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

                                    FORM 10-K

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


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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000            COMMISSION FILE NUMBER 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 March 28, 2001: 6,649,771
        Securities registered pursuant to Section 12(g) of the Act: None.

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


      Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes /X/   No / /

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

      Based upon the March 28, 2001 American Stock Exchange closing price of
$13.49 per share, the aggregate market value of the Registrant's outstanding
voting stock held by non-affiliates is approximately $50.9 million.

                      DOCUMENTS INCORPORATED BY REFERENCE:

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


                                TABLE OF CONTENTS


                                     Part I

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

Item 2.       Properties

Item 3.       Legal Proceedings

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

                                     Part II

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

Item 6.       Selected Financial Data

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

Item 7A.      Quantitative and Qualitative Disclosures About Market Risk

Item 8.       Financial Statements and Supplementary Data
                  Report of Independent Public Accountants
                  Consolidated Balance Sheet
                  Consolidated Statement of Operations
                  Consolidated Statement of 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.


$100 Preference Stock
1984 Plan
1994 Director Plan
1994 Omnibus Plan
A$
Acquiring Person
AKW
Alpart
AMT Price
Anglesey
ATI
BOF
BPA
Britt
Britt Agreement
CARIFA
CDF
CEQA
CERCLA
CESA
Class A Preferred Stock
Common Stock
Company
Custodial Trust Agreement
CWA
CWCB
Drexel
Elk River Timberlands
Environmental Laws
Environmental Plans
EPA
EPIC-SYP/Permits lawsuit
EPIC/THP 97-520 lawsuit
ERF lawsuit
ESA
FDIC
FDIC action
FDIC Counterclaim
Federated
FHLBB
Forest Practice Act
GIS
GPS
Grizzly Creek Agreement
Grizzly Creek Grove
HCP
Headwaters Agreement
Headwaters Timberlands
Hunsaker Action
Hydro
Intercompany Note
Junior Preferred Stock
KACC
KACC 10 7/8 % Senior Notes
KACC 9 7/8 % Senior Notes
KACC Credit Agreement
KACC Indentures
KACC Notes
KACC Senior Subordinated Notes
Kahn lawsuit
Kaiser
KJBC
KLHP
LIFO
LME
LTSY
MAXXAM
MAXXAM Parent
MGHI
MGHI Notes
MGI
MSHA
NLRB
Notice
Old growth
Old PALCO
OTS
OTS action
Owl Creek Agreement
Pacific Lumber
Pacific Lumber Credit Agreement
Palco Companies
Palmas
Permits
PG&E
Prefunding Account
QAL
Racing Act
Racing Commission
Redeemable Preference Stock
Required Liquidity Amount
Respondents
Rights
Rollins lawsuit
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. 138
SHRP, Ltd
SunCor
SYP
take
THPs
Timber Notes
Timber Notes Indenture
TMDLs
UFG
ULPs
USAT
USWA
USWA lawsuit
Valco
VRA
Water Board
Westbrook
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") (63% owned as of December 31, 2000), 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. A substantial portion of the Company's
      consolidated assets, liabilities, revenues, results of operations and cash
      flows are attributable to Kaiser. See Note 2 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 and California.

-     Racing operations, through Sam Houston Race Park, Ltd. ("SHRP, LTD."), a
      Texas limited partnership, in which the Company owned a 99.0% interest as
      of December 31, 2000.  SHRP, Ltd. owns and operates a Class 1 pari-mutuel
      horse racing facility in the greater Houston metropolitan area.  SHRP,
      Ltd. also owns and operates Valley Race Park, 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;"
"--Business Operations--Primary Aluminum Business Unit," and "--Competition;"
"--Forest Products Operations--Harvesting Practices," "--Production Facilities"
and "--Regulatory and Environmental Factors;" several 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.

      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, 2000, 1999 and 1998:


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

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

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

      Consistent with its previously disclosed strategy, Kaiser is considering
the possible sale of part or all of its interests in certain operating assets.
The contemplated transactions are in various stages of development. Kaiser
expects that at least one operating asset will be sold. Kaiser has multiple
transactions underway. It is unlikely, however, that it would consummate all of
the transactions under consideration. Further, there can be no assurance as to
the likelihood, timing, or terms of such sales. Kaiser would expect to use the
proceeds from any such sales for debt reduction, capital spending or some
combination thereof. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Aluminum
Operations--Recent Events and Developments" for additional information.

   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, 2000:


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

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

      Kaiser is a major producer of alumina and sells significant amounts of its
alumina production in domestic and international markets. Kaiser's strategy is
to sell a substantial portion of the alumina available to it in excess of its
internal smelting requirements under multi-year sales contracts with prices
linked to the price of primary aluminum.
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. KJBC's operations have been impacted by the Gramercy incident.
The Government of Jamaica 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. 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").
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. The plant is expected to increase
production progressively to approximately 75% of its newly rated estimated
annual capacity of 1,250,000 tons by the end of March 2001. Construction at the
facility is expected to be completed during the third quarter of 2001. At
February 28, 2001, the plant was operating at 70% of capacity. 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.

     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 28.3% interest in QAL, which owns one of the largest and
most competitive alumina refineries in the world, located in Queensland,
Australia. QAL refines bauxite into alumina, essentially on a cost basis, for
the account of its shareholders under long-term tolling contracts. The
shareholders, including Kaiser, purchase bauxite from another QAL shareholder
under long-term supply contracts. Kaiser has contracted with QAL to take
approximately 868,000 tons per year of alumina or pay standby charges. Kaiser is
unconditionally obligated to pay amounts calculated to service its share ($101.5
million at December 31, 2000) of certain debt of QAL, as well as other QAL costs
and expenses, including bauxite shipping costs.

      In 2000, Kaiser sold alumina to approximately 14 customers, the largest
and top five of which accounted for approximately 27% and 80% of the business
unit's third party net sales, respectively. All of Kaiser's third-party sales of
bauxite in 2000 were made to two customers, which sales represent approximately
9% 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, 2000:


                                                                               Annual
                                                                                Rated              Total
                                                                              Capacity            Annual           2000
                                                            Kaiser          Available to           Rated         Operating
           Location                    Facility            Ownership           Kaiser            Capacity          Rate
------------------------------      ---------------      ------------      --------------      ------------     -----------
                                                                                (In thousands of tons)
Domestic:
      Washington                    Mead                      100%                200.0             200.0            85%(1)
      Washington                    Tacoma                    100%                 73.0              73.0            41%(1)
                                                                           --------------      ------------
           Subtotal                                                               273.0             273.0
                                                                           --------------      ------------

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

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

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

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

      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 purchases electric power for the Mead and Tacoma,
Washington, smelters from the Bonneville Power Administration ("BPA"), which has
supplied approximately half of the electric power for the two plants over recent
years, and 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 sold
a portion of the power that it has under contract through September 30, 2001. As
a result of the curtailments, Kaiser avoided the need to purchase power on a
variable market price basis and will receive cash proceeds sufficient to more
than offset the cash impact of the potline curtailments over the period for
which the power was sold. Kaiser has made additional power sales in 2001. As of
December 31, both the Mead and Tacoma, Washington, smelters were completely
curtailed and are expected to remain curtailed through September 30, 2001.
However, Kaiser continues to operate the Tacoma rod-mill.

      The Mead facility uses pre-bake technology. Approximately 68% of Mead's
2000 production was used at Kaiser's Trentwood, Washington, rolling mill and
other Kaiser owned facilities, and the balance was sold to third parties. The
Tacoma facility uses Soderberg technology and produces primary aluminum and
high-grade, continuous-cast, redraw rod, which currently commands a premium
price in excess of the price of primary aluminum. The business unit maintains
specialized laboratories and a miniature carbon plant in the state of Washington
which concentrate on the development of cost-effective technical innovations
such as equipment and process improvements.

      The power contract with the BPA expires in September 2001, and the power
contracts with other suppliers have either expired or the underlying power has
been sold. Under a new contract with the BPA which will run from October 2001
through September 2006, the BPA will provide Kaiser with sufficient power to
operate its Trentwood facility as well as approximately 40% of the combined
capacity of its Mead and Tacoma aluminum smelting operations. Power costs under
the new contract are expected to exceed the cost of power under Kaiser's current
BPA contract by between 20% to 60% and, perhaps as much as 100% in certain
periods and other contract terms are less favorable than Kaiser's current BPA
contract. Kaiser does not have any remarketing rights under the new BPA
contract. See Note 5 to the Consolidated Financial Statements for additional
information on these matters.

      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 2000 and 1999, Valco operated an
average of four and three potlines, respectively. Valco and the VRA have reached
an agreement, which is subject to Parliamentary approval in 2001, that provides
for sufficient power to operate at least four of Valco's five potlines in 2001,
and at least three and one-half potlines 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's principal primary aluminum customers consist of large trading
intermediaries and metal brokers. In 2000, Kaiser sold its primary aluminum
production not utilized for internal purposes to approximately 46 customers, the
largest and top five of which accounted for approximately 52% and 73% 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. See Item 7A. "Quantitative and Qualitative Disclosures about
Market Risk" and Notes 1 and 18 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. The business unit sells to the aerospace, transportation and
industrial ("ATI") markets (producing heat treat sheet and plate products and
automotive brazing sheet) and the beverage container market (producing lid and
tab stock), both directly and through distributors.

      During 2000, Kaiser shifted the product mix of its Trentwood rolling mill
toward higher value added product lines, such as heat treat sheet and plate,
automotive brazing sheet and beverage can lid and tab stock, and away from
beverage can body stock, wheel and common alloy tread products in an effort to
enhance its profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations--Aluminum
Operations--Net Sales" for a discussion of the financial impact of this product
mix shift. In 2000, the business unit sold to approximately 124 customers in the
ATI markets, 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 8% and 23%, respectively, of the business unit's third party
net sales.

      Kaiser's flat-rolled products are also sold to beverage container
manufacturing locations primarily in the western United States and Asian Pacific
Rim countries. The largest and top five of such customers accounted for
approximately 12% and 26%, 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 and England, and by independent sales agents in Asia. However, in
addition to exiting can body stock production, beverage can lid and tab
manufacturing is also being de-emphasized to further increase the business
unit's focus on higher value-added product lines as described above.

