senior Notes due February 2002 (the "KACC 9 7/8% SENIOR
      NOTES"), KACC 10 7/8% Senior Notes due 2006 (the "KACC 10 7/8% SENIOR
      NOTES") and KACC 12 3/4% Senior Subordinated Notes due February 2003 (the
      "KACC SENIOR SUBORDINATED NOTES") (collectively, the "KACC NOTES")
      The obligations of Kaiser with respect to the KACC Notes are guaranteed,
jointly and severally, by certain subsidiaries of Kaiser. Prior to concluding
that, as a result of the events outlined in Note 1, Kaiser should file the
Cases, Kaiser had purchased $52.2 million of the KACC 9 7/8% Senior Notes. The
net gain from the purchase of the notes was less than $1.1 million.

      Alpart CARIFA Loans
      In December 1991, Alumina Partners of Jamaica ("ALPART") entered into a
loan agreement with the Caribbean Basin Projects Financing Authority ("CARIFA").
As of December 31, 2001, Alpart's obligations under the loan agreement were
secured by two letters of credit aggregating $23.5 million. Kaiser was a party
to one of the two letters of credit in the amount of $15.3 million in respect of
its 65% ownership interest in Alpart. Alpart has also agreed to indemnify
bondholders of CARIFA for certain tax payments that could result from events, as
defined, that adversely affect the tax treatment of the interest income on the
bonds.

      During the first quarter of 2001, Alpart redeemed $34.0 million principal
amount of the CARIFA loans. The redemption had a modest beneficial effect on the
unused availability remaining under the KACC Credit Agreement as the additional
KACC Credit Agreement borrowings of $22.1 million required for Kaiser's share of
the redemption were more than offset by a reduction in the amount of letters of
credit outstanding that supported the loan.

      7.6% Solid Waste Disposal Revenue Bonds
      The sold waste disposal revenue bonds are secured by a first mortgage on
certain machinery at KACC's Mead smelter.

      Aluminum Debt Covenants and Restrictions
      The DIP Facility requires Kaiser to comply with certain financial
covenants and places restrictions on Kaiser'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 DIP Facility is secured by, among other things, (i) mortgages on
Kaiser's major domestic plants; (ii) subject to certain exceptions, liens on the
accounts receivable, inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of Kaiser and certain of its
subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser; and (iv)
pledges of all of the stock of a number of Kaiser'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.

      The indentures governing the KACC Notes (collectively, the "KACC
INDENTURES") restrict, among other things, Kaiser's ability to incur debt,
undertake transactions with affiliates, and pay dividends. Further, the KACC
Indentures provide that Kaiser must offer to purchase the KACC Notes upon the
occurrence of a Change of Control (as defined therein).

      12% MGHI Senior Secured Notes due 2003 (the "MGHI NOTES")
      The MGHI Notes due August 1, 2003 are guaranteed on a senior, unsecured
basis by the Company. As of December 31, 2001, the MGHI Notes are also secured
by a pledge of 23,443,953 shares of the Kaiser common stock owned by MGHI, the
common stock of MGI and the Intercompany Note (defined below). Interest on the
MGHI Notes is payable semi-annually. During 2001, MGHI purchased $30.6 million
of the MGHI Notes resulting in an extraordinary gain of $3.6 million. During
January and February 2002, MGHI purchased $16.9 million of the MGHI Notes
resulting in an extraordinary gain of $1.9 million.

      The net proceeds from the offering of the MGHI Notes after expenses were
approximately $125.0 million, all of which was loaned to the Company pursuant to
an intercompany note (the "INTERCOMPANY NOTE"). The Intercompany Note bears
interest at the rate of 11% per annum (payable semi-annually on the interest
payment dates applicable to the MGHI Notes) and matures on August 1, 2003. The
Company is entitled to defer the payment of interest on the Intercompany Note on
any interest payment date to the extent that MGHI has sufficient available funds
to satisfy its obligations on the MGHI Notes on such date. Any such deferred
interest will be added to the principal amount of the Intercompany Note and will
be payable at maturity. As of December 31, 2001, $58.1 million of interest had
been deferred and added to principal. An additional $10.1 million of interest
was deferred and added to principal on February 1, 2002. The Company expects
that it will pay the amount of the Intercompany Note necessary to retire the
MGHI Notes.

      Scotia LLC Timber Notes
      Scotia LLC issued $867.2 million aggregate principal amount of Timber
Notes on July 20, 1998. The Timber Notes and the Scotia LLC Line of Credit are
secured by a lien on (i) Scotia LLC's timber, timberlands and timber rights and
(ii) substantially all of Scotia LLC's other property. The Timber Notes
Indenture permits Scotia LLC to have outstanding up to $75.0 million of
non-recourse indebtedness to acquire additional timberlands and to issue
additional timber notes provided certain conditions are met (including repayment
or redemption of the remaining $120.3 million of Class A-1 Timber Notes).

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

      In connection with the sale of the Headwaters Timberlands, Salmon Creek
received proceeds of $299.9 million in cash. See Note 5. In November 1999,
$169.0 million of funds from the sale of the Headwaters Timberlands were
contributed to Scotia LLC and set aside in the SAR Account. Amounts in the SAR
Account are part of the collateral securing the Timber Notes and will be used to
make principal payments to the extent that other available amounts are
insufficient to pay Scheduled Amortization on the Class A-1 and Class A-2 Timber
Notes. In addition, during the six years beginning January 20, 2014, amounts in
the SAR Account will be used to amortize the Class A-3 Timber Notes as set forth
in the Timber Notes Indenture, as amended. Funds may from time to time be
released to Scotia LLC from the SAR Account if the amount in the account exceeds
the then Required Scheduled Amortization Reserve Balance (as defined in the
Timber Notes Indenture). If the balance in the SAR Account falls below the
Required Scheduled Amortization Reserve Balance, up to 50% of any Remaining
Funds (funds that could otherwise be released to Scotia LLC free of the lien
securing the Timber Notes) is required to be used on each monthly deposit date
to replenish the SAR Account. The amount attributable to Timber Notes held in
the SAR Account of $53.0 million reflected in Note 6 represents $57.7 million
principal amount of reacquired Timber Notes.

      Principal and interest are payable semi-annually on January 20 and July
20. During the year ended December 31, 2001, Scotia LLC used $67.3 million set
aside in the note payment account to pay the $57.4 million of interest due as
well as $9.9 million of principal. Scotia LLC repaid an additional $4.3 million
of principal on the Timber Notes using funds held in the SAR Account, resulting
in total principal payments of $14.2 million, an amount equal to Scheduled
Amortization. In addition, Scotia LLC made distributions in the amount of $79.9
million to its parent, Pacific Lumber, $63.9 million of which was made using
funds from the December 2000 sale of the Owl Creek grove and $14.5 million of
which was made using excess funds released from the SAR Account.

      On the note payment date for the Timber Notes in January 2002, Scotia LLC
had $33.9 million set aside in the note payment account to pay the $28.4 million
of interest due as well as $5.5 million of principal. Scotia LLC repaid an
additional $6.1 million of principal using funds held in the SAR Account
resulting in a total principal payment of $11.6 million, an amount equal to
Scheduled Amortization.

      With respect to the note payment due in July 2002, Scotia LLC expects that
it will require funds from the Scotia LLC Line of Credit to pay a portion of the
interest due, and that all of the funds used to pay the Scheduled Amortization
amount will be provided from the SAR Account.

      Lakepointe Notes
      In June 2001, Lakepointe Assets financed the purchase of Lake Pointe Plaza
with proceeds from the Lakepointe Notes (see Note 5). The Lakepointe Notes
consist of $122.5 principal amount of 7.56% notes due June 8, 2021. The
Lakepointe Notes are secured by the Lake Pointe Plaza operating leases, Lake
Pointe Plaza and a $60.0 million residual value insurance contract.

      Maturities
      Scheduled maturities of short-term borrowings and long-term debt
outstanding (before considering any effects of the Cases) at December 31, 2001,
are as follows (in millions):


                                                                  YEARS ENDING DECEMBER 31,
                                         --------------------------------------------------------------------------
                                            2002        2003        2004         2005         2006      THEREAFTER
                                         ----------  ----------- -----------  -----------  -----------  -----------
KACC Credit Agreement................... $       -   $        -  $        -   $        -   $        -   $        -
KACC 9 7 8% Senior Notes................     172.8            -           -            -            -            -
KACC 10 7/8% Senior Notes...............         -            -           -            -        225.0            -
KACC 12 3/4% Senior Subordinated Notes..         -        400.0           -            -            -            -
Alpart CARIFA Loans.....................         -            -           -            -            -         22.0
Other aluminum operations debt..........       0.7          0.7         0.7          0.8          0.8         50.8
MGHI Notes..............................         -         88.2           -            -            -            -
Timber Collateralized Notes.............      14.8         16.7        19.2         21.7         25.3        671.4
Lakepointe 7.56% Notes..................       2.2          2.3         1.4          1.0          1.3        113.5
Other...................................      26.7          5.9         6.6          0.8          1.1         29.6
                                         ----------  ----------- -----------  -----------  -----------  -----------
                                         $   217.2   $    513.8  $     27.9   $     24.3        253.5   $    887.3
                                         ==========  =========== ===========  ===========  ===========  ===========

      Capitalized Interest
      Interest capitalized during the years ended December 31, 2001, 2000 and
1999 was $4.0 million, $7.0 million and $3.5 million, respectively.

      Restricted Net Assets of Subsidiaries and Pledges of Subsidiary Stock
      Certain debt instruments restrict the ability of the Company's
subsidiaries to transfer assets, make loans and advances and pay dividends to
the Company. As of December 31, 2001, all of the assets relating to the
Company's aluminum, forest products and racing operations are subject to such
restrictions and certain assets of the Company's real estate operations are
pledged or serve as collateral. As of April 2002, a total of 23,443,953
shares of Kaiser common stock (representing a 29.1% interest in Kaiser) owned by
MGHI were pledged to secure the MGHI Notes.

12.     INCOME TAXES

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

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


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Domestic......................................................................  $  (167.7)  $   (44.2)  $    109.5
Foreign.......................................................................      203.7       104.5        (15.0)
                                                                                ----------  ----------  -----------
                                                                                $    36.0   $    60.3   $     94.5
                                                                                ==========  ==========  ===========

      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 provision for income taxes on income before income taxes, minority
interests and extraordinary items consists of the following (in millions):

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Current:
   Federal....................................................................  $    (1.1)  $    (1.8)  $     (0.6)
   State and local............................................................       (0.2)       (0.2)           -
   Foreign....................................................................      (40.6)      (35.3)       (23.1)
                                                                                ----------  ----------  -----------
                                                                                    (41.9)      (37.3)       (23.7)
                                                                                ----------  ----------  -----------
Deferred:
   Federal....................................................................     (466.9)       25.7         (8.9)
   State and local............................................................      (25.4)       (6.6)       (18.2)
   Foreign....................................................................        0.5        (8.9)         7.1
                                                                                ----------  ----------  -----------
                                                                                   (491.8)       10.2        (20.0)
                                                                                ----------  ----------  -----------
                                                                                $  (533.7)  $   (27.1)  $    (43.7)
                                                                                ==========  ==========  ===========

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


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Income before income taxes, minority interests and extraordinary items........  $    36.0   $    60.3   $     94.5
                                                                                ==========  ==========  ===========

Amount of federal income tax provision based upon the statutory rate..........  $   (12.6)  $   (21.1)  $    (33.1)
Changes in valuation allowances and revision of prior years' tax estimates ...     (515.2)       (2.3)         4.1
Percentage depletion..........................................................        4.9         3.0          2.8
Foreign taxes, net of federal tax benefit.....................................       (9.6)       (3.2)        (3.2)
State and local taxes, net of federal tax effect..............................       (0.3)       (3.2)       (12.7)
Other.........................................................................       (0.9)       (0.3)        (1.6)
                                                                                ----------  ----------  -----------
                                                                                $  (533.7)  $   (27.1)  $    (43.7)
                                                                                ==========  ==========  ===========

      Changes in valuation allowances and revision of prior years' tax
estimates, as shown in the table above, includes changes in valuation allowances
with respect to deferred income tax assets, amounts for the reversal of reserves
which the Company no longer believes are necessary, and other changes in prior
years' tax estimates. $530.4 million of the changes in valuation allowances and
revision of prior years' tax estimates for 2001 is attributable to additional
valuation allowances on Kaiser's loss and credit carryforwards. Generally, the
reversal of reserves relates to the expiration of the relevant statute of
limitations with respect to certain income tax returns or the resolution of
specific income tax matters with the relevant tax authorities.