      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. During 2000 and 2001, the Tulsa facility is being reconfigured as a
focused production facility for standard soft-alloy extrusion products, having
transferred its cathodic protection business to the Sherman facility. 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.

      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.

      In 2000, the engineered products business unit had approximately 400
customers, the largest and top five of which accounted for approximately 8% and
23%, 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. Kaiser
manufactures and markets fabricated aluminum products for the transportation,
packaging, construction, and consumer durables markets in the United States and
abroad. Sales in these markets are made directly and through distributors to a
large number of customers. Competition in the sale of fabricated products is
based upon quality, availability, price and service, including delivery
performance. Kaiser concentrates its fabricating operations on selected products
in which it believes it has production expertise, high-quality capability, and
geographic and other competitive advantages. Kaiser believes that, assuming the
current relationship between worldwide supply and demand for alumina and primary
aluminum does not change materially, the loss of any one of Kaiser's customers,
including intermediaries, would not have a material adverse effect on its
financial condition or results of operations. Also see the description of each
of the business units above.

   Labor Matters

      As a result of the September 1998 strike by the United Steelworkers of
America ("USWA") and the subsequent "lock-out" by Kaiser in January 1999, and
prior to the settlement 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 Note 17 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 $5.6 million in 2000, $11.0 million in 1999 and $13.7 million in 1998.
Kaiser estimates that research and development net expenditures will be in the
range of $3.0 million to $5.0 million in 2001.

   Employees

      During 2000, Kaiser employed an average of approximately 7,800 persons,
compared with an average of approximately 8,600 persons in 1999 and
approximately 9,200 persons in 1998. At December 31, 2000, Kaiser employed
approximately 7,300 persons. The foregoing employee figures for 2000, 1999 and
1998 include the USWA workers who were subject to the lockout imposed by Kaiser
as a result of the labor dispute. During the labor dispute, Kaiser operated the
five affected facilities with temporary workers who were not included in the
employee counts for 2000, 1999 and 1998.

      The labor agreements with employees at the Alpart refinery in Jamaica, the
Valco smelter in Ghana and the engineered products business unit's plants in Los
Angeles, California, and Richmond, Virginia, are scheduled to expire in 2001.

   Environmental Matters

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

      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 17 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 KACC's Credit Agreement (the "KACC CREDIT
AGREEMENT"), are secured by, among other things, mortgages on its major domestic
plants (other than the Gramercy alumina refinery). For a description of the KACC
Credit Agreement, see Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities--Aluminum Operations" and Note 12 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 219,000 acres of virtually
contiguous commercial timberlands located in Humboldt County along the northern
California coast, an area which has very favorable soil and climate conditions
for growing timber. These timberlands contain approximately 67% redwood, 26%
Douglas-fir and 7% other timber, are located in close proximity to Pacific
Lumber's four sawmills, and contain an extensive network of roads. Approximately
205,000 acres of Pacific Lumber's timberlands are owned by Scotia LLC (the
"SCOTIA LLC TIMBERLANDS"), and Scotia LLC has the exclusive right to harvest
(the "SCOTIA LLC TIMBER RIGHTS") approximately 12,200 acres of Pacific Lumber's
timberlands. The timber in respect of the Scotia LLC Timberlands and the Scotia
LLC Timber Rights is collectively referred to as the "Scotia LLC Timber."
Substantially all of Scotia LLC's assets are pledged as security for 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 which approximately 5,600 acres of
timberlands owned by the Palco Companies known as the Headwaters Forest and the
Elk Head Springs Forest (the "HEADWATERS TIMBERLANDS") were transferred to the
United States. A substantial portion of the Headwaters Timberlands consists of
virgin old growth timberlands. In consideration for the transfer of the
Headwaters Timberlands, Salmon Creek was paid $299.9 million, Scotia LLC was
paid $150,000 and approximately 7,700 acres of timberlands known as the Elk
River Timberlands (the "ELK RIVER TIMBERLANDS") were transferred to Pacific
Lumber (and subsequently transferred to Scotia LLC). In addition, upon
consummation of the Headwaters Agreement (i) habitat conservation and sustained
yield plans were approved covering the Scotia LLC Timberlands (as defined
below), (ii) the Palco Companies dismissed takings litigation pending against
the United States and California and (iii) California agreed to purchase a
portion of Pacific Lumber's Grizzly Creek grove, as well as Scotia LLC's Owl
Creek grove. Salmon Creek placed $169.0 million of the proceeds from the sale of
the Headwaters Timberlands into a Scheduled Amortization Reserve Account ("SAR
ACCOUNT") in order to support principal payments on Scotia LLC's Timber Notes
(as defined below). See "Regulatory and Environmental Factors" below and Note 17
to the Consolidated Financial Statements.

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

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

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

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

   Harvesting Practices

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

      The ability of Pacific Lumber to harvest timber 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. Despite Scotia LLC's best
efforts, it has experienced an absence of a sufficient number of THPs available
for harvest to enable it to conduct its operations at levels it had experienced
prior to 1998 or at levels which meet its expectations. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Trends." However, Scotia LLC believes that the Environmental Plans
should in the long-term expedite the preparation and facilitate approval of its
THPs, although Pacific Lumber continues to experience difficulties in the THP
approval process as it implements the Environmental Plans.

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

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

   Production Facilities

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

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

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

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

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

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

   Products

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


                                              Year Ended December 31, 2000                     Year Ended December 31, 1999
                                     -----------------------------------------------   --------------------------------------------
                                     % of Total                                        % of Total
                                     Lumber            % of Total                      Lumber          % of Total
                                     Production        Lumber           % of Total     Production      Lumber           % of Total
              Product                Volume            Revenues         Revenues       Volume          Revenues         Revenues
                                     -------------     ------------     ------------   -----------     -----------      -----------
Upper grade redwood lumber........              7%              16%              14%            9%             23%              20%
Common grade redwood lumber.......             59%              58%              51%           52%             51%              46%
                                     -------------     ------------     ------------   -----------     -----------      -----------
   Total redwood lumber...........             66%              74%              65%           61%             74%              66%
                                     -------------     ------------     ------------   -----------     -----------      -----------
Upper grade Douglas-fir lumber....              4%               9%               8%            5%              8%               7%
Common grade Douglas-fir lumber...             28%              16%              14%           29%             16%              14%
                                     -------------     ------------     ------------   -----------     -----------      -----------
   Total Douglas-fir lumber.......             32%              25%              22%           34%             24%              21%
                                     -------------     ------------     ------------   -----------     -----------      -----------
Other grades of lumber............              2%               1%               1%            5%              2%               2%
                                     -------------     ------------     ------------   -----------     -----------      -----------
      Total lumber................            100%             100%              88%          100%            100%              89%
                                     =============     ============     ============   ===========     ===========      ===========

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

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

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

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

      Upper grade redwood lumber, which is derived primarily from large diameter
logs and is characterized by an absence of knots and other defects, is used
primarily in distinctive interior and exterior applications. The overall supply
of upper grade lumber has been diminishing due to increasing environmental and
regulatory restrictions and other factors. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--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 2000, MGI purchased
approximately 40 million board feet of logs from third parties. Pacific Lumber
uses a whole-log chipper to produce wood chips from hardwood trees which would
otherwise be left as waste. These chips are sold to third parties primarily for
the production of facsimile and other specialty papers. Pacific Lumber also
produces softwood chips from the wood residue from its milling operations. These
chips are sold to third parties for the production of wood pulp and paper
products. The Company also derives revenues from a soil amendment operation and
a concrete block manufacturing operation.

   Backlog and Seasonality

      MGI's backlog of sales orders at December 31, 2000 and 1999 was
approximately $15.7 million and approximately $19.0 million, respectively, the
substantial portion of which was delivered in the first quarter of the next
fiscal year. The decline in the sales backlog from 1999 to 2000 was principally
due to a diminished supply of THPs which reduced the volume of logs available
for the production of lumber products. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--Forest Products Operations--Net Sales" and "--Trends." MGI has
historically experienced lower first quarter sales due largely to the general
decline in construction-related activity during the winter months. As a
consequence, MGI's results in any one quarter are not necessarily indicative of
results to be expected for the full year. See "--Regulatory and Environmental
Factors" below and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--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 71.1% of these
sales in 2000. Common grades of Douglas-fir lumber are sold primarily in
California. In 2000, Pacific Lumber had three customers which accounted for
approximately 11.1%, 7.1% and 5.6%, respectively, of MGI's total net lumber
sales. Exports of lumber accounted for approximately 4.8% of MGI's total
revenues in 2000. MGI markets its products through its own sales staff which
focuses primarily on domestic sales.

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

   Competition

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

   Employees

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

   Relationships with Scotia LLC and Britt

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

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

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

   Regulatory and Environmental Factors

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

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

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

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

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

      Under the Owl Creek Agreement, Scotia LLC agreed to sell the Owl Creek
grove to the state of California for consideration consisting of the lesser of
the appraised fair market value or $79.7 million. On December 29, 2000, the
state of California purchased the Owl Creek grove for $67.0 million in cash. See
Note 6 to the Consolidated Financial Statements.

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

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

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

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

Real Estate Operations

      General

      The Company, principally through its wholly owned subsidiaries, invests in
and develops residential and commercial real estate primarily in Puerto Rico,
Arizona and California. Real estate properties and receivables for real estate
sales as of December 31, 2000 are as follows:


                                                                                                       Book Value
                                                                                                     as of December
                                                                                                        31, 2000
                                                                                                     --------------
                                                                                                      (In millions
                                                                                                      of dollars)
Palmas del Mar (Puerto Rico):
   Developed lots..................................................................        14 lots   $          2.1
   Undeveloped land and parcels held for sale......................................     1,293 acres            30.1
   Property, plant and equipment, receivables and other, net.......................                            12.7
                                                                                                     --------------
      Total........................................................................                            44.9
                                                                                                     --------------
   Resort operations (owned facilities)(1):
      Palmas Country Club(2).......................................................                            30.3
      Casino.......................................................................                             1.8
                                                                                                     --------------
      Total........................................................................                            32.1
                                                                                                     --------------
Fountain Hills (Arizona):
   Residential, commercial and industrial developed lots...........................        94 lots              5.0
   Undeveloped residential land....................................................     1,763 acres             8.9
   Property, plant, equipment and receivables, net.................................                             6.6
                                                                                                     --------------
      Total........................................................................                            20.5
                                                                                                     --------------
Rancho Mirage (California):
   Residential developed lots and lots under development...........................        69 lots              7.3
   Undeveloped land................................................................        57 acres             9.5
                                                                                                     --------------
      Total........................................................................                            16.8
                                                                                                     --------------
Other properties (3):
   Residential developed lots......................................................        85 lots              0.3
   Undeveloped land................................................................     1,253 acres             2.2
   Receivables for sales of real estate, net.......................................                             2.7
                                                                                                     --------------
      Total........................................................................                             5.2
                                                                                                     --------------
   Total real estate properties and receivables....................................                  $        119.5
                                                                                                     ==============
---------------

(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, 2000
                                                                                                           -------------
                                                                                                           (In millions
                                                                                                            of dollars)
Joint Ventures:
   FireRock, LLC(1):
      Residential developed lots and lots under development........................       122   lots       $        11.1
      Undeveloped land.............................................................       117   acres                3.7
      Golf course, clubhouse and other club facilities.............................                                 21.3
      Other property, plant and equipment, net.....................................                                  1.1
                                                                                                           -------------
        Total......................................................................                        $        37.2
                                                                                                           =============
      Investment in FireRock LLC...................................................                        $         6.2
                                                                                                           =============

   SunRidge Canyon L.L.C.(1):
      Residential developed lots...................................................         8   lots       $         1.3
      Golf course..................................................................                                  8.8
                                                                                                           -------------
        Total......................................................................                        $        10.1
                                                                                                           =============
      Investment in SunRidge Canyon L.L.C..........................................                        $         1.5
                                                                                                           =============
------------------
(1)   50% owned.

      Revenues from real estate operations are as follows:


                                                                                            Years Ended December 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------

Palmas del Mar:
   Real estate sales......................................................................  $     4.8   $     10.2
   Resort operations and other............................................................       12.0          8.1
                                                                                            ----------  -----------
      Total...............................................................................       16.8         18.3
                                                                                            ----------  -----------
Fountain Hills:
   Real estate sales......................................................................       15.0         16.2
   Resort operations and other............................................................        3.6          3.6
                                                                                            ----------  -----------
      Total...............................................................................       18.6         19.8
                                                                                            ----------  -----------
Rancho Mirage:
   Real estate sales......................................................................        0.3          5.0
   Resort operations and other............................................................        0.1          0.3
                                                                                            ----------  -----------
      Total...............................................................................        0.4          5.3
                                                                                            ----------  -----------
Other:
   Real estate sales......................................................................        6.3          2.8
   Resort operations and other............................................................        5.1          5.8
                                                                                            ----------  -----------
      Total...............................................................................       11.4          8.6
                                                                                            ----------  -----------
                                                                                            $    47.2   $     52.0
                                                                                            ==========  ===========
FireRock LLC(1):
   Real estate sales......................................................................  $    28.9   $     13.4
   Resort operations and other............................................................        2.1            -
                                                                                            ----------  -----------
      Total...............................................................................  $    31.0   $     13.4
                                                                                            ==========  ===========
SunRidge Canyon L.L.C.(1):
   Real estate sales......................................................................  $     9.3   $     15.8
   Resort operations and other............................................................        4.4          4.0
                                                                                            ----------  -----------
      Total...............................................................................  $    13.7   $     19.8
                                                                                            ==========  ===========
-----------------
(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 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 18,000. The Company is planning
the development of certain remaining acreage at Fountain Hills. Future sales are
expected to consist mainly of undeveloped acreage, semi-developed parcels and
fully-developed lots.

      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 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 begun 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.

   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, 2001, the Company's real estate operations had
approximately 180 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. On January
24, 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.

   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, club memberships, luxury suites, advertising sales and
other sources.

      Valley Race Park opened for simulcast wagering in mid-March of 2000, and
live greyhound racing began in December 2000.

   Regulation of Racing Operations

      The ownership and operation of horse and greyhound racetracks in Texas are
subject to significant regulation by the Texas Racing Commission (the "RACING
COMMISSION") under the Texas Racing Act and related regulations (collectively,
the "RACING ACT"). The Racing Act provides, among other things, for the
allocation of wagering proceeds among betting participants, purses, racetracks,
the state of Texas and for other purposes, and empowers the Racing Commission to
license and regulate substantially all aspects of horse 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 and a
wide range of sporting events and other entertainment activities in the Houston
area. 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
Greyhound to market its simulcast signal due to its brief live racing season.
Sam Houston Race Park and Valley Race Park had 135 and 14 days, respectively, of
live racing during 2000. Sam Houston Race Park currently has 126 days of live
racing scheduled for 2001, and Valley Race Park currently has 111 days of live
racing scheduled for 2001.

   Employees

      As of March 1, 2001, the Company's racing operations had approximately 520
employees, approximately 335 of whom are seasonal employees during live racing.

Employees

      At March 1, 2001, MAXXAM and its subsidiaries employed approximately 2,130
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 claims, among other things, that the remaining Respondents, Mr.
Hurwitz, the Company and Federated, are jointly and severally liable to pay
either $821.3 million in restitution or reimbursement of $362.6 million for
alleged unjust enrichment. The OTS also claims that each remaining Respondent
should be required to pay $4.6 million in civil money penalties, and that Mr.
Hurwitz should be prohibited from engaging in the banking industry. The
Respondents' brief claims that none of them has any liability in this matter. A
recommended decision by the administrative law judge could be made at any time.
A final agency decision would thereafter be issued by the OTS Director. Such
decision would then be subject to appeal by any of the parties to a federal
appellate court.

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

      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, 2000, such fees
were in excess of $30.0 million.

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

      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. 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

   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, 2000, a total of approximately $99.5 million of asbestos-related settlements
and defense costs were paid, and partial insurance reimbursements for
asbestos-related matters totaling approximately $62.8 million were received. 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 17 to the Consolidated Financial Statements under the headings
"Environmental Contingencies" and "Asbestos Contingencies."

   Gramercy Litigation

      On July 5, 1999, Kaiser's Gramercy, Louisiana, alumina refinery was
extensively damaged by an explosion in the digestion area of the plant. A number
of employees were injured in the incident, several of them severely. Kaiser may
be liable for claims relating to the injured employees. The incident has also
resulted in more than 90 lawsuits, many of which were styled as class action
suits, being filed against KACC and others since July 1999 on behalf of more
than 16,000 claimants. Such lawsuits allege, among other things, property
damage, business interruption loss by other businesses and personal injury. All
such lawsuits previously pending in state court are now consolidated into one
action pending in the Twenty-Third Judicial District Court for the Parish of St.
James, State of Louisiana. One lawsuit remains pending in the United States
District Court, Eastern District of Louisiana. The aggregate amount of damages
sought in the lawsuits cannot be determined at this time. 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.

      In connection with the settlement of the U.S. Mine Safety and Health
Administration's ("MSHA") investigation of the incident, Kaiser is paying a fine
of $0.5 million but denied violations alleged by MSHA.

   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 commenced in November 2000
and is continuing. Kaiser is unable to estimate when the trial will be
completed. 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. If these proceedings eventually resulted in a final ruling
against Kaiser, it could be obligated to provide 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
17 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, but no further proceedings have occurred. The
Company believes that it has strong factual and legal defenses with respect to
the ERF lawsuit; however, there can be no assurance that it will not have a
material adverse effect on its financial position, results of operations or
liquidity.

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

      On March 31, 1999, an action entitled Environmental Protection Information
Association, Sierra Club v. California Department of Forestry and Fire
Protection, California Department of Fish and Game, The Pacific Lumber Company,
Scotia Pacific Company LLC, Salmon Creek Corporation, et al. (No. 99CS00639)
(the "EPIC-SYP/PERMITS LAWSUIT") was filed alleging, among other things, that
the CDF and the CDFG violated the CEQA and the CESA with respect to the SYP and
the Permits issued by California. This action is now pending in Humboldt County,
California (No. CV-990445). The plaintiffs seek, among other things, injunctive
relief to set aside the CDF's and the CDFG's decisions approving the SYP and the
Permits issued by California. On March 31, 1999, an action entitled United
Steelworkers of America, AFL-CIO, CLC, and Donald Kegley v. California
Department of Forestry and Fire Protection, The Pacific Lumber Company, Scotia
Pacific Company LLC and Salmon Creek Corporation (No. 99CS00626) (the "USWA
LAWSUIT") was filed alleging, among other things, violations of the Forest
Practice Act in connection with the CDF's approval of the SYP. This action is
now pending in Humboldt County, California (No. CV-990452). The plaintiffs seek
to prohibit the CDF from approving any THPs relying on the SYP. The
EPIC-SYP/Permits lawsuit and the USWA lawsuit have been set for trial in
November 2001.

      The Company believes that appropriate procedures were followed throughout
the public review and approval process concerning the Environmental Plans, and
the Company is working with the relevant government agencies to defend the USWA
lawsuit and the EPIC-SYP/Permits lawsuit.

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

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

   Hunsaker Action

      On November 24, 1998, an action entitled William Hunsaker, et al. v.
Charles E. Hurwitz, Pacific Lumber, MAXXAM Group Inc., MXM Corp., Federated
Development Company and Does I-50 (No. C 98-4515) was filed in the United States
District Court for the Northern District of California ("HUNSAKER ACTION"). This
action alleges, among other things, that a class consisting of the vested
employees and retirees of the former Pacific Lumber Company (Maine) ("OLD
PALCO") is entitled to recover approximately $60.0 million of surplus funds
allegedly obtained through deceit and fraudulent acts from the Old Palco
retirement plan that was terminated in 1986 following the Company's acquisition
of Pacific Lumber. Plaintiffs further allege that defendants violated RICO and
engaged in numerous acts of unfair business practices in violation of
California's business and professions code. In addition to seeking the surplus
funds, plaintiffs also seek, among other things, a constructive trust on the
assets traceable from the surplus funds, plus interest, trebling of damages for
violation of RICO, punitive damages, and injunctive and other relief. On March
30, 1999, the Court dismissed the lawsuit with prejudice and ordered the
plaintiffs to pay the defendants' costs with respect to the lawsuit. On April
30, 1999, the plaintiffs appealed the dismissal, and on February 13, 2001 the
U.S. Ninth Circuit Court of Appeals heard such appeal, but has not yet rendered
a decision. The Company believes that it has strong factual and legal defenses
with respect to the Hunsaker action, and does not believe that the resolution of
this matter will result in a material adverse effect on its financial position,
results of operations or liquidity.