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


                                                                                                 DECEMBER 31,
                                                                                               2001        2000
                                                                                            ----------  -----------
Deferred income tax assets:
   Postretirement benefits other than pensions............................................  $   268.8   $    271.9
   Loss and credit carryforwards..........................................................      314.9        266.2
   Other liabilities......................................................................      341.0        286.5
   Costs capitalized only for tax purposes................................................       53.0         63.0
   Real estate............................................................................       21.2         28.8
   Timber and timberlands.................................................................       23.8         28.1
   Other..................................................................................       32.2         30.7
   Valuation allowances...................................................................     (669.1)      (137.3)
                                                                                            ----------  -----------
      Total deferred income tax assets, net...............................................      385.8        837.9
                                                                                            ----------  -----------
Deferred income tax liabilities:
   Property, plant and equipment..........................................................     (155.1)      (112.1)
   Deferred gains on sales of timber and timberlands......................................     (111.0)      (130.4)
   Other..................................................................................      (57.4)       (43.6)
                                                                                            ----------  -----------
      Total deferred income tax liabilities...............................................     (323.5)      (286.1)
                                                                                            ----------  -----------
Net deferred income tax assets............................................................  $    62.3   $    551.8
                                                                                            ==========  ===========

      As of December 31, 2001, Kaiser's net deferred tax liability was $39.4
million. The principal component of Kaiser's deferred income tax liabilities is
the tax benefit associated with the accrued liability for postretirement
benefits other than pensions. The future tax deductions with respect to the
turnaround of this accrual will occur over a 30 to 40 year period. If such
deductions create or increase a net operating loss, Kaiser has the ability to
carry forward such loss for 20 taxable years. Accordingly, prior to the Cases,
Kaiser believed that a long-term view of profitability was appropriate and had
concluded that the portion of this deferred income tax asset for which it had
not provided valuation allowances would more likely than not be realized.

      However, in light of the Cases, Kaiser provided additional valuation
allowances of $530.4 million in 2001, of which $505.4 million was recorded in
provision for income taxes in the accompanying consolidated statement of
operations, and $25.0 million was recorded in other comprehensive income (loss)
in the accompanying consolidated balance sheet. The additional valuation
allowances were provided as Kaiser no longer believes that the "more likely than
not" recognition criteria are appropriate given a combination of factors
including: (a) the expiration date of its loss and credit carryforwards; (b) the
possibility that all or a substantial portion of the loss and credit
carryforwards and the tax basis of assets could be reduced to the extent of
cancellation of indebtedness occurring as a part of a reorganization plan; (c)
the possibility that all or a substantial portion of the loss and credit
carryforwards could become limited if a change of ownership occurs as a result
of the Debtors reorganization; and (d) due to updated expectations regarding
near term taxable income. In prior periods, Kaiser had concluded that a
substantial portion of these items would more likely than not be realized (to
the extent not covered by valuation allowances) based on the cyclical nature of
its business, its history of operating earnings, and its then-existing
expectations for future years. The valuation allowances adjustment has no impact
on Kaiser's liquidity, operations or loan compliance and is not intended, in any
way, to be indicative of its long-term prospects or its ability to successfully
reorganize.

      The net deferred income tax assets listed above which are not attributable
to Kaiser are $101.7 million as of December 31, 2001. This amount includes
$155.3 million attributable to the tax benefit of loss and credit carryforwards,
net of valuation allowances. The Company evaluated all appropriate factors in
determining the realizability of the deferred tax assets attributable to loss
and credit carryforwards, including any limitations on their use, the reversal
of deferred gains, other temporary differences, the year the carryforwards
expire and the levels of taxable income necessary for utilization. The Company
also considered the potential recognition for the purposes of the deferred gains
on sales of timber and timberlands. Based on this evaluation of the appropriate
factors to determine the proper valuation allowances for these carryforwards,
the Company believes that it is more likely than not that it will realize the
benefit for the carryforwards for which valuation allowances were not provided.
The deferred income tax liabilities related to deferred gains on sales of timber
and timberlands are a result of the sales of the Headwaters Timberlands (1999),
the Owl Creek grove (2000), and the Grizzly Creek grove (2001). The Company has
reinvested a portion of these proceeds, and expects to make further
reinvestments. Reinvestments beyond the levels currently planned could impact
the Company's evaluation of deferred gains available for offset against net
operating losses and in turn the Company's evaluation of the realizability of
its net operating losses.

      As of December 31, 2001 and 2000, $10.6 million and $64.0 million,
respectively, of the net deferred income tax assets listed above are included in
prepaid expenses and other current assets. Certain other portions of the
deferred income tax liabilities listed above are included in other accrued
liabilities and other noncurrent liabilities.

      Kaiser and its domestic subsidiaries are members of a separate
consolidated return group which files its own consolidated federal income tax
return. During the period from October 28, 1988, through June 30, 1993, Kaiser
and its domestic subsidiaries were included in the consolidated federal income
tax returns of the Company. The tax allocation agreements of Kaiser and KACC
with the Company terminated pursuant to their terms, effective for taxable
periods beginning after June 30, 1993. However, payments or refunds for periods
prior to July 1, 1993 related to certain jurisdictions could still be required
pursuant to Kaiser's and KACC's respective tax allocation agreements with the
Company. Any such payments to the Company by KACC would require approval by the
DIP Facility lenders and the Court. In March 2002, the Company filed a suit with
the Court asking the Court to find that it has no further obligations to the
Debtors under the tax sharing agreement. The Company's suit is based on the
assertion that the agreements are personal contracts and financial
accommodations which cannot be assumed under the Code.

      The following table presents the estimated tax attributes for federal
income tax purposes at December 31, 2001 attributable to the Company and Kaiser
(in millions). The utilization of certain of these tax attributes is subject to
limitations.


                                                                         THE COMPANY                 KAISER
                                                                   -----------------------  -----------------------
                                                                                 EXPIRING                EXPIRING
                                                                                 THROUGH                  THROUGH
                                                                                ----------              -----------
Regular Tax Attribute Carryforwards:
   Current year net operating loss...............................  $     63.5        2021   $      -             -
   Prior year net operating losses...............................       364.3        2020       60.3          2019
   General business tax credits..................................         0.1        2002        1.0          2011
   Foreign tax credits...........................................           -           -       93.6          2006
   Alternative minimum tax credits...............................         1.8   Indefinite      26.9    Indefinite

Alternative Minimum Tax Attribute Carryforwards:
   Current year net operating loss...............................  $     62.4        2021   $      -             -
   Prior year net operating losses...............................       372.0        2020        1.0          2011
   Foreign tax credits...........................................           -           -      105.0          2006

      The income tax credit (provision) related to other comprehensive income
was $(1.3) million, $(0.1) million and $0.7 million for the years ended December
31, 2001, 2000 and 1999, respectively.

13.     EMPLOYEE BENEFIT AND INCENTIVE PLANS

      Pension and Other Postretirement Benefit Plans
      The Company has various retirement plans which cover essentially all
employees. Most of the Company's employees are covered by defined benefit plans.
The benefits are determined under formulas based on the employee's years of
service, age and compensation. The Company's funding policies meet or exceed all
regulatory requirements.

      The Company has unfunded postretirement medical benefit plans which cover
most of its employees. Under the plans, employees are eligible for health care
benefits (and life insurance benefits for Kaiser employees) upon retirement.
Retirees from companies other than Kaiser make contributions for a portion of
the cost of their health care benefits. The expected costs of postretirement
medical benefits are accrued over the period the employees provide services to
the date of their full eligibility for such benefits. Postretirement medical
benefits are generally provided through a self insured arrangement. The Company
has not funded the liability for these benefits, which are expected to be paid
out of cash generated by operations.

      The following tables present the changes, status and assumptions of the
Company's pension and other postretirement benefit plans as of December 31, 2001
and 2000, respectively (in millions):


                                                                      PENSION BENEFITS      MEDICAL/LIFE BENEFITS
                                                                   -----------------------  -----------------------
                                                                               YEARS ENDED DECEMBER 31,
                                                                   ------------------------------------------------
                                                                      2001         2000        2001        2000
                                                                   -----------  ----------  ----------  -----------
Change in benefit obligation: (1)
   Benefit obligation at beginning of year.......................  $    928.3   $   890.9   $   666.7   $    621.8
   Service cost..................................................        41.3        23.0        12.5          5.7
   Interest cost.................................................        68.0        67.4        49.4         45.5
   Plan participants' contributions..............................         2.0         1.7         1.2          1.1
   Actuarial (gain) loss.........................................        36.0        13.8       220.1         81.0
   Currency exchange rate change.................................        (1.4)       (3.4)          -            -
   Curtailments, settlements and amendments......................        (0.2)       33.7       (13.7)       (33.0)
   Benefits paid.................................................       (93.9)      (98.8)      (58.6)       (55.4)
                                                                   -----------  ----------  ----------  -----------
      Benefit obligation at end of year                                 980.1       928.3       877.6        666.7
                                                                   -----------  ----------  ----------  -----------

Change in plan assets: (1)
   Fair value of plan assets at beginning of year................       845.5       948.9           -            -
   Actual return on assets.......................................       (52.2)      (16.8)          -            -
   Employer contributions........................................        23.0        15.0        57.4         54.3
   Currency exchange rate change.................................        (1.1)       (2.8)          -            -
   Plan participants' contributions..............................           -           -         1.2          1.1
   Benefits paid.................................................       (93.9)      (98.8)      (58.6)       (55.4)
                                                                   -----------  ----------  ----------  -----------
   Fair value of plan assets at end of year......................       721.3       845.5           -            -
                                                                   -----------  ----------  ----------  -----------

   Benefit obligation in excess of plan assets(1)................       258.8        82.8       877.6        666.7
   Unrecognized actuarial gain (loss)............................      (127.7)       37.2      (239.0)       (19.2)
   Unrecognized prior service costs..............................       (40.6)      (46.0)       76.7         78.2
   Adjustment required to recognize minimum liability............       105.5         3.0           -            -
   Intangible asset and other....................................        40.3         1.8           -            -
                                                                   -----------  ----------  ----------  -----------
      Accrued benefit liability (1)..............................  $    236.3   $    78.8   $   715.3   $    725.7
                                                                   ===========  ==========  ==========  ===========

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

(1)  The December 31, 2000, pension benefit amounts in the above table have been
     revised from previous disclosures to include the balances of Alumina
     Partners of Jamaica ("Alpart") and Kaiser Bauxite Company ("KBC") that were
     already fully reflected in the consolidated balance sheet as of December
     31, 2000.

      With respect to Kaiser's pension plans, the benefit obligation was $915.6
million and $871.4 million as of December 31, 2001 and 2000, respectively. The
benefit obligation exceeded Kaiser's fair value of plan assets by $244.8 million
and $80.3 million as of December 31, 2001 and 2000, respectively.

      The assets of the Company sponsored pension plans, like numerous other
companies' plans, are, to a substantial degree, invested in the capital markets
and managed by a third party. Given the performance of the stock market during
2001, the Company was required to reflect an additional minimum pension liability of
$65.1 million (net of income tax benefit of $38.0 million) in its 2001 financial
statements as a result of a decline in the value of the assets held by Kaiser's
pension plans. Minimum pension liability adjustments are non-cash adjustments
that are reflected as an increase in pension liability and an offsetting charge
to stockholders' equity (net of income tax) through other comprehensive income
(rather than net income). Kaiser also anticipates that the decline in the value
of the pension plans' assets will unfavorably impact pension costs reflected in
its 2002 operating results. However, absent a decision by Kaiser to increase its
contributions to the pension plans as a result of the 2001 asset performance,
such asset performance is not expected to have a material impact on Kaiser's
near-term liquidity as pension funding requirements generally allow for such
impacts to be spread over multiple years. Increases in post-2002 pension funding
requirements could occur, however, if capital market performance in future
periods does not more closely approximate the long-term rate of return assumed
by Kaiser, and the amount of such increases could be material.