Other 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.


                                                                              2000                    1999
                                                                     --------------------    --------------------
                                                                       High         Low        High         Low
                                                                     --------    --------    --------    --------

   First quarter...................................................  $  43.38    $  25.94    $  64.75    $  43.00
   Second quarter..................................................     29.88       17.38       64.50       50.25
   Third quarter...................................................     23.25       17.44       64.25       50.13
   Fourth quarter..................................................     20.25       13.94       51.44       41.38

      The following table sets forth the number of record holders of each class
of publicly owned securities of the Company at March 15, 2001:


                                                                                                      Number of
                                                                                                       Record
                                         Title of Class                                               Holders
------------------------------------------------------------------------------------------------     -----------
Common Stock....................................................................................           3,027
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, 2000 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,
                                                       ------------------------------------------------------------
                                                          2000        1999        1998         1997        1996
                                                       ----------  ----------- -----------  ----------  -----------
                                                              (In millions of dollars, except share amounts)
Consolidated statement of operations:
   Net sales(1)......................................  $ 2,448.0   $  2,350.7  $  2,618.7   $ 2,779.2   $  2,591.6
   Operating income (loss)...........................      130.6        (51.5)      125.6       236.4        131.3
   Income (loss) before extraordinary items(2).......       30.0         73.6       (14.7)       65.2         22.9
   Extraordinary items, net (3)......................        3.9            -       (42.5)          -            -
   Net income (loss).................................       33.9         73.6       (57.2)       65.2         22.9

Consolidated balance sheet at end of period:
   Total assets......................................    4,504.0      4,393.1     4,075.2     4,114.2      4,115.7
   Long-term debt, less current maturities...........    1,882.8      1,956.8     1,971.7     1,888.0      1,881.9
   Stockholders' equity (deficit) (4)................       49.1         27.8       (56.8)       (2.9)       (50.8)

Per share information:
   Basic:
      Income (loss) before extraordinary items.......  $    4.34   $    10.49  $    (2.10)  $    7.81   $     2.63
      Extraordinary items............................       0.57            -       (6.07)          -            -
                                                       ----------  ----------- -----------  ----------  -----------
      Net income (loss)..............................  $    4.91   $    10.49  $    (8.17)  $    7.81   $     2.63
                                                       ==========  =========== ===========  ==========  ===========
   Diluted:
      Income (loss) before extraordinary items.......  $    3.95   $     9.49  $    (2.10)  $    7.14   $     2.42
      Extraordinary items............................       0.52            -       (6.07)          -            -
                                                       ----------  ----------- -----------  ----------  -----------
      Net income (loss)..............................  $    4.47   $     9.49  $    (8.17)  $    7.14   $     2.42
                                                       ==========  =========== ===========  ==========  ===========

------------------------------------
(1)  Net sales for 1996 through 1999 have been restated to conform to a new
     accounting requirement which states that freight charges should be included
     in cost of sales and operations rather than netted against net sales as was
     the Company's prior policy. The amount of the restatement was $39.3
     million, $46.0 million, $50.1 million and $48.3 million for 1999, 1998,
     1997 and 1996, respectively.
(2)  2000 results include estimated business interruption insurance recoveries
     of $111.6 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
     $37.6 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 2000 relates to the repurchase of the 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, 2000.


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

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

Results of Operations

   Aluminum Operations

      Aluminum operations account for the substantial portion of the Company's
revenues and operating results. Kaiser, through its principal subsidiary KACC,
operates in 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.

      Industry Overview
      Kaiser's operating results are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products, and also depend to a
significant degree on the volume and mix of all products sold and on Kaiser's
hedging strategies. Primary aluminum prices have historically been subject to
significant cyclical price fluctuations (see Item 7A. "Quantitative and
Qualitative Disclosures About Market Risk" and Notes 1 and 18 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 alumina and primary aluminum.

      During 1998, the Average Midwest United States transaction price ("AMT
PRICE") per pound of primary aluminum steadily declined throughout the year,
beginning the year in the $.70 to $.75 per pound range and ending the year in
the low $.60 per pound range. During 1999, the AMT Price per pound of primary
aluminum declined to a low of approximately $.57 per pound in February 1999 and
then began a steady increase ending 1999 at $.79 per pound. During 2000, the AMT
Price averaged $.75 per pound. At January 31, 2001, the AMT Price was
approximately $.81 per pound.

      Summary
      The following table presents selected operational and financial
information with respect to the Company's aluminum operations for the years
ended December 31, 2000, 1999, and 1998.


                                                                                      Years Ended December 31,
                                                                                   ------------------------------
                                                                                     2000      1999       1998
                                                                                   --------- ---------  ---------
Shipments:(1)
   Alumina:(2)
      Third party................................................................   1,927.1   2,093.9    2,250.0
      Intersegment...............................................................     751.9     757.3      750.7
                                                                                   --------- ---------  ---------
        Total alumina............................................................   2,679.0   2,851.2    3,000.7
                                                                                   --------- ---------  ---------
   Primary aluminum:(3)
      Third party................................................................     345.5     295.6      263.2
      Intersegment...............................................................     148.9     171.2      162.8
                                                                                   --------- ---------  ---------
        Total primary aluminum...................................................     494.4     466.8      426.0
                                                                                   --------- ---------  ---------
   Flat-rolled products..........................................................     162.3     217.9      235.6
                                                                                   --------- ---------  ---------
   Engineered products...........................................................     164.6     171.1      169.4
                                                                                   --------- ---------  ---------
--------------------
Table and Notes continued on next page


                                                                                       Years Ended December 31,
                                                                                ---------------------------------
                                                                                  2000         1999       1998
                                                                                ---------    --------   ---------
                                                                                     (In millions of dollars,
                                                                                   except shipments and prices)

Average realized third party sales price:(4)(5)
   Alumina (per ton)..........................................................  $    209     $   176    $    184
   Primary aluminum (per pound)...............................................      0.74        0.66        0.67
Net sales:(6)
   Bauxite and alumina: (2)(5)
      Third party (includes net sales of bauxite).............................  $  442.2     $ 395.8    $  445.2
      Intersegment............................................................     148.3       129.0       135.8
                                                                                ---------    --------   ---------
        Total bauxite and alumina.............................................     590.5       524.8       581.0
                                                                                ---------    --------   ---------
   Primary aluminum:(3)(5)
      Third party.............................................................     563.7       432.9       390.7
      Intersegment............................................................     242.3       240.6       233.5
                                                                                ---------    --------   ---------
        Total primary aluminum................................................     806.0       673.5       624.2
                                                                                ---------    --------   ---------
   Flat-rolled products.......................................................     521.0       591.3       732.7
   Engineered products........................................................     564.9       556.8       595.3
   Commodities marketing (5)..................................................     (25.4)       18.3        60.5
   Minority interests.........................................................     103.4        88.5        78.0
   Eliminations...............................................................    (390.6)     (369.6)     (369.3)
                                                                                ---------    --------   ---------
        Total net sales.......................................................  $2,169.8    $2,083.6    $2,302.4
                                                                                =========   =========   =========
Operating income (loss)(7)....................................................  $  145.2    $  (23.0)   $   96.5
                                                                                =========   =========   =========
Income (loss) before income taxes and minority interests(8)...................  $   31.3    $  (84.0)   $  (10.0)
                                                                                =========   =========   =========

--------------------
(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 2000 and 1999 include approximately 267,000
      and 264,000 tons, respectively, of alumina purchased from third parties
      and resold to certain unaffiliated customers and 55,000 and 131,000 tons,
      respectively, of alumina purchased from third parties and transferred to
      Kaiser's primary aluminum business unit.
(3)   Net sales for 2000, 1999 and 1998 included approximately 206,500 tons,
      260,100 tons and 251,300 tons, respectively, of primary aluminum
      purchased from third parties to meet third-party and internal 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)   Average realized third-party sales prices and net sales for bauxite and
      alumina and for primary aluminum for 1999 and 1998 have been restated to
      reflect a change in Kaiser's segment reporting. Bauxite and alumina net
      sales were restated by $2.1 million and $27.5 million for 1999,
      respectively, and $6.2 million and $19.1 million for 1998, respectively.
      The results of Kaiser's metal hedging activities are now reported
      separately in the commodities marketing segment rather than being
      allocated between the two commodity business units.
(6)   Net sales for 1999 and 1998 for all segments have been restated by $39.3
      million and $46.0 million, respectively, to conform to a new accounting
      requirement which states that freight charges should be included in cost
      of sales and operations rather than netted against net sales as was the
      Company's prior policy.
(7)   Operating income for 2000 included the following: estimated business
      interruption insurance recoveries totaling $110.0 million and other
      non-recurring charges (gains) totaling $41.9 million. The operating loss
      for 1999 included the following: estimated business interruption insurance
      recoveries totaling $41.0 million, potline restart costs of $12.8 million
      and other non-recurring charges totaling $24.1 million. Additionally,
      depreciation was suspended for the Gramercy, Louisiana, alumina refinery
      for the last six months of 1999, as a result of the July 5, 1999,
      incident. Depreciation expense for the Gramercy facility for the six
      months ended June 30, 1999, was approximately $6.0 million. Operating
      income for 1998 included non-recurring charges totaling $105.0 million.
      See Note 3 to the Consolidated Financial Statements for additional
      information on the Gramercy facility. See Note 2 to the Consolidated
      Financial Statements for a detailed summary of the other non-recurring
      items impacting aluminum operations.
(8)   In addition to the items described in (6) above, income (loss) before
      income taxes and minority interests included the impact of non-recurring
      items of $(4.3) million, $49.1 million and $3.5 million for the years
      ended December 31, 2000, 1999 and 1998, respectively. See Note 2 to the
      Consolidated Financial Statements for further information.