      The postretirement medical/life benefit obligation attributable to
Kaiser's plans was $868.2 million and $658.2 million as of December 31, 2001 and
2000, respectively. The postretirement medical/life benefit liability recognized
in the Company's Consolidated Balance Sheet attributable to Kaiser's plans was
$704.2 million and $714.9 million as of December 31, 2001 and 2000,
respectively.


                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2001       2000      1999       2001      2000       1999
                                                     ---------  --------  ---------  --------- ---------  ---------
Components of net periodic benefit costs:(1)
   Service cost....................................  $   41.3   $  23.0   $   17.5   $   12.5  $    5.7   $    5.6
   Interest cost...................................      68.0      67.4       63.5       49.4      45.5       42.0
   Expected return on assets.......................     (75.3)    (84.8)     (76.3)         -         -          -
   Amortization of prior service costs.............       5.6       4.0        3.4      (15.1)    (12.9)     (12.1)
   Recognized net actuarial (gain) loss............      (1.0)     (2.5)       0.7       (0.1)     (0.3)      (0.2)
                                                     ---------  --------  ---------  --------- ---------  ---------
   Net periodic benefit costs......................      38.6       7.1        8.8       46.7      38.0       35.3
   Curtailments, settlements and other.............      (0.4)      0.1        0.4       (0.1)       -           -
                                                     ---------  --------  ---------  --------- ---------  ---------
      Adjusted net periodic benefit costs(2).......  $   38.2   $   7.2   $    9.2   $   46.6  $   38.0   $   35.3
                                                     =========  ========  =========  ========= =========  =========

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

(1)  The December 31, 2000 net periodic benefit costs in the above table have
     been revised from previous disclosures to include the balances of Alpart
     and KBC that were fully reflected in the statement of consolidated income
     (loss) for the year ended December 31, 2000. The costs in the table for
     1999 were not revised because the amounts were not material.
(2)  Approximately $24.5 million of the $36.3 million adjusted net periodic
     benefit costs in 2001 and $6.1 million of the $5.3 million adjusted net
     periodic benefit costs in 2000 related to pension accruals that were
     provided in respect to headcount reductions resulting from the performance
     improvement program (see Note 1) and the Pacific Northwest power sales (see
     Note 4).

      The net periodic pension costs attributable to Kaiser's plans was $36.3
million, $5.3 million and $5.8 million for the years ended December 31, 2001,
2000 and 1999, respectively.

      Included in the net periodic postretirement medical/life benefit cost is
$45.7 million, $37.5 million and $34.6 million for the years ended December 31,
2001, 2000 and 1999, respectively, attributable to Kaiser's plans.

      The accumulated benefit obligation and aggregate fair value of plan assets
for pension plans with accumulated benefit obligations in excess of plan assets
were $920.6 million and $685.1 million, respectively, as of December 31, 2001,
and $827.5 million and $783.2 million, respectively, as of December 31, 2000.


                                                                    PENSION BENEFITS        MEDICAL/LIFE BENEFITS
                                                                ------------------------  -------------------------
                                                                             YEARS ENDED DECEMBER 31,
                                                                ---------------------------------------------------
                                                                 2001    2000     1999     2001     2000     1999
                                                                ------- -------  -------  -------  -------  -------
Weighted-average assumptions:
   Discount rate..............................................     7.3%    7.8%     7.8%     7.3%     7.8%     7.8%
   Expected return on plan assets.............................     9.5%    9.5%     9.5%       -        -        -
   Rate of compensation increase..............................     4.0%    4.0%     4.0%     4.0%     4.0%     4.0%

      In 2001, the average annual assumed rate of increase in the per capita
cost of covered benefits (i.e. health care cost trend rate) is 7.5% for all
participants. The assumed rate of increase is assumed to decline gradually to
5.0% in 2006 for all participants and remain at that level thereafter. Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plan. A one-percentage-point change in assumed health care
cost trend rates as of December 31, 2001 would have the following effects (in
millions):


                                                                                   1-PERCENTAGE-     1-PERCENTAGE-
                                                                                   POINT INCREASE    POINT DECREASE
                                                                                  ----------------  ----------------
Effect on total of service and interest cost components.......................... $       7.0       $    (5.8)
Effect on the postretirement benefit obligations.................................        92.8           (65.3)

      The foregoing medical benefit liability and cost data does not reflect the
fact that in February 2002, Kaiser notified its salaried retirees that, given
the significant escalation in medical costs and the increased burden it was
creating, Kaiser was going to require such retirees to fund a portion of their
medical costs beginning May 1, 2002. The impact of such changes will be to
reduce the estimated cash payments by Kaiser by approximately $10.0 million per
year. The financial statement benefits of this change will, however, be
reflected over the remaining employment period of Kaiser's employees in
accordance with generally accepted accounting principles.

      Savings and Incentive Plans
      The Company has various defined contribution savings plans designed to
enhance the existing retirement programs of participating employees. Kaiser has
an unfunded incentive compensation program which provides incentive compensation
based upon performance against annual plans and over rolling three-year periods.
Expenses incurred by the Company for all of these plans were $6.4 million, $7.7
million and $7.8 million for the years ended December 31, 2001, 2000 and 1999,
respectively.

14.   MINORITY INTERESTS

      Minority interests are attributable to Kaiser as follows (in millions):

                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001        2000
                                                                                            ----------  -----------

   Kaiser common stock, par $.01..........................................................  $       -   $     31.7
   Minority interests attributable to Kaiser's subsidiaries...............................      118.5        101.1
                                                                                            ----------  -----------
                                                                                            $   118.5   $    132.8
                                                                                            ==========  ===========

      As a result of significant losses at Kaiser for the year ended December 31,
2001, minority interest in Kaiser was reduced to zero.  Accordingly, the Company
was required to recognize 100% of Kaiser's losses from that point forward.

      KACC Redeemable Preference Stock
      In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and
its Cumulative (1985 Series B) Preference Stock (together, the "REDEEMABLE
PREFERENCE STOCK") each of which has a par value of $1 per share and a
liquidation and redemption value of $50 per share plus accrued dividends, if
any. In connection with the USWA settlement agreement, during March 2001, KACC
redeemed all of the remaining Redeemable Preference Stock (350,872 shares
outstanding at December 31, 2000). The amount applicable to the unredeemed
shares at December 31, 2000, of $17.5 million is included in other accrued
liabilities. The net cash impact of the redemption on Kaiser was only
approximately $5.6 million because approximately $12.0 million of the redemption
amount had previously been funded into redemption funds (included in prepaid
expenses and other current assets).

      Preference Stock
      KACC has four series of $100 par value Cumulative Convertible Preference
Stock ("$100 PREFERENCE STOCK") outstanding with annual dividend requirements of
between 4 1/8% and 4 3/4%. KACC has the option to redeem the $100 Preference
Stock at par value plus accrued dividends. KACC does not intend to issue any
additional shares of the $100 Preference Stock. The $100 Preference Stock can be
exchanged for per share cash amounts between $69 to $80. KACC records the $100
Preference Stock at their exchange amounts for financial statement presentation
and the Company includes such amounts in minority interests. At December 31,
2001 and 2000, outstanding shares of $100 Preference Stock were 8,969 and 9,250,
respectively. In accordance with the Code and DIP Facility, KACC is not
permitted to repurchase any of its stock. Further, as a part of a plan of
reorganization, it is possible that the interests of the holders of the $100
Preference Stock could be diluted or cancelled.

      Kaiser Common Stock Incentive Plans
      Kaiser has a total of 8,000,000 shares of Kaiser common stock reserved for
issuance under its incentive compensation programs. At December 31, 2001,
3,573,728 shares were available for issuance under these plans. Pursuant to
Kaiser's nonqualified stock option program, stock options are granted at or
above the prevailing market price, generally vest at the rate of 20% to 33% per
year and have a five or ten year term. Information relating to nonqualified
stock options is shown below. The prices shown in the table below are the
weighted average price per share for the respective number of underlying shares.


                                           2001                        2000                        1999
                                --------------------------  --------------------------- ---------------------------
                                   SHARES        PRICE         SHARES        PRICE         SHARES        PRICE
                                ------------  ------------  ------------  ------------- ------------- -------------
Outstanding at beginning of
   year.......................    4,375,947   $     10.24     4,239,210   $      10.24     3,049,122  $       9.98
Granted.......................      874,280          2.89       757,335          10.23     1,218,068         11.15
Exercised.....................            -                           -                       (7,920)         7.25
Expired or forfeited..........   (3,689,520)        10.39      (620,598)         11.08       (20,060)        11.02
                                ------------                ------------                -------------
Outstanding at end of year....    1,560,707          8.37     4,375,947          10.24     4,239,210         10.24
                                ============                ============                =============

Exercisable at end of year....      695,183   $      9.09     2,380,491   $      10.18     1,763,852  $      10.17
                                ============                ============                =============

      Options exercisable at December 31, 2001, had exercise prices ranging from
$1.72 to $12.75 and a weighted average remaining contractual life of 2.7 years.

      During 2001, Kaiser completed an exchange with certain employees who held
stock options to purchase Kaiser's common stock whereby a total of approximately
3,617,000 options were exchanged (on a fair value basis) for approximately
1,086,000 restricted shares of Kaiser's common stock. The fair value of the
restricted shares issued is being amortized to expense over the three-year
period during which the restrictions lapse. In March 2002, approximately 155,000
restricted shares, all of which had not been vested, were voluntarily forfeited
by certain employees.

      As a part of the Cases, it is possible that the interests of the holders
of outstanding options for Kaiser common stock could be diluted or cancelled.

15.   STOCKHOLDERS' EQUITY (DEFICIT)

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

      Stock Option and Restricted Stock Plans
      In 1994, the Company adopted the MAXXAM 1994 Omnibus Employee Incentive
Plan (the "1994 OMNIBUS PLAN"). Up to 1,000,000 shares of common stock and
1,000,000 shares of Class A Preferred Stock were reserved for awards or for
payment of rights granted under the 1994 Omnibus Plan of which 23,092 and
910,000 shares, respectively, were available to be awarded at December 31, 2001.
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 1999, 2000 and
2001 generally vest at the rate of 20% per year commencing one year from the
date of grant. 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.


                                           2001                        2000                        1999
                                --------------------------  --------------------------- ---------------------------
                                   SHARES         PRICE        SHARES         PRICE        SHARES         PRICE
                                ------------  ------------  ------------  ------------- ------------- -------------
Outstanding at beginning of
   year.......................      601,200   $     34.96       401,400   $      44.36       302,000  $      41.88
Granted.......................      233,600         18.09       199,800          16.08       107,500         51.12
Exercised.....................            -             -             -              -        (6,600)        38.31
Expired or forfeited..........      (34,700)        33.02             -              -        (1,500)        56.00
                                ------------                ------------                -------------
Outstanding at end of year....      800,100         30.12       601,200          34.96       401,400         44.36
                                ============                ============                =============

Exercisable at end of year....      312,120   $     39.32       225,500   $      41.09       160,400  $      38.42
                                ============                ============                =============

      The following table summarizes information about stock options outstanding
as of December 31, 2001:


                                                       WEIGHTED AVERAGE
        RANGE OF                                          REMAINING                    WEIGHTED AVERAGE              OPTIONS
    EXERCISE PRICES               SHARES               CONTRACTUAL LIFE                 EXERCISE PRICE             EXERCISABLE
------------------------     -----------------    --------------------------       -------------------------     ----------------
    $15.90 - $19.55                   419,800               9.5 years                   $         17.19                   37,240
         $28.00                         6,000               0.9 years                             28.00                    6,000
    $30.38 - $45.50                   213,800               5.2 years                             39.18                  167,080
    $46.80 - $56.00                   160,500               6.1 years                             51.95                  101,800
                             -----------------                                                                   ----------------
                                      800,100               7.6 years                             30.12                  312,120
                             =================                                                                   ================

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

      Concurrent with the adoption of the 1994 Omnibus Plan, the Company adopted
the MAXXAM 1994 Non-Employee Director Plan (the "1994 DIRECTOR PLAN"). Up to
35,000 shares of common stock are reserved for awards under the 1994 Director
Plan. Options were granted to non-employee directors to purchase 2,400 shares of
common stock in 2001, 2,300 shares in 2000, and 1,800 shares in 1999. The
weighted average exercise prices of these options are $17.02, $26.19 and $62.00
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, 2001, options for 13,400 shares were outstanding,
7,925 of which were exercisable.