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

      Liquidity and Cash Resources. Kaiser has significant near-term debt
maturities. Kaiser's ability to make payments on and refinance its debt depends
on its ability to generate cash in the future. In addition to being impacted by
power sales and normal operating items, Kaiser's near-term liquidity and cash
flows will also be affected by the Gramercy incident, net payments for
asbestos-related liabilities, and possible proceeds from asset dispositions. See
"--Financial Condition and Investing and Financing Activities--Aluminum
Operations" for a discussion of these matters.

      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. See Note 3 to the Consolidated Financial Statements for further
information regarding the incident at the Gramercy facility.

      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. The plant is expected to increase production progressively to
approximately 75% of its newly rated estimated annual capacity of 1,250,000 tons
by the end of March 2001. At February 28, 2001, the plant was operating at 70%
of capacity. Based on current estimates, construction at the facility is
expected to be completed during the third quarter of 2001.

      Through February 28, 2001, Kaiser had recorded $289.3 million of estimated
insurance recoveries related to the Gramercy incident and had collected $262.6
million of such amounts. An additional $7.0 million is expected to be received
in March 2001. The remaining balance of approximately $20.0 million and any
additional amounts possibly due to Kaiser will likely not be recovered until
Kaiser and the insurers resolve their differences. Kaiser and the insurers are
currently negotiating an arbitration agreement as a means of resolving certain
outstanding issues. Kaiser anticipates that the remaining issues will not be
resolved until late 2001 or early 2002. Kaiser continues to believe that a
minimum of approximately $290.0 million of insurance recoveries are probable,
that additional amounts are owed to Kaiser by the insurers, and that the
likelihood of any refund by Kaiser of amounts previously received from the
insurers is remote.

      Labor Matters. Prior to the settlement of the labor dispute, Kaiser was
operating five of its U.S. facilities with salaried employees and other
employees as a result of the September 1998 strike by the USWA and the
subsequent "lock-out" by Kaiser in January 1999. The labor dispute was settled
in September 2000. Kaiser recorded a one-time pre-tax labor settlement charge of
$38.5 million in its results for the year ended December 31, 2000, to reflect
the incremental, non-recurring impacts of the labor settlement, including
severance and other contractual obligations for non-returning workers. See Note
4 to the Consolidated Financial Statements for additional discussion of the
labor settlement.

      Pacific Northwest Power Sales and Operating Level. In response to the
unprecedented high market prices for power in the Pacific Northwest, Kaiser
temporarily curtailed its primary aluminum production at the Tacoma and Mead,
Washington, smelters during the second half of 2000 and has sold a portion of
the 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 will receive cash proceeds sufficient to more than offset the
cash impact of the potline curtailments over the contract period for which the
power was sold. Kaiser has made additional power sales in 2001.

      During October 2000, Kaiser signed a new power contract with the BPA under
which the BPA will provide Kaiser's operations in the State of Washington with
power during the period from October 2001 through September 2006. The contract
will provide sufficient power to operate Kaiser's Trentwood facility as well as
approximately 40% of the combined capacity of Kaiser's Mead and Tacoma aluminum
smelting operations. Power costs under the new contract are expected to exceed
the cost of power under Kaiser's current BPA contract by between 20% to 60% and,
perhaps, by as much as 100% in certain periods. There are other terms of the new
BPA contract which are also less favorable than the current BPA contract. Kaiser
does not have any remarketing rights under the new BPA contract.

      See Note 5 to the Consolidated Financial Statements for additional
information on the power sales and the new BPA contract.

      Strategic Initiatives. Kaiser has devoted significant efforts toward
analyzing its existing asset portfolio. Kaiser intends to focus its efforts and
capital in sectors of the industry that are considered most attractive and in
which Kaiser believes it is well positioned to capture value. During 2000,
Kaiser sold certain non-operating properties, its Micromill assets and
technology, and its Pleasanton, California, office complex and purchased the
assets of a drawn tube aluminum fabricating operation. The dispositions were
part of Kaiser's initiative to monetize non-strategic or under-performing
assets. The acquisition was part of Kaiser's continued focus on growing its
engineered products operations.

      Kaiser is considering the possible sale of part or all of its interests in
certain operating assets. The contemplated transactions are in various stages of
development. Kaiser expects that at least one operating asset will be sold.
Kaiser has multiple transactions under way. It is unlikely, however, that it
would consummate all of the transactions under consideration. Further, there can
be no assurance as to the likelihood, timing, or terms of such sales. The
consummation of any such sales would be dependent upon a number of factors, such
as negotiation of definitive documentation, due- diligence investigations,
certain lender approvals and/or anti-trust clearances. Kaiser would expect to
use the proceeds from any such sales for debt reduction, capital spending or
some combination thereof.

      Another area of emphasis has been a continuing focus on managing Kaiser's
legacy liabilities. Kaiser believes that it has insurance coverage available to
recover a substantial portion of its asbestos-related costs and is actively
pursuing recoveries in this regard. For the period from inception through
December 31, 2000, Kaiser has paid approximately $220.5 million for
asbestos-related settlements and associated defense costs and has received
partial insurance reimbursements during this same period totaling $131.3
million. The timing and amount of future recoveries of asbestos-related claims
from insurance carriers remain a major priority of Kaiser, but will depend on
the pace of claims review and processing by such carriers and the resolution of
any disputes regarding coverage under the insurance policies.

      Net Sales
      Net sales for the year ended December 31, 2000, increased over 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.

      Net sales for the year ended December 31, 1999, declined from 1998 due to
an overall decrease in average realized prices and due to lower shipments of
alumina and flat-rolled products. This decrease was somewhat offset by an
increase in primary aluminum shipments. The decrease in average realized prices
for alumina and primary aluminum was a result of a decline in market prices for
primary aluminum. The decline in average realized prices for flat-rolled
products and engineered products resulted primarily from a shift in product mix
from aerospace products, which have a higher price and operating margin, to
other products, and a reduction in prices resulting from reduced demand for heat
treat products. The reduction in shipments of alumina reflected the net impact
of the Gramercy incident on production. With respect to flat-rolled products
shipments, the decline was due to reduced demand in 1999 for aerospace heat
treat products offset, in small part, by increased shipments of general
engineered products. The increase in primary aluminum shipments was the result
of an increase in the operating rate for Valco.

      Operating Income (Loss)
      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. These items as well as
the non-recurring items discussed below are described further in Note 2 to the
Consolidated Financial Statements. 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.

      Operating income for the year ended December 31, 1998 included total
non-recurring charges of $105.0 million. After excluding non-recurring items,
operating income declined from $201.5 million in 1998 to $1.1 million in 1999
primarily as a result of the decline in net sales discussed above. In addition,
1999 included $12.8 million associated with preparing and restarting potlines at
Valco and at the Washington smelters. In addition, 1998 included approximately
$29.0 million in mitigating compensation earned by Valco for potline
curtailments.

      Income (Loss) Before Income Taxes and Minority Interests
      Income before income taxes and minority interests for the year ended
December 31, 2000, included non-recurring items totaling $(4.3) million in
addition to the items included in operating income as discussed above. The loss
before income taxes and minority interests for the year ended December 31, 1999,
included non-recurring items totaling $49.1 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.

      The loss before income taxes and minority interests for the year ended
December 31, 1998, included a net total benefit from non-recurring items of $3.5
million. 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 $109.0 million in 1999 as
compared to income of $91.5 million in 1998. This decline is due to the decrease
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. MGI's business is somewhat seasonal, and its net sales
have historically been higher in the months of April through November than in
the months of December through March. Management expects that MGI's revenues and
cash flows will continue to be seasonal. The following should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto appearing in Item 8.

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

      The following table presents selected operational and financial
information for the years ended December 31, 2000, 1999 and 1998 for the
Company's forest products operations.


                                                                                        Years Ended December 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------
                                                                                        (In millions of dollars,
                                                                                      except shipments and prices)
Shipments:
   Lumber: (1)
      Redwood upper grades.........................................................      15.8      24.6       41.9
      Redwood common grades........................................................     143.8     137.4      230.1
      Douglas-fir upper grades.....................................................      11.5      10.4        6.9
      Douglas-fir common grades....................................................      76.1      61.5       47.5
      Other........................................................................       5.9       8.7        7.0
                                                                                     --------- ---------  ---------
   Total lumber....................................................................     253.1     242.6      333.4
                                                                                     ========= =========  =========
   Wood chips (2)..................................................................     169.5     163.7      176.7
                                                                                     ========= =========  =========
Average sales price:
   Lumber: (3)
      Redwood upper grades.........................................................  $  1,798  $  1,531   $  1,478
      Redwood common grades........................................................       712       629        540
      Douglas-fir upper grades.....................................................     1,352     1,290      1,280
      Douglas-fir common grades....................................................       376       430        346
   Wood chips (4)..................................................................        67        77         70
Net sales:
   Lumber, net of discount.........................................................  $  175.3  $  165.3   $  211.6
   Wood chips......................................................................      11.3      12.5       12.3
   Cogeneration power(7)...........................................................       6.0       3.8        3.9
   Other...........................................................................       7.5       6.2        5.8
                                                                                     --------- ---------  ---------
      Total net sales .............................................................  $  200.1  $  187.8   $  233.6
                                                                                     ========= =========  =========
Operating income (loss)............................................................  $    7.6  $   (4.1)  $   40.9
                                                                                     ========= =========  =========
Operating cash flow (5)............................................................  $   27.3  $   12.9   $   63.4
                                                                                     ========= =========  =========
Income (loss) before income taxes and minority interests(6)........................  $   23.9  $  196.1   $  (24.7)
                                                                                     ========= =========  =========

------------------------------------
(1)   Lumber shipments are expressed in millions of board feet.
(2)   Wood chip shipments are expressed in thousands of bone dry units of 2,400
      pounds.
(3)   Dollars per thousand board feet.
(4)   Dollars per bone dry unit.
(5)   Operating income before depletion and depreciation, also referred to as
      "EBITDA."
(6)   2000 results include a $60.0 million gain on the sale of the Owl Creek
      grove, and 1999 results include a $239.8 million gain on the sale of the
      Headwaters Timberlands.
(7)   As of December 31, 2000, the Company had receivables from Pacific Gas &
      Electric Company ("PG&E") of $2.2 million. PG&E is currently experiencing
      financial difficulties in connection with the power shortages in
      California, and therefore the collectibility of the receivables is
      uncertain. As of March 15, 2001, $0.9 million of this balance had been
      collected. Additional sales of power to PG&E have been made during the
      first quarter of 2001. As of March 15, 2001, the uncollected receivable
      balance attributable to sales made in 2000 and 2001 was $4.2 million.

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

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

      Operating Income (Loss)
      The 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.

      The forest products segment had an operating loss for the year ended
December 31, 1999, as compared to operating income for the comparable 1998
period, primarily due to the decrease in net sales discussed above. Results for
1999 were also affected by higher costs and expenses due to higher logging costs
as well as manufacturing inefficiencies resulting from production curtailments
at the sawmills due to the lack of logs.

      Income (Loss) Before Income Taxes and Minority Interests
      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 ($35.6 million net of
deferred taxes or $4.69 per share).

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

   Real Estate Operations

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


                                                                                      Years Ended December 31,
                                                                                  ---------------------------------
                                                                                     2000       1999        1998
                                                                                  ----------  ---------  ----------
                                                                                      (In millions of dollars)

Net sales.......................................................................  $    47.2   $   52.0   $    58.6
Operating loss..................................................................       (7.8)      (5.2)          -
Income before income taxes and minority interests...............................       14.5       13.7        14.4

      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.

      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. Net sales decreased in 1999 from
1998 primarily due to lower revenues from real estate development projects at
Palmas del Mar.

      Operating Loss
      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.
The real estate segment had an operating loss for 1999 as compared to breakeven
operating income for 1998 primarily due to lower net sales from the Company's
real estate development projects at Palmas del Mar discussed above.

      Income Before Income Taxes and  Minority Interests
      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 impact of an $11.3 million gain in 2000 on the sale of a water
company in Arizona offset by the impact of a $7.4 million gain in 1999 from
insurance recoveries discussed below.

      Income before income taxes and minority interests for 1999 decreased
compared to 1998 primarily due to the operating loss in 1999. In addition, 1998
included gains on the sale of a portion of the Company's Waterwood development
project and other asset sales in 1998, whereas 1999 included a $7.4 million gain
associated with insurance recoveries from property damage resulting from the
1998 hurricane in Puerto Rico.

   Racing Operations

      Industry Overview
      The Company, through its subsidiaries, has a 99.0% ownership interest in
SHRP, Ltd., a Texas limited partnership, which owns and operates 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 mid-March of 2000. Historically, 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.


                                                                                       Years Ended December 31,
                                                                                   --------------------------------
                                                                                     2000       1999        1998
                                                                                   ---------  ---------  ----------
                                                                                       (In millions of dollars)

Net sales........................................................................  $   30.9   $   27.3   $    24.1
Operating income.................................................................       2.1        3.8         1.8
Income (loss) before income taxes and minority interests.........................       2.1        3.1        (1.0)

      Net Sales
      Net sales for the racing segment in the year ended December 31, 2000, were
higher compared to the same period in 1999 due to the opening of Valley Race
Park. Net sales for the racing segment increased in 1999 from 1998 due to an
increase in average daily attendance and an increase in wagering at facilities
receiving the Sam Houston Race Park's simulcast signal.

      Operating Income
      Operating income for the racing segment 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. Operating income for the racing segment increased for the
year ended December 31, 1999, from the same period in 1998 due to the increase
in net sales discussed above. Although costs and expenses increased with the
higher attendance and the increase in live racing days, expenses as a percentage
of net sales declined between the years.

      Income (Loss) Before Income Taxes and Minority Interests
      Income before income taxes and minority interests for this segment
decreased for the year ended December 31, 2000, as compared to the year ended
December 31, 1999, primarily due to the decrease in operating income discussed
above.

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

   Other Items Not Directly Related to Industry Segments


                                                                                      Years Ended December 31,


                                                                                     2000       1999        1998
                                                                                  ----------  ---------  ----------
                                                                                      (In millions of dollars)

Operating loss..................................................................  $   (16.5)  $  (23.0)  $   (13.6)
Loss before income taxes and minority interests.................................      (11.5)     (34.4)      (25.3)

      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 2000, 1999 and 1998 were due to: (i) accruals for
certain legal contingencies, which were $6.6 million, $0.5 million and $3.0
million in 2000, 1999 and 1998, respectively (see Note 17 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 2000 decreased from 1999 due to a
decrease in operating losses discussed above and an increase in earnings from
marketable securities. The loss for 1999 increased from 1998 principally due to
the higher operating losses described above, offset by higher earnings from
marketable securities.

      Credit (Provision) for Income Taxes
      The Company's credit (provision) for income taxes differs from the federal
statutory rate due principally to (i) revision of prior years' tax estimates and
other changes in valuation allowances, (ii) percentage depletion, and (iii)
foreign, state and local taxes, net of related federal tax benefits. Revision of
prior years' tax estimates includes amounts for the reversal of reserves which
the Company no longer believes are necessary. The Company's credit (provision)
for income taxes for 2000, 1999 and 1998 reflects benefits of $0.2 million, $4.0
million and $11.5 million, respectively, for such reversals of reserves.

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

Financial Condition and Investing and Financing Activities

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

      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. Certain of the Company's subsidiaries, principally Kaiser, 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. Kaiser and the Forest Products companies are highly leveraged and
have significant debt service requirements. Notes 11 and 12 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 Kaiser's 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, 2000............ $    31.6  $ 16.4  $  37.1  $    -  $    2.1  $    -  $    -  $    13.4  $ 100.6
   December 31, 1999............       0.3    15.9      0.1       -      11.2       -       -       18.5     46.0

Long-term debt, excluding
   current maturities:
   December 31, 2000(1)(2)...... $   957.8  $767.2  $   0.6  $    -  $   38.2  $  0.2  $118.8  $       - $1,882.8
   December 31, 1999............     972.5   843.5      0.7       -      14.4     0.5   125.2          -  1,956.8

Revolving credit facilities:
   Facility amounts............. $   300.0  $ 62.0  $  60.0  $  2.5  $   23.6  $    -  $    -  $       -  $ 448.1
   December 31, 2000:
      Borrowings................      30.4       -     37.0       -       5.2       -       -          -     72.6
      Letters of credit.........      55.7       -     12.5       -       1.5       -       -          -     69.7
      Unused and available
        credit..................     155.3    62.0        -     2.5      11.0       -       -          -    230.8

CASH, CASH EQUIVALENTS,
   MARKETABLE SECURITIES AND
   OTHER INVESTMENTS
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
                                 ========== ======= ======== ======= ========= ======= ======= ========== ========

December 31, 1999:
   Current amounts restricted for
      debt service.............. $       -  $ 15.9  $     -  $    -  $    0.9  $    -  $    -  $       -  $  16.8
   Other current amounts........      21.2     1.3     27.5   179.9      23.5    10.2     9.0       44.6    317.2
                                 ---------- ------- -------- ------- --------- ------- ------- ---------- --------
                                      21.2    17.2     27.5   179.9      24.4    10.2     9.0       44.6    334.0
                                 ---------- ------- -------- ------- --------- ------- ------- ---------- --------
   Long-term amounts restricted
      for debt service(1).......         -   153.6        -       -         -       -       -          -    153.6
   Other long-term restricted
      amounts...................       0.1     3.3        -     2.0         -       -       -          -      5.4
                                 ---------- ------- -------- ------- --------- ------- ------- ---------- --------
                                       0.1   156.9        -     2.0         -       -       -          -    159.0
                                 ---------- ------- -------- ------- --------- ------- ------- ---------- --------
                                 $    21.3  $174.1  $  27.5  $181.9  $   24.4  $ 10.2  $  9.0  $    44.6  $ 493.0
                                 ========== ======= ======== ======= ========= ======= ======= ========== ========

------------------
Table and Notes continued on next page


                                                 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, 2000(4)......... $   261.9  $  8.2  $   4.1  $   1.7  $    6.9  $  4.5  $    -  $     1.0  $ 288.3
   December 31, 1999(4).........      68.4    19.2      2.6      1.3       3.1     0.6       -        0.6     95.8
   December 31, 1998............      77.6    16.6      4.2      0.4      22.2     0.9       -        0.2    122.1

Net proceeds from dispositions
   of property and investments:
   December 31, 2000(5)......... $   166.9  $ 67.0  $   0.3  $     -  $   18.0  $    -  $    -  $       -  $ 252.2
   December 31, 1999(5).........      74.8     0.3        -    298.0       2.0       -       -          -    375.1
   December 31, 1998............       6.7       -      6.5      0.1       9.8       -       -          -     23.1

Borrowings (repayments) of debt
   and credit facilities, net of
   financing costs:
   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)
   December 31, 1998(3).........      (9.5)  488.9   (244.9)  (232.3)      3.0       -    (2.6)      16.0     18.6

Dividends and advances received
   (paid):
   December 31, 2000(6)......... $       -  $    -  $  23.7  $(132.1) $  (33.7) $    -  $ 63.4  $    78.7  $     -
   December 31, 1999............         -       -        -    (18.7)    (15.0)      -    18.7       15.0        -
   December 31, 1998(3).........         -  (532.8)   262.8    251.3      (7.7)      -    16.2       10.2        -

------------------
(1)  The decrease in MGHI's and Scotia LLC's long-term debt between December 31,
     1999, and December 31, 2000, was due primarily to repurchases of debt. With
     respect to Scotia LLC, such repurchases were made using proceeds from the
     SAR Account, resulting in a decrease in long-term cash restricted for debt
     service. In addition, Scotia LLC made principal payments on the Timber
     Notes of $15.9 million and $8.2 million during the years ended December 31,
     2000 and 1999, respectively. 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)  In addition to the debt obligations shown here, Kaiser has guaranteed
     $101.5 million of debt of unconsolidated affiliates as of December 31,
     2000.
(3)  Scotia LLC issued the $867.2 million aggregate principal amount of Timber
     Notes on July 20, 1998. Proceeds from the offering of the Timber Notes were
     used primarily to prepay Scotia Pacific's 7.95% Timber Collateralized Notes
     due 2015 and to redeem the 10 1/2% Senior Notes due 2003 of Pacific Lumber,
     the 11 1/4% Senior Secured Notes due 2003 and the 12 1/4% Senior Secured
     Discount Notes due 2003 of MGI. On July 28, 1998, when the Timber Notes
     were issued, Scotia LLC paid a dividend of $526.1 million to Pacific
     Lumber, Pacific Lumber paid a dividend of $263.0 million to MGI, and MGI
     paid a dividend of $14.7 million to MGHI.
(4)  Aluminum: The capital expenditures in 2000 included $239.1 million spent
     with respect to rebuilding the Gramercy facility and $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. Racing: Capital
     expenditures for racing operations for the year ended December 31, 2000
     include $2.4 million for the acquisition of Valley Race Park.
(5)  Kaiser net proceeds from dispositions of property and investments in 2000
     includes $51.6 million for the Pleasanton office complex and $100.0 million
     related to Gramercy property damage insurance recoveries while 1999 is
     related to the sale of its 50% interest in AKW for $70.4 million. Net
     proceeds from dispositions of property and investments includes $67.0
     million of proceeds in 2000 for Scotia LLC's sale of the Owl Creek grove
     and $299.9 million of gross proceeds in 1999 for Pacific Lumber's sale of
     the Headwaters Timberlands.
(6)  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 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.