      Pro Forma Disclosures
      The Company applies the "intrinsic value" method described by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations to account for stock and stock-based compensation
awards. In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company calculated compensation expense for all stock options
granted using the "fair value" method. Under this alternative accounting method,
net income and net income per share would have been as follows (in millions,
except share information):


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Income (loss) before extraordinary items......................................  $  (465.1)  $    21.6   $     69.1
Net income (loss).............................................................     (461.5)       25.5         69.1

Earnings (loss) per share before extraordinary items:
   Basic......................................................................     (70.66)       2.86         8.99
   Diluted....................................................................     (70.66)       2.85         8.91

Net income (loss) per share:
   Basic......................................................................     (70.11)       3.37         8.99
   Diluted....................................................................     (70.11)       3.37         8.91


      The average fair values of the options granted were $8.69 in 2001, $7.40
in 2000, and $24.15 in 1999. The Company estimated the fair value of each option
at the grant date using a Black-Scholes option pricing model and the following
assumptions:


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Divided yield.................................................................          -           -            -
Expected volatility...........................................................       0.39        0.36         0.35
Risk-free interest rate.......................................................      4.99%       5.11%        5.72%
Expected life (years).........................................................       6.59        6.59         6.59

      Shares Reserved for Issuance
      At December 31, 2001, the Company had 2,446,582 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.

      Rights

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

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

      Voting Control
      As of December 31, 2001, Federated Development Inc., a wholly owned
subsidiary of Federated Development Company ("FEDERATED"), and Mr. Charles E.
Hurwitz beneficially owned (exclusive of securities acquirable upon exercise of
stock options) an aggregate of 99.2% of the Company's Class A Preferred Stock
and 44.9% of the Company's common stock (resulting in combined voting control of
approximately 73.8% of the Company). Mr. Hurwitz is the Chairman of the Board
and Chief Executive Officer of the Company and Chairman and Chief Executive
Officer of Federated. Federated is wholly owned by Mr. Hurwitz, members of his
immediate family and trusts for the benefit thereof.

16.   Commitments and Contingencies

      Commitments
      Minimum rental commitments under operating leases at December 31, 2001 are
as follows: years ending December 31, 2002 - $42.6 million; 2003 - $37.9
million; 2004 - $33.7 million; 2005 - $29.8 million; 2006 - 29.1 million;
thereafter - $46.4 million. Rental expense for operating leases was $46.9
million, $48.6 million and $47.3 million for the years ended December 31, 2001,
2000 and 1999, respectively. The future minimum rentals receivable under
subleases at December 31, 2001 were $104.5 million. Minimum rental commitments
attributable to Kaiser's operating leases were $197.8 million as of December
31, 2001. Pursuant to the Code, the Debtors may elect to reject or assume
unexpired pre-petition leases. At this time, no decisions have been made as to
which significant leases will be accepted or rejected.

      The Lake Pointe Plaza building is leased to tenants under operating
leases. Building lease terms are for 20 years. Minimum rentals on operating
leases are contractually due as follows: 2002 - $11.3 million; 2003 - $11.3
million; 2004 - $10.2 million; 2005 - $9.7 million; 2006 - $10.2 million;
thereafter - $155.8 million.

      Kaiser has a variety of financial commitments, including purchase
agreements, tolling arrangements, forward foreign exchange and forward sales
contracts (see Note 17), 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 are scheduled to expire in 2008. Under the agreements, Kaiser is
unconditionally obligated to pay its proportional share of debt, operating
costs, and certain other costs of QAL. Kaiser's share of the aggregate minimum
amount of required future principal payments at December 31, 2001, is $79.4
million which matures as follows: $30.4 million in 2002, $32.0 million in 2003
and $17.0 million in 2006. Kaiser's share of payments, including operating costs
and certain other expenses under the agreements, has ranged between $92.0
million - $103.0 million over the past three years. Kaiser also has agreements
to supply alumina to and to purchase aluminum from Anglesey.

      Kaiser has a long-term liability, net of estimated sublease income
(included in other noncurrent liabilities), on a building in which Kaiser has
not maintained offices for a number of years, but for which it is responsible
for lease payments as master tenant through 2008 under a sale-and-leaseback
agreement. During 2000, Kaiser reduced its net lease obligation by $17.0 million
(see Note 2) to reflect new third-party sublease agreements which resulted in
occupancy and lease rates above those previously projected.

   Aluminum Operations

      Kaiser's contingencies are discussed below. As discussed in Note 1, the
Company believes additional losses related to its investment in Kaiser are not
probable. Accordingly, the ultimate resolution of the Kaiser contingencies
discussed below are not expected to impact the Company's financial results.

      Impact of Reorganization Proceedings
      During the pendency of the Cases, substantially all pending litigation,
except certain environmental claims and litigation, against the Debtors is
stayed. Generally, claims arising from actions or omissions prior to the Filing
Date will be settled in connection with the plan of reorganization.

      Environmental Contingencies
      Kaiser is subject to a number of environmental laws and regulations, to
fines or penalties assessed for alleged breaches of the environmental laws and
regulations, and to claims and litigation based upon such laws. Kaiser is
subject to a number of claims 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. During 2001,
Kaiser's ongoing assessment process resulted in Kaiser recording charges of
$13.5 million (included in investment, interest and other income (expense), net;
see Note 2) to increase its environmental accrual. Additionally, Kaiser's
environmental accruals were increased during 2001 by approximately $6.0 million
in connection with the purchase of certain property. The following table
presents the changes in such accruals, which are primarily included in other
noncurrent liabilities (in millions):


                                                    YEARS ENDED DECEMBER 31,
                                               -----------------------------------
                                                  2001        2000        1999
                                               ----------  ----------  -----------
Balance at beginning of year.................. $    46.1   $    48.9   $     50.7
Additional accruals...........................      23.1         2.6          1.6
Less expenditures.............................      (8.0)       (5.4)        (3.4)
                                               ----------  ----------  -----------
Balance at end of year........................ $    61.2   $    46.1   $     48.9
                                               ==========  ==========  ===========

      These environmental accruals represent Kaiser's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and Kaiser's
assessment of the likely remediation actions to be taken. Kaiser expects that
these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $1.3 million to $12.2 million for the years 2002 through
2006 and an aggregate of approximately $24.8 million thereafter.

      As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. Kaiser
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $27.0 million. As the resolution of these
matters is subject to further regulatory review and approval, no specific
assurance can be given as to when the factors upon which a substantial portion
of this estimate is based can be expected to be resolved. However, Kaiser is
working to resolve certain of these matters.

      Kaiser believes that it has insurance coverage available to recover
certain incurred and future environmental costs and is pursuing claims in this
regard. However, no amounts have been accrued in the financial statements with
respect to such potential recoveries.

      While uncertainties are inherent in the final outcome of these
environmental matters, and it is presently impossible to determine the actual
costs that ultimately may be incurred, Kaiser's 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.

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

      The following table presents the changes in number of such claims pending
for the years ended December 31, 2001, 2000, and 1999.

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Number of claims at beginning of year.........................................    110,800     100,000       86,400
Claims received...............................................................     34,000      30,600       29,300
Claims settled or dismissed...................................................    (32,000)    (19,800)     (15,700)
                                                                                ----------  ----------  -----------
Number of claims at end of year...............................................    112,800     110,800       100,000
                                                                                ==========  ==========  ===========
Number of claims at end of period (included above) covered by agreements under
   which Kaiser expects to settle over an extended period.....................     49,700      66,900       31,900
                                                                                ==========  ==========  ===========

      Due to the Cases, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. However, during the pendency of the Cases, Kaiser expects additional
asbestos claims will be filed as part of the claims process. A separate
creditors' committee representing the interests of the asbestos claimants has
been appointed. The Debtors' obligations with respect to present and future
asbestos claims will be resolved pursuant to a plan of reorganization.

      Kaiser maintains a liability for estimated asbestos-related costs for
claims filed to date and an estimate of claims to be filed over a 10 year period
(i.e., through 2011). Kaiser's estimate is based on its view, at each balance
sheet date, of the current and anticipated number of asbestos-related claims,
the timing and amounts of asbestos-related payments, the status of ongoing
litigation and settlement initiatives, and the advice of Wharton Levin
Ehrmantraut Klein & Nash, P.A., with respect to the current state of the law
related to asbestos claims. However, there are inherent uncertainties involved
in estimating asbestos-related costs, and Kaiser's actual costs could exceed its
estimates due to changes in facts and circumstances after the date of each
estimate. Further, while Kaiser does not believe there is a reasonable basis for
estimating asbestos-related costs beyond 2011 and, accordingly, no accrual has
been recorded for any costs which may be incurred beyond 2011, Kaiser expects
that the plan of reorganization process may require an estimation of Kaiser's
entire asbestos-related liability, which may go beyond 2011, and that such costs
could be substantial.

      Kaiser believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Although Kaiser has settled
asbestos-related coverage matters with certain of its insurance carriers, other
carriers have not yet agreed to settlements, and disputes with certain carriers
exist. The timing and amount of future recoveries from these and other insurance
carriers will depend on the pendency of the Cases and on the resolution of any
disputes regarding coverage under the applicable insurance policies. Kaiser
believes that substantial recoveries from the insurance carriers are probable
and additional amounts may be recoverable in the future if additional claims are
added. Kaiser reached this conclusion after considering its prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Heller Ehrman White & McAuliffe LLP with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies. During 2000, Kaiser filed suit against a group of
its insurers, after negotiations with certain of the insurers regarding an
agreement covering both reimbursement amounts and the timing of reimbursement
payments were unsuccessful. During October 2001, the court ruled favorably on a
number of issues, and during February 2002, an intermediate appellate court also
ruled favorably on an issue involving coverage. The rulings did not result in
any changes to Kaiser's estimates of its current or future asbestos-related
insurance recoveries. Other courts may hear additional issues from time to time.
Moreover, Kaiser expects to amend its lawsuit during the second quarter of 2002
to add additional insurers who may have responsibility to respond for
asbestos-related costs. Given the expected significance of probable future
asbestos-related payments, the receipt of timely and appropriate payments from
such insurers is critical to a successful plan of reorganization and Kaiser's
long-term liquidity.

      The following tables present the historical information regarding Kaiser's
asbestos-related balances and cash flows (in millions).


                                                                                                December 31,
                                                                                         --------------------------
                                                                                            2001           2000
                                                                                         -----------   ------------
Liability (current portion of $130.0 in both years)......................................$    621.3    $     492.4
Receivable (included in long-term receivables and other assets)(1).......................    (501.2)        (406.3)
                                                                                         -----------   ------------

                                                                                         $    120.1    $      86.1
                                                                                         ===========   ============
----------------

(1)   The asbestos-related receivable was determined on the same basis as the
      asbestos-related cost accrual. However, no assurances can be given that
      Kaiser will be able to project similar recovery percentages for future
      asbestos-related claims or that the amounts related to future
      asbestos-related claims will not exceed Kaiser's aggregate insurance
      coverage. As of December 31, 2001, and December 31, 2000, $33.0 million
      and $36.9 million, respectively, of the receivable amounts relate to costs
      paid by Kaiser. The remaining receivable amounts relate to costs that are
      expected to be paid by Kaiser in the future.


                                                                     YEAR ENDED DECEMBER 31,
                                                              ------------------------------------     INCEPTION
                                                                 2001        2000         1999          TO DATE
                                                              ----------  ----------  ------------  ---------------
Payments made, including related legal costs...............   $   118.1   $    99.5   $      24.6   $        338.6
Insurance recoveries.......................................       (90.3)      (62.8)         (6.6)          (221.6)
                                                              ----------  ----------  ------------  ---------------
                                                              $    27.8   $    36.7   $      18.0   $        117.0
                                                              ==========  ==========  ============  ===============

      During the pendency of the Cases, all asbestos litigation is stayed. As a
result, Kaiser does not expect to make any asbestos payments in the near term.
Despite the Cases, Kaiser continues to pursue insurance collections in respect
of asbestos-related amounts paid prior to the Filing Date.