   MAXXAM Parent

      MAXXAM Parent realized a substantial portion of its cash flows during 2000
from dividends and other distributions from subsidiaries in the forest products
and real estate segments. The Company expects dividends and other distributions
from subsidiaries in real estate segment during 2001 to be lower than 2000 but
comparable to 1999 as a result of further sales at the Fountain Hills real
estate development. As of December 31, 2000, MAXXAM Parent's other subsidiaries
(principally real estate) had an aggregate of nonrestricted cash and unused
borrowing availability of approximately $20.3 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 2001.

      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 $9.0 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 action, FDIC action and Kahn lawsuit which are
described further in Item 3. "Legal Proceedings" and Note 17 to the Consolidated
Financial Statements, the OTS claims, among other things, that Mr. Hurwitz, the
Company and Federated, are jointly and severally liable to pay either $821.3
million in restitution or reimbursement of $362.6 million for alleged unjust
enrichment. The OTS also claims that each should be required to pay $4.6 million
in civil money penalties. In the FDIC action, the FDIC seeks, conditioned on the
OTS prevailing 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 Kahn lawsuit is a shareholder
lawsuit brought in connection with the OTS and FDIC matters which challenges the
Company's advances of fees and expenses on behalf of Federated and certain of
the Company's directors. The Company has concluded that it is unable to
determine a reasonable estimate of the loss (or range of loss), if any, that
could result from the OTS, FDIC and Kahn matters. Accordingly, it is impossible
to assess the ultimate outcome of the foregoing matters or their potential
impact on the Company's consolidated financial position, results of operations
or liquidity.

      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 the year, the Company purchased
509,400 shares of its common stock for $12.8 million.

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

      MAXXAM Parent believes that its existing resources, together with the cash
available from subsidiaries and potential financing sources, 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 the cash proceeds from the sale of assets and
distributions from its subsidiaries, should be sufficient to meet its working
capital requirements. However, there can be no assurance that MAXXAM Parent's
cash resources, together with the cash proceeds from the sale of assets,
distributions from its subsidiaries and other sources of financing, will be
sufficient for such purposes. Any adverse outcome of the OTS, FDIC and Kahn
matters could materially adversely affect MAXXAM Parent's financial position,
results of operations or liquidity.

      MGHI

      Subsequent to December 31, 2000, MGHI repurchased $15.7 million of the 12%
MGHI Senior Secured Notes ("MGHI NOTES") for $12.8 million. MGHI expects that
interest payments on the remaining $103.2 million of MGHI Notes will be paid
with its existing cash and dividends paid by MGI to MGHI. Dividends from MGI are
expected to be at least $14.9 million per year based on the minimum levels
provided for under the indenture for the MGHI Notes.

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

   Aluminum Operations

      The increase in cash flows from operating activities between 2000 and 1999
was due primarily to the impact of the improved operating results in 2000,
driven primarily by the net proceeds received from power sales of approximately
$119.8 million, and a decline in inventories of approximately $125.8 million,
offset in part by an increase in receivables of approximately $168.8 million.
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. The
decrease in cash flows from operating activities between 1999 and 1998 was due
primarily to the impact of 1999 results, excluding non-cash charges, and an
increased investment in working capital (excluding cash).

      Kaiser uses the KACC Credit Agreement to provide short-term liquidity
requirements and for letters of credit to support operations. As of February 28,
2001, there were $94.0 million of borrowings outstanding under the KACC Credit
Agreement and remaining availability of approximately $120.0 million. However,
proceeds of approximately $130.0 million related to 2001 power sales are
expected to be received at or near March 30, 2001, and an additional $130.0
million of power proceeds will be received periodically through October 2001
with respect to other power sales made during the first quarter of 2001. The
KACC Credit Agreement expires in August 2001. It is Kaiser's intent to extend or
replace the KACC Credit Agreement prior to its expiration. However, in order for
the KACC Credit Agreement to be extended, on a short-term basis, beyond August
2001, Kaiser will have to have a plan to retire and/or refinance the $225.0
million of KACC 9 7/8% Senior Notes, due February 2002 (the "KACC 9 7/8% SENIOR
NOTES"). For the KACC Credit Agreement to be extended past February 2003, both
the KACC 9 7/8% Senior Notes and the $400.0 million of 12 3/4% KACC Senior
Subordinated Notes, due February 2003, will have to be retired and/or
refinanced. As of February 28, 2001, Kaiser had received approval from the KACC
Credit Agreement lenders to purchase up to $50.0 million of the KACC 9 7/8%
Senior Notes. As of February 28, 2001, Kaiser had purchased approximately $1.0
million of the KACC 9 7/8% Senior Notes.

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

      Total consolidated capital expenditures, excluding the expenditures in
2001 to finish rebuilding the Gramercy, Louisiana, facility, are expected to be
between $60.0 and $80.0 million per year in each of 2001 and 2002 (of which
approximately 15% is expected to be funded by 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.

      In addition to being impacted by power sales and normal operating
variables, Kaiser's near-term liquidity will be, as more fully discussed below,
affected by, among other things, the Gramercy incident, the amount of net
payments for asbestos liabilities, and possible proceeds from asset
dispositions.

      Kaiser will continue to incur business interruption costs and capital
spending until all construction activity at the Gramercy facility is completed
and full production is restored. As more fully discussed in Note 3 to the
Consolidated Financial Statements, unless Kaiser is successful in its
arbitration process against its insurers, it will have to fund all of the
remaining Gramercy related capital expenditures as well as any incremental costs
or losses incurred at Gramercy. It is believed that such amounts will total
between $100.0 million and $150.0 million depending on, among other things, the
ultimate cost of the rebuild, the elapsed time of the rebuild and the amount of
start-up costs and inefficiencies. Kaiser now believes that the total cost of
the rebuild will be between $300.0 million and $325.0 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 $492.4 million accrual at December 31, 2000, for estimated
asbestos-related costs for claims filed and estimated to be filed through 2010,
before consideration of insurance recoveries. However, Kaiser believes that
substantial recoveries from insurance carriers are probable. Accordingly, Kaiser
has recorded an estimated aggregate insurance recovery of $406.3 million
(determined on the same basis as the asbestos-related cost accrual) at December
31, 2000. During the year ended December 31, 2000, Kaiser paid $99.5 million of
asbestos-related settlement and defense costs and received insurance
reimbursements of $62.8 million for asbestos-related matters. Kaiser's 2001 and
2002 cash payments, prior to insurance recoveries, for asbestos-related costs
are estimated to be between $110.0 million and $135.0 million per year. While
Kaiser believes it will recover a substantial portion of its asbestos payments
through insurance, insurance reimbursements have historically lagged Kaiser's
payments. Delays in receiving future insurance repayments would have an adverse
impact on Kaiser's liquidity. 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 carriers will depend on the pace of
claims review and processing by such carriers and on the resolution of any
disputes regarding coverage under such policies that may arise. 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. The
litigation is intended, among other things, to: (i) ensure that the insurers
provide Kaiser with timely and appropriate reimbursement payments for
asbestos-related settlements and related legal costs incurred; and (ii) to
resolve certain issues between the parties with respect to how specific
provisions of the applicable insurance policies are to be applied. Given the
significance of expected asbestos-related payments in 2001 and 2002 based on
settlement agreements in place at December 31, 2000, the receipt of timely and
appropriate reimbursements from such insurers is critical to Kaiser's liquidity.
The court is not expected to hear the case until late 2001 or 2002. Kaiser is
continuing to receive cash payments from the insurers.

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

      Kaiser's management believes that Kaiser's existing cash resources,
together with cash flows from operations, power sales and anticipated asset
dispositions, as well as borrowings under the KACC Credit Agreement, will be
sufficient to satisfy its working capital and capital expenditure requirements
for the next year. However, no assurance can be given that existing cash sources
will be sufficient to meet Kaiser's short-term liquidity requirements or that
additional sources of cash will not be required.

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

      Environmental, Labor and Other Contingencies
      Kaiser is subject to a number of environmental laws, to fines or penalties
assessed for alleged breaches of the environmental laws, and to claims and
litigation based upon such laws. Based on Kaiser's evaluation of these and other
environmental matters, Kaiser has established environmental accruals of $46.1
million at December 31, 2000. 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 $35.0 million.

      In connection with the USWA strike and subsequent lock-out by Kaiser which
was settled in September 2000, certain allegations of unfair labor practices
have been filed with the NLRB by the USWA. A trial before an administrative law
judge for the two remaining allegations commenced in November 2000 and is
continuing. Kaiser is unable to estimate when the trial will be completed. 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. 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.

      See Note 17 to the Consolidated Financial Statements for a more detailed
discussion of these contingencies and the factors affecting Kaiser's beliefs.