      Kaiser's management continues to monitor claims activity, the status of
lawsuits (including settlement initiatives), legislative developments, and costs
incurred in order to ascertain whether an adjustment to the existing accruals
should be made to the extent that historical experience may differ significantly
from Kaiser's underlying assumptions. This process resulted in Kaiser recording
charges of $57.2 million, $43.0 million, and $53.2 million (included in
investment, interest and other income (expense), see Note 2) in the years ended
December 31, 2001, 2000, and 1999, respectively, for asbestos-related claims,
net of expected insurance recoveries, based on recent cost and other trends
experienced by Kaiser and other companies. Additional asbestos-related claims
are likely to be filed against Kaiser as a part of the Chapter 11 process.
Kaiser's management cannot reasonably predict the ultimate number of such claims
or the amount of the associated liability. However, it is likely that such
amounts could exceed, perhaps significantly, the liability amount reflected in
Kaiser's consolidated financial statements, which (as previously stated) is only
reflective of an estimate of claims over the next ten-year period. Kaiser's
obligations in respect of the currently pending and future asbestos-related
claims will ultimately be determined (and resolved) as a part of the overall
Chapter 11 proceedings. It is anticipated that resolution of these matters will
be a lengthy process. Kaiser's management will continue to periodically reassess
its asbestos-related liabilities and estimated insurance recoveries as the Cases
proceed. However, absent unanticipated developments such as asbestos-related
legislation, material developments in other asbestos-related proceedings or in
Kaiser's Chapter 11 proceedings, it is not anticipated that Kaiser will have
sufficient information to reevaluate its asbestos-related obligations and
estimated insurance recoveries until much later in the Cases. Any adjustments
ultimately deemed to be required as a result of the reevaluation of Kaiser's
asbestos-related liabilities or estimated insurance recoveries could have a
material impact on Kaiser's future financial statements.

      Labor Matters
      In connection with the USWA strike and subsequent lock-out by Kaiser,
which was settled in September 2000, certain allegations of ULPs were filed with
the National Labor Relations Board ("NLRB") by the USWA. Kaiser responded to all
such allegations and believes that they were without merit. Twenty-two of
twenty-four allegations of ULPs previously brought against Kaiser by the USWA
have been dismissed. A trial before an administrative law judge for the two
remaining allegations concluded in September 2001. A decision is not expected
until sometime after the first quarter of 2002. Any outcome from the trial
before the administrative law judge would be subject to additional appeals by
the general counsel of the NLRB, the USWA or Kaiser. This process could take
months or years. This matter is currently not stayed by the Cases. Kaiser
continues to believe that the charges are without merit. While uncertainties are
inherent in matters such as this and it is presently impossible to determine the
remedy, if any, that may ultimately arise in connection with this matter, Kaiser
does not believe that the outcome of this matter will have a material adverse
impact on Kaiser's liquidity or financial position. However, no assurances can
be given in this regard. Amounts due, if any, in satisfaction of this matter
could be significant to the results of the period in which they are recorded. If
these proceedings eventually resulted in a final ruling against Kaiser with
respect to either allegation, it could be liable for back pay to USWA members at
the five plants and such amount could be significant. Any liability ultimately
determined to exist in this matter will be dealt with in the overall context of
the Debtors' plan of reorganization.

      Forest Products Operations

      Regulatory and environmental matters play a significant role in the
Company's forest products business, which is subject to a variety of California
and federal laws and regulations, as well as the HCP and the SYP, dealing with
timber harvesting practices, threatened and endangered species and habitat for
such species, and air and water quality.

       The SYP complies with regulations of the California Board of Forestry and
Fire Protection requiring timber companies to project timber growth and harvest
on their timberlands over a 100-year planning period and to demonstrate that
their projected average annual harvest for any decade within a 100-year planning
period will not exceed the average annual harvest level during the last decade
of the 100-year planning period. The SYP is effective for 10 years (subject to
review after five years) and may be amended by Pacific Lumber, subject to
approval by the California Department of Forestry and Fire Protection
(the"CDF"). Revised SYPs will be prepared every decade that address the harvest
level based upon reassessment of changes in the resource base and other factors.
The HCP and incidental take permits related to the HCP (the "PERMITS") allow
incidental "take" of certain species located on the Company's timberlands which
species have been listed as endangered or threatened under the federal
Endangered Species Act (the "ESA") and/or the California Endangered Species Act
(the"CESA") so long as there is no "jeopardy" to the continued existence of such
species. The HCP identifies the measures to be instituted in order to minimize
and mitigate the anticipated level of take to the greatest extent practicable.
The SYP is also subject to certain of these provisions. The HCP and related
Permits have a term of 50 years.

      Under the federal Clean Water Act (the "CWA"), the Environmental
Protection Agency (the "EPA") is required to establish total maximum daily load
limits (the "TMDLS") in water courses that have been declared to be "water
quality impaired." The EPA and the North Coast Regional Water Quality Control
Board (the "NORTH COAST WATER BOARD") are in the process of establishing TMDLs
for 17 northern California rivers and certain of their tributaries, including
nine water courses that flow within the Company's timberlands. The Company
expects this process to continue into 2010. In December 1999, the EPA issued a
report dealing with TMDLs on two of the nine water courses. The agency indicated
that the requirements under the HCP would significantly address the sediment
issues that resulted in TMDL requirements for these water courses. However, the
September 2000 report by the staff of the North Coast Water Board proposed
various actions, including restrictions on harvesting beyond those required
under the HCP. Establishment of the final TMDL requirements applicable to the
Company's timberlands will be a lengthy process, and the final TMDL requirements
applicable to the Company's timberlands may require aquatic protection measures
that are different from or in addition to the prescriptions to be developed
pursuant to the watershed analysis process provided for in the HCP.

      Since the consummation of the Headwaters Agreement in March 1999, there
has been a significant amount of work required in connection with the
implementation of the Environmental Plans, and this work is expected to continue
for several more years. During the implementation period, government agencies
had until recently failed to approve THPs in a timely manner. The rate of
approvals of THPs during 2001 improved over that for the prior year, and further
improvements have been experienced thus far in 2002. However, it continues to be
below levels which meet the Company's expectations. Nevertheless, the Company
anticipates that once the Environmental Plans are fully implemented, the process
of preparing THPs will become more streamlined, and the time to obtain approval
of THPs will potentially be shortened.

      Lawsuits are pending and threatened which seek to prevent the Company from
implementing the HCP and/or the SYP, implementing certain of the Company's
approved THPs, or carrying out certain other operations. On January 28, 1997, an
action was filed against Pacific Lumber entitled Ecological Rights Foundation,
Mateel Environmental v. Pacific Lumber (the "ERF LAWSUIT"). This action alleges
that Pacific Lumber has discharged pollutants into federal waterways, and seeks
to enjoin these activities, remediation, civil penalties of up to $25,000 per
day for each violation, and other damages. This case was dismissed by the
District Court on August 19, 1999, but the dismissal was reversed by the U.S.
Ninth Circuit Court of Appeals on October 30, 2000, and the case was remanded to
the District Court. On September 26, 2001, the plaintiffs sent Pacific Lumber a
60 day notice alleging that Pacific Lumber continues to violate the CWA
by discharging pollutants into certain waterways. Pacific Lumber
has taken certain remedial actions since its receipt of the notice.

      On December 2, 1997, an action entitled Kristi Wrigley, et al. v. Charles
Hurwitz, John Campbell, Pacific Lumber, MAXXAM Inc., Scotia Pacific Company LLC,
et al. (the "WRIGLEY LAWSUIT") was filed. This action alleges, among other
things, that the defendants' logging practices have contributed to an increase
in flooding and damage to domestic water systems in a portion of the Elk River
watershed. The Company believes that it has strong factual and legal defenses
with respect to the Wrigley lawsuit and ERF lawsuit; however, there can be no
assurance that they will not have a material adverse effect on the Company's
financial position, results of operations or liquidity.

      On March 31, 1999, an action entitled Environmental Protection Information
Center, Sierra Club v. California Department of Forestry and Fire Protection,
California Department of Fish and Game, The Pacific Lumber Company, Scotia
Pacific Company LLC, Salmon Creek Corporation, et al. (the"EPIC-SYP/PERMITS
LAWSUIT") was filed alleging, among other things, various violations of the CESA
and the California Environmental Quality Act, and challenging, among other
things, the validity and legality of the SYP and the Permits issued by
California. August 5, 2002, has been set as the trial date. On March 31, 1999,
an action entitled United Steelworkers of America, AFL-CIO, CLC, and Donald
Kegley v. California Department of Forestry and Fire Protection, The Pacific
Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation
(the"USWA LAWSUIT") was filed also challenging the validity and legality of the
SYP. June 10, 2002, has been set as the trial date. The Company believes that
appropriate procedures were followed throughout the public review and approval
process concerning the HCP and the SYP, and the Company is working with the
relevant government agencies to defend these challenges. Although uncertainties
are inherent in the final outcome of the EPIC-SYP/Permits lawsuit and the USWA
lawsuit, the Company believes that the resolution of these matters should not
result in a material adverse effect on its financial condition, results of
operations or the ability to harvest timber.

      On July 24, 2001, an action entitled Environmental Protection Information
Association v. Pacific Lumber, Scotia Pacific Company LLC (the "BEAR CREEK
LAWSUIT") was filed. The lawsuit alleges that Pacific Lumber's harvesting and
other activities under certain of its approved and proposed THPs will result in
discharges of pollutants in violation of the CWA. The plaintiff asserts that the
CWA requires the defendants to obtain a permit from the North Coast Water Board
before beginning timber harvesting and road construction activities in the Bear
Creek watershed, and is seeking to enjoin these activities until such permit has
been obtained. The plaintiff also seeks civil penalties of up to $27,000 per day
for the defendant's alleged continued violation of the CWA. The Company believes
that the requirements under the HCP are adequate to ensure that sediment and
pollutants from its harvesting activities will not reach levels harmful to the
environment. Furthermore, EPA regulations specifically provide that such
activities are not subject to CWA permitting requirements. The Company believes
that it has strong legal defenses in this matter; however, there can be no
assurance that this lawsuit will not have a material adverse effect on its
consolidated financial condition or results of operations.

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

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

      Post hearing briefing concluded on January 31, 2000. In its post-hearing
brief, the OTS claimed, among other things, that the remaining Respondents, Mr.
Hurwitz, the Company and Federated, were jointly and severally liable to pay
either $821.3 million in restitution or reimbursement of $362.6 million for
alleged unjust enrichment. The OTS also claimed that each remaining Respondent
should be required to pay $4.6 million in civil money penalties, and that Mr.
Hurwitz should be prohibited from engaging in the banking industry. The
Respondents' brief claimed that none of them has any liability in this matter.
On September 12, 2001, the administrative law judge issued a recommended
decision in favor of the Respondents on each claim made by the OTS. The OTS
Director may accept or change the judge's recommended decision. If changed, such
a decision would then be subject to appeal by any of the Respondents to the
federal appellate court.

      On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC")
filed the Federal Deposit Insurance Corporation, as manager of the FSLIC
Resolution Fund v. Charles E. Hurwitz (the "FDIC ACTION"). The original
complaint was against Mr. Hurwitz and alleged damages in excess of $250.0
million based on the allegation that Mr. Hurwitz was a controlling shareholder,
de facto senior officer and director of USAT, and was involved in certain
decisions which contributed to the insolvency of USAT. The original complaint
further alleged, among other things, that Mr. Hurwitz was obligated to ensure
that UFG, Federated and the Company maintained the net worth of USAT. In January
1997, the FDIC filed an amended complaint which seeks, conditioned upon 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 FDIC may not pursue its claims under the FDIC action if the OTS
Director accepts the judge's recommended decision.

      On May 31, 2000, the Company, Federated and Mr. Hurwitz filed a
counterclaim to the FDIC action (the "FDIC COUNTERCLAIM"). The FDIC Counterclaim
states that the FDIC illegally paid the OTS to bring claims against the Company,
Federated and Mr. Hurwitz. The Company, Federated and Mr. Hurwitz are asking
that the FDIC be ordered to not make any further payments to the OTS to fund the
administrative proceedings described above, and seek reimbursement of attorneys'
fees and damages from the FDIC. As of December 31, 2001, such fees were in
excess of $35.0 million. The Company, Federated and Mr. Hurwitz intend to pursue
this claim vigorously.

      On January 16, 2001, an action was filed against the Company, Federated
and certain of the Company's directors entitled Alan Russell Kahn v. Federated
Development Co., MAXXAM Inc., et. al., (the "KAHN LAWSUIT") was filed. The
plaintiff purports to bring this action as a stockholder of the Company
derivatively on behalf of the Company. The lawsuit concerns the FDIC and OTS
actions, and the Company's advancement of fees and expenses on behalf of
Federated and certain of the Company's directors in connection with these
actions. It alleges that the defendants have breached their fiduciary duties to
the Company, and have wasted corporate assets, by allowing the Company to bear
all of the costs and expenses of Federated and certain of the Company's
directors related to the FDIC and OTS actions. The plaintiff seeks to require
Federated and certain of the Company's directors to reimburse the Company for
all costs and expenses incurred by the Company in connection with the FDIC and
OTS actions, and to enjoin the Company from advancing to Federated or certain of
the Company's directors any further funds for costs or expenses associated with
these actions. The parties to the Kahn lawsuit have agreed to an indefinite
extension of the defendants' obligations to respond to the plaintiffs' claims.

      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.

      Although the OTS Director may change the judge's recommended decision, the
Company believes that the ultimate resolution of the OTS and FDIC matters should
not have a material adverse effect on its consolidated financial position,
results of operations or liquidity. Furthermore, with respect to the Kahn
lawsuit, the Company believes that the resolution of this matter should not
result in a material adverse effect on its 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.

17.   DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

      In conducting its business, Kaiser uses various instruments to manage the
risks arising from fluctuations in aluminum prices, energy prices and exchange
rates. Kaiser enters into hedging transactions to limit its exposure resulting
from (i) its anticipated sales of alumina, primary aluminum, and fabricated
aluminum products, net of expected purchase costs for items that fluctuate with
aluminum prices, (ii) the energy price risk from fluctuating prices for natural
gas, fuel oil and diesel oil used in its production process, and (iii) foreign
currency requirements with respect to its cash commitments to foreign
subsidiaries and affiliates.

      As Kaiser's hedging activities are generally designed to lock-in a
specified price or range of prices, realized gains or losses on the derivative
contracts utilized in these hedging activities (except the impact of those
contracts discussed below which have been marked to market) will generally
offset at least a portion of any losses or gains, respectively, on the
transactions being hedged. See Note 1 for a discussion of the effects of the new
accounting requirements under SFAS No. 133, which is being used for reporting
results beginning with the first quarter of 2001.

      Because the agreements underlying Kaiser's hedging positions provided that
the counterparties to the hedging contracts could liquidate Kaiser's hedging
positions if Kaiser filed for reorganization, Kaiser chose to liquidate these
positions in advance of the Filing Date. Proceeds from the liquidation totaled
approximately $42.2 million. Gains or losses associated with these liquidated
positions have been deferred and are being recognized over the original hedging
periods as the underlying purchases/sales are still expected to occur. The
amount of gains/losses deferred are as follows: gains of $30.2 million for
aluminum contracts, losses of $5.0 million for Australian dollars and $1.9
million for energy contracts. The following table summarizes Kaiser's derivative
hedging positions at December 31, 2001:


                                                                       CARRYING/
                                                                        MARKET
                    COMMODITY                           PERIOD           VALUE
-------------------------------------------------   ---------------  -------------

Aluminum -
   Option contracts and swaps....................        2002        $       40.8
   Option contracts..............................        2003                11.9
Australian dollars - option contracts............    2002 to 2005             4.0
Energy -
   Natural gas - option contracts and swaps......    1/02 to 3/02            (1.2)
   Fuel oil - swaps..............................    1/02 to 3/02             0.7

      During the first quarter of 2001, Kaiser recorded a mark-to-market benefit
of $6.8 million (included in investment, interest and other income (expense))
related to the application of SFAS No. 133. However, starting in the second
quarter of 2001, the income statement impact of mark-to-market changes was
essentially eliminated as unrealized gains or losses resulting from changes in
the value of these hedges began being recorded in other comprehensive income
(see Note 1) based on changes in SFAS No. 133 enacted in April 2001.

      During late 1999 and early 2000, Kaiser entered into certain aluminum
contracts with a counterparty. While Kaiser believed that the transactions were
consistent with its stated hedging objectives, these positions did not qualify
for treatment as a "hedge" under accounting guidelines. Accordingly, the
positions were marked-to-market each period. A recap of mark-to-market pre-tax
gains (losses) for these positions, together with the amount discussed in the
paragraph above, is provided in Note 2. During the fourth quarter of 2001,
Kaiser liquidated all of the remaining positions. This resulted in the
recognition of approximately $3.3 million of additional mark-to-market income
during 2001.

      As of December 31, 2001, Kaiser had sold forward substantially all of the
alumina available to it in excess of its projected internal smelting
requirements for 2002 and 2003, respectively, at prices indexed to future prices
of primary aluminum.

      Kaiser anticipates that, subject to the approval of the Court and
prevailing economic conditions, it may reinstitute an active hedging program to
protect the interests of its constituents. However, no assurance can be given as
to when or if the appropriate Court approval will be obtained or when or if such
hedging activities will restart.

18.   SUBSEQUENT EVENT

      Subsequent to December 31, 2001, Kaiser paid an aggregate of $10.0 million
into two separate trusts funds in respect of (i) potential liability obligations
of directors and officers and (ii) certain obligations relating to management
compensation agreements. These payments will result in an approximate $5.0
million increase in other assets and an approximate $5.0 million charge to
selling, administrative, research and development, and general expenses in 2002.

19.   SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION

                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
                                                                                           (In millions)
                                                                                            -----------
Supplemental information on non-cash investing and financing activities:
   Repurchases of debt using restricted cash and marketable securities........  $       -   $    52.4   $        -
   Purchases of marketable securities and other investments using restricted
      cash                                                                              -         0.4         15.9

Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized interest.................................  $   186.9   $   183.5   $    189.9
   Income taxes paid, net.....................................................       52.2        19.6         27.0

20.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

      Summary quarterly financial information for the years ended December 31,
2001 and 2000 is as follows (in millions, except share information):


                                                                           THREE MONTHS ENDED
                                                     --------------------------------------------------------------
                                                        MARCH 31         JUNE 30      SEPTEMBER 30     DECEMBER 31
                                                     --------------  --------------  --------------  --------------
2001:
   Net sales.......................................  $       544.4   $       516.2   $       504.1   $       453.5
   Operating income (loss).........................          209.3           (30.2)          (34.3)          (99.4)
   Income (loss) before extraordinary items........           63.4           (44.4)           29.4          (508.0)
   Extraordinary items, net........................            1.9             1.7               -               -
   Net income (loss)...............................           65.3           (42.7)           29.4          (508.0)
   Basic earnings (loss) per common share:
      Income (loss) before extraordinary items.....  $        8.56   $       (6.80)  $        4.09   $      (77.83)
      Extraordinary items, net.....................           0.25            0.27               -               -
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        8.81   $       (6.53)  $        4.09   $      (77.83)
                                                     ==============  ==============  ==============  ==============
   Diluted earnings (loss) per common and common
      equivalent share:
      Income (loss) before extraordinary items.....  $        8.56   $       (6.80)  $        4.08   $      (77.83)
      Extraordinary items, net.....................           0.25            0.27               -               -
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        8.81   $       (6.53)  $        4.08   $      (77.83)
                                                     ==============  ==============  ==============  ==============
2000:
   Net sales.......................................  $       637.6   $       627.1   $       618.3   $       565.0
   Operating income................................           38.5            60.6             1.4            30.1
   Income (loss) before extraordinary items........            3.5            10.3           (17.3)           33.5
   Extraordinary items, net........................            1.4               -             0.6             1.9
   Net income (loss)...............................            4.9            10.3           (16.7)           35.4
   Basic earnings (loss) per common share:
      Income (loss) before extraordinary items.....  $        0.44   $        1.36   $       (2.54)  $        4.51
      Extraordinary items, net.....................           0.18               -            0.07            0.27
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        0.62   $        1.36   $       (2.47)  $        4.78
                                                     ==============  ==============  ==============  ==============
   Diluted earnings (loss) per common and common
      equivalent share:
      Income (loss) before extraordinary items.....  $        0.44   $        1.36   $       (2.54)  $        4.51
      Extraordinary items, net.....................           0.18               -            0.07            0.27
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        0.62   $        1.36   $       (2.47)  $        4.78
                                                     ==============  ==============  ==============  ==============

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

(1)   Basic earnings per share for 2000 have been restated to reflect the
      dilutive effect of participating convertible preferred securities. See
      Note 1 to the Consolidated Financial Statements.

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

      None.


                                    PART III

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


                                     PART IV


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

(A)   INDEX TO FINANCIAL STATEMENTS

      1.   FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):

           Report of Independent Public Accountants
           Consolidated Balance Sheet at December 31, 2001 and 2000
           Consolidated Statement of Operations for the Years Ended December 31, 2001,
                2000 and 1999
           Consolidated Statement of Stockholders' Equity for the Years Ended
                December 31, 2001, 2000 and 1999
           Consolidated Statement of Cash Flows for the Years Ended December 31, 2001,
                2000 and 1999
           Notes to Consolidated Financial Statements

      2.   FINANCIAL STATEMENT SCHEDULES:

           Schedule I - Condensed Financial Information of Registrant at December 31, 2001
              and 2000 and for the Years Ended December 31, 2001, 2000 and 1999

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

(B)   REPORTS ON FORM 8-K

      On January 15, 2002, the Company filed a current report on Form 8-K (under
Item 5) dated January 15, 2002, related to the discussions of its subsidiary,
Kaiser Aluminum Corporation, regarding its near-term debt maturities.

      On January 31, 2002, the Company filed a current report on Form 8-K (under
Item 5) dated January 29, 2002 related to its deferral and that of its
subsidiary, Kaiser Aluminum Corporation, of the release of the 2001 fourth
quarter earnings.

      On February 12, 2002, the Company filed a current report on Form 8-K
(under Item 5) in connection with Kaiser filing a voluntary petition for
reorganization under Chapter 11 of the United States Federal Code.

(C)   EXHIBITS

      Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 106), which index is incorporated herein by
reference.

           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                   MAXXAM INC.

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


                                                                                                  DECEMBER 31,
                                                                                             -----------------------
                                                                                                2001        2000
                                                                                             ----------  -----------
ASSETS

Current assets:
   Cash and cash equivalents...............................................................  $    29.1   $     99.6
   Marketable securities and other investments.............................................       99.2         15.7
   Other current assets....................................................................       16.4         17.6
                                                                                             ----------  -----------
      Total current assets.................................................................      144.7        132.9
Deferred income taxes......................................................................       84.4         73.2
Investment in subsidiaries.................................................................       73.2        109.0
Investment in Kaiser.......................................................................          -         35.4
Other assets...............................................................................        1.9          2.3
                                                                                             ----------  -----------
                                                                                             $   304.2   $    352.8
                                                                                             ==========  ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and other accrued liabilities..........................................  $     9.3   $     11.0
   Short-term borrowings...................................................................          -         13.4
                                                                                             ----------  -----------
      Total current liabilities............................................................        9.3         24.4
Payables to subsidiaries, net of receivables and advances..................................      299.1        258.7
Losses recognized in excess of investment in Kaiser........................................      450.2            -
Other noncurrent liabilities...............................................................       21.2         20.6
                                                                                             ----------  -----------
      Total liabilities....................................................................      779.8        303.7
                                                                                             ----------  -----------

Stockholders' equity:
   Preferred stock, $0.5 par value; 12,500,000 shares authorized; Class A $0.05
      Non-Cumulative Participating Convertible Preferred Stock; 669,235 and
      669,355 shares issued, respectively..................................................        0.3          0.3
   Common stock, $0.50 par value; 28,000,000 shares authorized;
      10,063,359 shares issued.............................................................        5.0          5.0
   Additional capital......................................................................      225.3        225.3
   Accumulated deficit.....................................................................     (524.2)       (68.2)
   Accumulated other comprehensive loss....................................................      (66.3)        (0.5)
   Treasury stock, at cost (shares held: preferred - 845; common - 3,535,688 and
       3,315,008, respectively)............................................................     (115.7)      (112.8)
                                                                                             ----------  -----------
      Total stockholders' equity...........................................................     (475.6)        49.1
                                                                                             ----------  -----------
                                                                                             $   304.2   $    352.8
                                                                                             ==========  ===========



     See notes to consolidated financial statements and accompanying notes.

                                  MAXXAM INC.
                    STATEMENT OF OPERATIONS (UNCONSOLIDATED)
                            (IN MILLIONS OF DOLLARS)


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Investment, interest and other income (expense), net..........................  $     7.2   $    14.1   $      4.5
Intercompany interest income (expense), net...................................      (25.0)      (20.4)       (18.2)
Interest expense..............................................................       (1.0)       (1.5)        (1.6)
General and administrative expenses...........................................       (9.1)      (16.1)       (22.6)
Equity in earnings (loss) of subsidiaries.....................................     (454.9)       45.7        101.7
                                                                                ----------  ----------  -----------
Income (loss) before income taxes.............................................     (482.8)       21.8         63.8
Credit for income taxes.......................................................       26.8        12.1          9.8
                                                                                ----------  ----------  -----------
Net income (loss).............................................................  $  (456.0)  $    33.9   $     73.6
                                                                                ==========  ==========  ===========




     See notes to consolidated financial statements and accompanying notes.

                                   MAXXAM INC.

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


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)..........................................................  $  (456.0)  $    33.9   $     73.6
   Adjustments to reconcile net income (loss) to net cash provided
      by (used for) operating activities:
      Equity in (earnings) loss of subsidiaries...............................      454.9       (45.7)      (101.7)
      Restricted common stock grant - compensation expense....................          -           -         11.7
      Net gains on marketable securities and other investments................       (1.7)      (12.8)        (6.6)
      Increase (decrease) in receivables, prepaids and other assets...........        1.7         5.4          0.7
      Increase (decrease) in deferred income tax assets.......................      (11.2)       (2.4)         3.3
      Increase (decrease) in accounts payable and other liabilities...........       (0.6)        2.2        (10.5)
      Other...................................................................          -           -          0.7
                                                                                ----------  ----------  -----------
        Net cash used for operating activities................................      (12.9)      (19.4)       (28.8)
                                                                                ----------  ----------  -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net sales (purchases) of marketable securities and other investments.......      (81.8)       11.6         (0.1)
   Dividends received from subsidiaries.......................................        8.0        61.0         10.0
   Investments in and net advances from (to) subsidiaries.....................       33.1        35.2         15.2
   Capital expenditures.......................................................       (0.6)       (1.0)        (0.6)
                                                                                ----------  ----------  -----------
        Net cash provided by (used for) investing activities..................      (41.3)      106.8         24.5
                                                                                ----------  ----------  -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Short-term borrowings......................................................          -        (5.1)           -
   Repayment of short-term borrowings.........................................      (13.4)          -            -
   Treasury stock repurchases.................................................       (2.9)      (12.8)           -
                                                                                ----------  ----------  -----------
        Net cash used for financing activities................................      (16.3)      (17.9)           -
                                                                                ----------  ----------  -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..........................      (70.5)       69.5         (4.3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................       99.6        30.1         34.4
                                                                                ----------  ----------  -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................................  $    29.1   $    99.6   $     30.1
                                                                                ==========  ==========  ===========

Supplementary schedule of non-cash investing and financing activities:
   Deferral of interest payment on intercompany note payable..................  $    18.6   $    16.7   $     15.0
   Distribution of assets from subsidiaries...................................          -        33.3          1.9
Supplemental disclosure of cash flow information:
   Interest paid..............................................................  $     0.8   $     1.3   $      1.4
   Income taxes paid..........................................................          -           -          2.8


     See notes to consolidated financial statements and accompanying notes.

                                  MAXXAM INC.
                          NOTES TO FINANCIAL STATEMENTS


1.    INVESTMENT IN KAISER

      On February 12, 2002, Kaiser and certain of its subsidiaries filed for
reorganization under Chapter 11 of the United States Bankruptcy Code. As a
result, Kaiser's financial results were deconsolidated beginning February 12,
2002, and the Company began reporting its investment in Kaiser using the cost
method. The Company believes additional losses related to its investment in
Kaiser are not probable and, accordingly, it expects to reverse its losses in
excess of its investment in Kaiser on February 12, 2002. Since Kaiser's results
are no longer consolidated as of February 12, 2002, any adjustments made to
Kaiser's financial statements subsequent to February 12, 2002 (relating to the
recoverability and classification of recorded asset amounts and classification
of liabilities or the effects on existing stockholders' equity as well as
adjustments made to Kaiser's financial information for loss contingencies and
other matters discussed in the notes to Consolidated Financial Statements) are
not expected to impact the Company's financial results. No assurances can be
given that the Company's ownership interest in Kaiser will not be significantly
diluted or cancelled.

2.    DEFERRED INCOME TAXES

      The deferred income tax assets and liabilities reported in the
accompanying unconsolidated balance sheet are determined by computing such
amounts on a consolidated basis, for the Company and members of its consolidated
federal income tax return group, and then reducing such consolidated amounts by
the amounts recorded by the Company's subsidiaries pursuant to their respective
tax allocation agreements with the Company. The Company's net deferred income
tax assets relate primarily to loss and credit carryforwards, net of valuation
allowances. The Company evaluated all appropriate factors to determine the
proper valuation allowances for these carryforwards, including any limitations
concerning their use, the year the carryforwards expire and the levels of
taxable income necessary for utilization. Based on this evaluation, the Company
has concluded that it is more likely than not that it will realize the benefit
of these carryforwards for which valuation allowances were not provided.

3.    SHORT-TERM BORROWINGS

      During 2001 and 2000, the Company had average short-term borrowings
outstanding of $10.2 million and $14.0 million, respectively, under the
Custodial Trust Agreement. The weighted average interest rate during 2001 and
2000 was 7.0%, and 7.2%, respectively.

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

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001        2000
                                                                                            ----------  -----------
Note payable to MGHI, interest at 11%.....................................................  $   183.1   $    164.5
Unsecured note payable to MCO Properties Inc., interest at 6%.............................       26.0         24.5
Unsecured notes payable to MAXXAM Property Company, interest at 7%........................       14.6         13.8
Net advances..............................................................................       40.1         20.6
                                                                                            ----------  -----------
                                                                                            $   263.8   $    223.4
                                                                                            ==========  ===========

      In January 2002, the Company elected to defer all of the $10.1 million
interest payment due on the note payable to MGHI on February 1, 2002. The
deferred amount effectively increases the note payable balance to $193.2
million.


                                   SIGNATURES

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

                                                     MAXXAM INC.


Date:   April 12, 2002           By:             /S/ PAUL N. SCHWARTZ
                                                 Paul N. Schwartz
                                                     President

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



Date:   April 12, 2002           By:                /S/ CHARLES E. HURWITZ
                                                    Charles E. Hurwitz
                                                Chairman of the Board and
                                                 Chief Executive Officer


Date:   April 12, 2002           By:                 /S/ J. KENT FRIEDMAN
                                                     J. Kent Friedman
                                              Vice Chairman of the Board and
                                                     General Counsel


Date:   April 12, 2002           By:               /S/ ROBERT J. CRUIKSHANK
                                                   Robert J. Cruikshank
                                                         Director


Date:   April 12, 2002           By:                  /S/ EZRA G. LEVIN
                                                      Ezra G. Levin
                                                         Director


Date:   April 12, 2002           By:               /S/ STANLEY D. ROSENBERG
                                                   Stanley D. Rosenberg
                                                         Director


Date:   April 12, 2002           By:               /S/ MICHAEL J. ROSENTHAL
                                                   Michael J. Rosenthal
                                                         Director


Date:   April 12, 2002           By:                 /S/ PAUL N. SCHWARTZ
                                                     Paul N. Schwartz
                                             President, Chief Financial Officer
                                                       and Director
                                              (Principal Financial Officer)


Date:   April 12, 2002           By:               /S/ ELIZABETH D. BRUMLEY
                                                   Elizabeth D. Brumley
                                                        Controller
                                              (Principal Accounting Officer)



                                INDEX OF EXHIBITS


      EXHIBIT
      NUMBER                        DESCRIPTION
      -------

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

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

3.3                Certificate of Designations of Class A $.05 Non-Cumulative
                   Participating Convertible Preferred Stock of the Company,
                   dated as of December 15, 1999 (incorporated by reference to
                   Exhibit 3.3 to the Company's Annual Report on Form 10-K for
                   the year ended December 31, 1999; the "Company 1999 Form
                   10-K")

3.4                Amended and Restated By-laws of the Company dated as of March
                   30, 2000 (incorporated herein by reference to Exhibit 3.1 to
                   the Company's Quarterly Report on Form 10-Q for the quarter
                   ended March 31, 2000)

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

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

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

4.4                Amendment No. 2, dated as of September 29, 2000, to the Loan
                   and Pledge Agreement 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, 2000)

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

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

4.7                First Supplemental Indenture, dated as of July 8, 1998, to
                   the MGHI Indenture (incorporated herein by reference to
                   Exhibit 4.4 to the Quarterly Report on Form 10-Q/A of MGHI
                   for the quarter ended June 30, 1998; File No. 333-18723; the
                   "MGHI June 1998 Form 10-Q/A")

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

4.9                Indenture, dated as of July 20, 1998, between Scotia Pacific
                   Company LLC ("Scotia LLC") and State Street Bank and Trust
                   Company ("State Street") regarding Scotia LLC's Class A-1,
                   Class A-2 and Class A-3 Timber Collateralized Notes (the
                   "Timber Notes Indenture") (incorporated herein by reference
                   to Exhibit 4.1 to Scotia LLC's Registration Statement on Form
                   S-4; Registration No. 333-63825; the "Scotia LLC Registration
                   Statement")

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

4.11               Second Supplemental Indenture, dated as of November 18, 1999,
                   to the Timber Notes Indenture (incorporated herein by
                   reference to Exhibit 99.3 to Scotia LLC's Report on Form 8-K
                   dated November 19, 1999; File No. 333-63825)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4.47               Nineteenth Amendment to Kaiser Credit Agreement dated as of
                   December 27, 2000 (incorporated herein by reference to
                   Exhibit 4.35 to Kaiser's Annual Report on Form 10-K for the
                   year ended December 31, 2000; File No. 1-9447)

4.48               Twentieth Amendment to Kaiser Credit Agreement dated as of
                   January 26, 2001 (incorporated herein by reference to Exhibit
                   4.36 to Kaiser's Annual Report on Form 10-K for the year
                   ended December 31, 2000; File No. 1-9447)

4.49               Twenty-First Amendment, dated as of July 18, 2001, to 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, 2001; File No. 1-9447; the "Kaiser June 2001
                   Form 10-Q")

4.50               Twenty-Second Amendment, dated as of October 16, 2001, to
                   Kaiser Credit Agreement (incorporated herein by reference to
                   Exhibit 10.1 to Kaiser's Quarterly Report on Form 10-Q for
                   the quarter ended September 30, 2001; File No. 1-9447)

4.51               Twenty-Third Amendment, dated as of October 24, 2001, to
                   Kaiser Credit Agreement (incorporated herein by reference to
                   Exhibit 10.2 to Kaiser's Quarterly Report on Form 10-Q for
                   the quarter ended September 30, 2001; File No. 1-9447)

4.52               Twenty-Fourth Amendment, dated as of November 15, 2001, to
                   Kaiser Credit Agreement (incorporated herein by reference to
                   Exhibit 4.40 to Kaiser's Annual Report on Form 10-K for the
                   year ended December 31, 2001; File No. 1-9447; the "Kaiser's
                   2001 Form 10-K")

4.53               Agreement dated August 18, 2000, among Kaiser, KACC and the
                   financial institutions party to the Kaiser Credit Agreement
                   dated as of February 15, 1994, as amended, and Bank of
                   America, N.A., as agent (incorporated by reference to Exhibit
                   4.1 to Kaiser's Quarterly Report on Form 10-Q for the quarter
                   ended September 30, 2000; File No. 1-9447; the "Kaiser
                   September 2000 Form 10-Q")

4.54               Amended and Restated Credit Agreement between The Pacific
                   Lumber Company ("Pacific Lumber") and Bank of America, N.A.,
                   dated as of August 14, 2001 (the "Pacific Lumber Credit
                   Agreement") (incorporated herein by reference to Exhibit 4.1
                   to MGHI's Quarterly Report on Form 10-Q for the quarter ended
                   September 30, 2001; File No. 333-18723)

4.55               Waiver and Consent Agreement, dated as of January 29, 2002,
                   to Kaiser Credit Agreement (incorporated herein by reference
                   Exhibit 4.43 to Kaiser's 2001 Form 10-K)

4.56               Post Petition Credit Agreement, dated as of February 12, 2002
                   (the "Kaiser Post Petition Agreement), among Kaiser, KACC,
                   certain financial institutions and Bank of America, N.A., as
                   Agent (incorporated herein by reference Exhibit 4.44 to
                   Kaiser's 2001 Form 10-K)

4.57               First Amendment, dated as of March 21, 2002, to the Kaiser
                   Post Petition Agreement (incorporated herein by reference
                   Exhibit 4.45 to Kaiser's 2001 Form 10-K)

4.58               Second Amendment dated as of March 21, 2002, to the Kaiser
                   Post Petition Agreement (incorporated herein by reference
                   Exhibit 4.46 to Kaiser's 2001 Form 10-K)

4.59               Credit Agreement, dated as of July 20, 1998, among Scotia
                   LLC, the financial institutions party thereto and Bank of
                   America National Trust and Savings Association, as agent (the
                   "Scotia LLC Credit Agreement") (incorporated herein by
                   reference to Exhibit 4.3 to the Company June 1998 Form
                   10-Q/A)

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

4.61               Second Amendment, dated June 15, 2001, to the Scotia LLC Line
                   of Credit (incorporated herein by reference to Exhibit 4.1 to
                   Scotia LLC's Form 10-Q for the quarter ended June 30, 2001;
                   File No. 333-63825)

4.62               Indenture, dated as of August 25, 2000, by and among Sam
                   Houston Race Park, Ltd., New SHRP Capital Corp., SHRP General
                   Partner, Inc. and U.S. Bank Trust National Association,
                   Trustee

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

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

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

4.65               Second Amendment to Loan Agreement and Promissory Note, dated
                   as of October 1, 2000, by and among MCO Properties Inc., MCO
                   Properties L.P., Horizon Corporation, Horizon Properties
                   Corporation, Westcliff Development Corporation and Southwest
                   Bank of Texas, N.A.

4.66               Loan Agreement, dated as of June 28, 2001, between Lakepointe
                   Assets LLC and Legg Mason Real Estate Services, Inc.
                   (incorporated herein by reference to Exhibit 4.2 to MGHI's
                   Quarterly Report on Form 10-Q for the quarter ended June 30,
                   2001; File No. 333-18723; the "MGHI June 2001 Form 10-Q")

4.67               Promissory Note, dated as of June 28, 2001, between
                   Lakepointe Assets LLC and Legg Mason Real Estate Services,
                   Inc. (incorporated herein by reference to Exhibit 4.3 to the
                   MGHI June 2001 Form 10-Q

4.68               Lease Agreement, dated as of June 28, 2001, between
                   Lakepointe Assets LLC and Fluor Enterprises Inc.
                   (incorporated herein by reference to Exhibit 10.1 to the MGHI
                   June 2001 Form 10-Q)

4.69               Guarantee of Lease dated as of June 28, 2001, between Fluor
                   Corporation and Lakepointe Assets LLC (incorporated herein by
                   reference to Exhibit 10.2 to the MGHI June 2001 Form 10-Q)

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

10.2               Amendment of Tax Allocation Agreement, dated as of December
                   31, 2001, between the company and MGHI (incorporated herein
                   by reference to Exhibit 10.2 to MGHI's Form 10-K for the year
                   ended December 31, 2001; File No. 333-18723; the "MGHI 2001
                   Form 10-K")

10.3               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)

10.4               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)

10.5               Amendment of Tax Allocation Agreement, dated as of March 12,
                   2001, between Kaiser and the Company (incorporated herein by
                   reference to Exhibit 10.3 to Kaiser's Annual Report on Form
                   10- K for the year ended December 31, 2000; File No. 1-9447)

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

10.7               Amendment of Tax Allocation Agreement, dated as of December
                   31, 2001, between the Company and MGI (incorporated herein by
                   reference to Exhibit 10.4 to the MGHI 2001 Form 10-K

10.8               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)

10.9               Tax Allocation Agreement, dated as of March 23, 1993, among
                   Pacific Lumber, Scotia Pacific Holding Company ("Scotia
                   Pacific"), Salmon Creek Corporation ("Salmon Creek") and the
                   Company ("Pacific Lumber Tax Allocation Agreement")
                   (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)

10.10              Amendment of Pacific Lumber Tax Allocation Agreement, dated
                   as of December 31, 2001 (incorporated herein by reference to
                   Exhibit 10.7 to the MGHI 2001 Form 10-K

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

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

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

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

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

10.16              Amendment to Kaiser Intercompany Note, dated as of December
                   11, 2000 (incorporated by reference to the Exhibit 4.41 to
                   Kaiser's Annual Report on Form 10-K for the year ended
                   December 31, 2000; File No. 1-9447)

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

10.18              New Master Purchase Agreement, dated as of July 20, 1998,
                   between Scotia LLC and Pacific Lumber (incorporated herein by
                   reference to Exhibit 10.1 to the Quarterly Report on Form
                   10-Q of MGHI for the quarter ended June 30, 1998; File No.
                   333-18723; the "MGHI June 1998 Form 10-Q")

10.19              New Services Agreement, dated as of July 20, 1998, between
                   Pacific Lumber and Scotia LLC (incorporated herein by
                   reference to Exhibit 10.2 to the MGHI June 1998 Form 10-Q)

10.20              New Additional Services Agreement, dated as of July 20, 1998,
                   between Scotia LLC and Pacific Lumber (incorporated herein by
                   reference to Exhibit 10.3 to the MGHI June 1998 Form 10-Q)

10.21              New Reciprocal Rights Agreement, dated as of July 20, 1998,
                   among Pacific Lumber, Scotia LLC and Salmon Creek Corporation
                   (incorporated herein by reference to Exhibit 10.4 to the MGHI
                   June 1998 Form 10-Q)

10.22              New Environmental Indemnification Agreement, dated as of July
                   20, 1998, between Pacific Lumber and Scotia LLC (incorporated
                   herein by reference to Exhibit 10.5 to the MGHI June 1998
                   Form 10- Q)

10.23              Implementation Agreement with Regard to Habitat Conservation
                   Plan for the Properties of Pacific Lumber, Scotia LLC and
                   Salmon Creek dated as of February 1999 by and among The
                   United States Fish and Wildlife Service, the National Marine
                   Fisheries Service, the California Department of Fish and Game
                   ("CDF&G"), the California Department of Forestry and Fire
                   Protection (the "CDF") and Pacific Lumber, Salmon Creek and
                   Scotia LLC (incorporated herein by reference to Exhibit 99.3
                   to Scotia LLC's Form 8-K dated March 19, 1999; File No.
                   333-63825; the "Scotia LLC March 19, 1999 Form 8-K")

10.24              Agreement Relating to Enforcement of AB 1986 dated as of
                   February 25, 1999 by and among The California Resources
                   Agency, CDF&G, The California Department of Forestry, The
                   California Wildlife Conservation Board (the "CWCB"), Pacific
                   Lumber, Salmon Creek and Scotia LLC (incorporated herein by
                   reference to Exhibit 99.4 to the Scotia LLC March 19, 1999
                   Form 8-K)

10.25              Habitat Conservation Plan dated February 1999 for the
                   Properties of Pacific Lumber, Scotia Pacific Holding Company
                   and Salmon Creek (incorporated herein by reference to Exhibit
                   99.5 to the Scotia LLC March 19, 1999 Form 8-K)

10.26              Agreement for Transfer of Grizzly Creek and Escrow
                   Instructions and Option Agreement dated as of February 26,
                   1999 by and between Pacific Lumber and the State of
                   California acting by and through the CWCB Board (incorporated
                   herein by reference to Exhibit 99.6 of the Scotia LLC March
                   19, 1999 Form 8-K)

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

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

10.29              Letter dated March 1, 1999 from the U.S. Department of the
                   Interior Fish and Wildlife Service and the U.S. Department of
                   Commerce National Oceanic and Atmospheric Administration to
                   Pacific Lumber, Salmon Creek and the Company (incorporated
                   herein by reference to Exhibit 99.10 to the Scotia LLC March
                   19, 1999 Form 8-K)

                           Executive Compensation Plans and Arrangements

10.30              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")

10.31              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)

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

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

10.34              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)

10.35              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)

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

10.37              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)

10.38              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")

10.39              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)

10.40              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)

10.41              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)

10.42              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)

10.43              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)

10.44              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)

10.45              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)

10.46              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)

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

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

10.49              Form of Stock Option Grant for options issued commencing
                   January 1, 2001 under the 1997 Kaiser Omnibus Stock Incentive
                   Plan (incorporated herein by reference to Exhibit 10.2 to the
                   Kaiser June 2001 Form 10-Q; File No. 1-9447)

10.50              Form of Restricted Stock Agreement for restricted shares
                   issued commencing January 1, 2001 under the 1997 Kaiser
                   Omnibus Stock Incentive Plan (incorporated herein by
                   reference to Exhibit 10.3 to the Kaiser June 2001 Form 10-Q;
                   File No. 1-9447)

10.51              Form of Non-Employee Director Stock Option Agreement pursuant
                   to the Kaiser 1997 Omnibus Stock Incentive Plan (incorporated
                   herein by reference to Exhibit 10.3 to Kaiser's Quarterly
                   Report on Form 10-Q for the quarter ended June 30, 2000; File
                   No. 1-9447; the "Kaiser June 2000 Form 10-Q")

10.52              Form of Non-Employee Director Stock Option Grant for options
                   issued commencing January 1, 2001 under the 1997 Kaiser
                   Omnibus Stock Incentive Plan (incorporated herein by
                   reference to Exhibit 10.1 to the Kaiser June 2001 Form 10-Q;
                   File No. 1-9447)

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

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

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

10.56              Time-Based Stock Option Grant pursuant to the Kaiser 1997
                   Omnibus Stock Incentive Plan to J. Kent Friedman, effective
                   December 1, 1999 (incorporated herein by reference to Exhibit
                   10.2 to the Kaiser June 2000 Form 10-Q)

10.57              Form of Enhanced Severance Agreement between KACC and key
                   executive personnel (incorporated herein by reference to
                   Exhibit 10.3 to the Kaiser September 2000 Form 10-Q)

10.58              Executive Employment Agreement between the Company and J.
                   Kent Friedman dated as of November 29, 1999 (incorporated
                   herein by reference to Exhibit 10.52 to the Company 1999 Form
                   10-K)

10.59              Restricted Stock Agreement between the Company and Charles E.
                   Hurwitz effective as of December 13, 1999 (incorporated
                   herein by reference to Exhibit 10.53 to the Company 1999 Form
                   10-K)

10.60              Kaiser Retention Plan, dated January 15, 2002 (incorporated
                   herein by reference to Exhibit 10.35 to Kaiser's 2001 Form
                   10-K)

10.61              Form of Retention Agreement to Kaiser Retention Plan
                   (incorporated herein by reference to Exhibit 10.36 to
                   Kaiser's 2001 Form 10-K)

  *21              List of the Company's Subsidiaries

  *23              Consent of Arthur Andersen LLP

  *99.1            Letter dated April 12, 2002, to the Securities and Exchange
                   Commission from the Company related to assurances the Company
                   has received from Arthur Andersen LLP with respect to the
                   audit of its financial statements for the fiscal year ended
                   December 31, 2001.

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

* Included with this filing`