      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 believes that the resolution of these uncertainties and the
incurrence of related costs, net of any related insurance recoveries, should not
have a material adverse effect on its consolidated financial position, results
of operations, or liquidity. However, amounts paid, if any, in satisfaction of
these matters could be significant to the results of the period in which they
are recorded.

   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 would effectively
be precluded from distributing funds to MGI and MGI in turn to MGHI.

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

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

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

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

      MGI and its subsidiaries anticipate that existing cash, cash equivalents,
marketable securities, funds available from the SAR Account and available
sources of financing will be sufficient to fund their working capital, debt
service and capital expenditure requirements for the next year. With respect to
their long-term liquidity, although MGI and its subsidiaries believe that their
existing cash and cash equivalents should provide sufficient funds to meet their
debt service and working capital requirements until such time as Pacific Lumber
has adequate cash flows from operations and/or dividends from Scotia LLC, there
can be no assurance that this will be the case. Furthermore, due to its highly
leveraged condition, MGI is more sensitive than less leveraged companies to
factors affecting its operations, including governmental regulation and
litigation affecting its timber harvesting practices (see "--Trends" below and
Note 17 to the Consolidated Financial Statements), increased competition from
other lumber producers or alternative building products and general economic
conditions.

   Real Estate Operations

      Capital expenditures are expected to be approximately $6.5 million in
2001. The Company expects that these expenditures will be funded by existing
cash and available credit facilities.

      PDMPI and its subsidiaries, which own the Company's Puerto Rican real
estate operations, required advances to fund their operations and capital
expenditures in 1999 and 1998. In 2000, funds from financing activities more
than offset funds required for operations and capital expenditures. Cash flows
from the Company's other real estate subsidiaries have exceeded PDMPI's
requirements for additional funds. Although PDMPI and its subsidiaries may
require 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

      At December 31, 2000, all of the $62.0 million in SHRP Notes outstanding
were owned by affiliates. Capital expenditures and investments in new ventures
are expected to be approximately $2.5 million in 2001.

      With respect to long-term liquidity, SHRP, Ltd's management expects that,
excluding amounts due to affiliates, SHRP, Ltd. will generate cash flows from
operations.

Trends

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

      Regulatory and environmental matters play a significant role in the
Company's forest products operations. See Item 1. "Business - Forest Products
Operations - Regulatory and Environmental Matters" and Note 17 to the
Consolidated Financial Statements for a discussion of these matters. Regulatory
compliance and related litigation have increased the cost of logging operations,
and Pacific Lumber has also been adversely affected by a lack of available logs
as a result of a severely diminished supply of available THPs, resulting in
delayed or reduced harvest and in lower shipments of lumber and lower net sales.

      With the consummation of the Headwaters Agreement, Pacific Lumber has
completed its work in connection with preparation of the Environmental Plans;
however, significant additional work continues to be required in connection with
their implementation. As a result of the implementation process, 1999 was a
transition period for Pacific Lumber with respect to the filing and approval of
its THPs. The transition period continued into 2000 and is expected to continue
into 2001. Although the rate of submissions and approvals of THPs during 2000 is
higher than that for 1999, monthly submissions and approvals continue to be
slower than Pacific Lumber's expectations and slower than Pacific Lumber had
experienced prior to 1998, principally because government agencies have failed
to approve THPs in a timely manner. Nevertheless, Pacific Lumber anticipates
that after a transition period, the implementation of the Environmental Plans
will streamline the process of preparing THPs and potentially shorten the time
to obtain approval of THPs.

      There can be no assurance that Pacific Lumber will not continue to
experience difficulties in receiving approvals of its THPs similar to those it
has been experiencing. Furthermore, there can be no assurance that certain
pending legal, regulatory and environmental matters or future governmental
regulations, legislation or judicial or administrative decisions, or adverse
weather conditions, would not have a material adverse effect on the Company's
financial position, results of operations or liquidity. See Item 3. "Legal
Proceedings" and Note 17 to the Consolidated Financial Statements for further
information regarding regulatory and legal proceedings affecting the Company's
operations.

Accounting Pronouncements

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

ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

      The following disclosures are before consideration of any impacts
resulting from the application of SFAS No. 133 beginning January 1, 2001. See
Note 1 to the Consolidated Financial Statements for a discussion of the impacts
of SFAS No. 133.

      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 18 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 its exposure to changes in foreign currency exchange rates. The
following sets forth the impact on future earnings of adverse market changes
related to Kaiser's hedging positions with respect to commodity, foreign
exchange and energy contracts described more fully in Note 18 to the
Consolidated Financial Statements.

      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 to
$15.0 million, based on recent fluctuations in operating levels.

      Based on the average December 31, 2000, LME cash price for primary
aluminum of approximately $.71 per pound, Kaiser estimates that there would be
no material net aggregate pre-tax impact on operating income from its hedging
positions and fixed price customer contracts during the period from 2001 through
2003. Kaiser estimates that a hypothetical $.10 increase from the above stated
December 2000 price would result in a net aggregate pre-tax decrease in
operating income of approximately $75.0 million being realized during the period
from 2001 through 2003 from its hedging positions and fixed price customer
contracts. Conversely, Kaiser estimates that a hypothetical $.10 decrease from
the above stated December 2000 price level would result in an aggregate pre-tax
increase in operating income of approximately $130.0 million being realized
during the period from 2001 through 2003 from Kaiser's hedging positions and
fixed price customer contracts. Both of the foregoing hypothetical amounts are
versus what Kaiser's results would have been without the derivative commodity
contracts and fixed price customer contracts discussed above. It should be
noted, however, that, since the hedging positions and fixed price customer
contracts lock-in a specified price or range of prices, increases and decreases
in earnings attributable to Kaiser's hedging positions or fixed price customer
contracts are significantly offset by a decrease or increase in the proceeds to
be realized on the underlying physical transactions.

      As stated in Note 18 to the Consolidated Financial Statements, Kaiser has
certain hedging positions which do not qualify for treatment as a "hedge" under
current accounting guidelines and thus must be marked-to-market each period.
Fluctuations in forward market prices for primary aluminum would likely result
in additional earnings volatility as a result of these positions. Kaiser
estimates that a hypothetical $.10 change in spot market prices from the
December 31, 2000, LME cash price of $.71 per pound would, depending on the
shape of the forward curve, result in additional aggregate mark-to-market
impacts of between $10.0 million and $30.0 million during any period through
2003.

      In addition to having an impact on Kaiser's earnings, a hypothetical
$.10-per-pound change in primary aluminum prices would also impact Kaiser's cash
flows and liquidity through changes in possible margin advance requirements. At
December 31, 2000, Kaiser had made margin advances of $5.1 million and had
posted letters of credit totaling $5.0 million in lieu of paying margin
advances. Increases in primary aluminum prices subsequent to December 31, 2000,
could result in Kaiser having to make additional margin advances or post
additional letters of credit and such amounts could be significant. If primary
aluminum prices increased by $.10 per pound (from the year-end 2000 price) by
March 31, 2001 and the forward curve were as described above, it is estimated
that Kaiser could be required to make additional margin advances in the range of
$50.0 million to $100.0 million.

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

      Kaiser's foreign currency hedges would have no net aggregate pre-tax
impact on Kaiser's operating results for the period from 2001 through 2005 at
the December 31, 2000, US$ to A$ exchange rate of $.55. Kaiser estimates that a
hypothetical 10% reduction in the A$ exchange rate would result in Kaiser
recognizing a net aggregate pre-tax cost of approximately $10.0 million for the
period from 2001 through 2005 from its foreign currency hedging positions.
Conversely, Kaiser estimates that a hypothetical 10% increase in the A$ exchange
rate (from $.55) would result in Kaiser realizing a net pre-tax aggregate
benefit of approximately $20.0 million. These hypothetical impacts are versus
what Kaiser's results would have been without Kaiser's derivative foreign
currency contracts. It should be noted, however, that since the hedging
positions lock-in specified rates, increases or decreases in earnings
attributable to currency hedging instruments would be offset by a corresponding
decrease or increase in the value of the hedged commitments.

      Energy
      Kaiser is exposed to energy price risk from fluctuating prices for fuel
oil, diesel oil and natural gas 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. Kaiser from
time to time in the ordinary course of business enters into hedging transactions
with major suppliers of energy and energy related financial instruments. As of
December 31, 2000, Kaiser held option and swap contracts hedging a substantial
majority of its first quarter 2001 natural gas requirements. Kaiser expects to
realize a pre-tax benefit of approximately $10.0 million in the first quarter of
2001 associated with these hedging positions. However, it should be noted that
these benefits will be offset by the higher than normal gas prices on the
physical gas deliveries received during the first quarter of 2001.


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, 2000 and 1999, 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,
2000. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

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



                                                          ARTHUR ANDERSEN LLP


Houston, Texas
March 27, 2001


                          MAXXAM INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
               (In millions of dollars, except share information)


                                                                                                 December 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------- -----------
Assets
Current assets:
   Cash and cash equivalents............................................................... $    353.2  $    275.7
   Marketable securities...................................................................       44.6        58.3
   Receivables:
      Trade, net of allowance for doubtful accounts of $6.4 and $6.0, respectively.........      202.3       169.4
      Other................................................................................      251.6       116.0
   Inventories.............................................................................      451.3       590.7
   Prepaid expenses and other current assets...............................................      203.1       192.7
                                                                                            ----------- -----------
        Total current assets...............................................................    1,506.1     1,402.8
Property, plant and equipment, net of accumulated depreciation of $1,033.0 and
      $977.9, respectively.................................................................    1,331.3     1,222.2
Timber and timberlands, net of accumulated depletion of $183.8 and $180.6,
   respectively............................................................................      244.3       254.1
Investments in and advances to unconsolidated affiliates...................................       85.5       112.6
Deferred income taxes......................................................................      553.1       549.1
Restricted cash, marketable securities and other investments...............................      106.3       159.0
Long-term receivables and other assets.....................................................      677.4       693.3
                                                                                            ----------- -----------
                                                                                            $  4,504.0  $  4,393.1
                                                                                            =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable........................................................................ $    248.7  $    243.1
   Accrued interest........................................................................       70.1        72.4
   Accrued compensation and related benefits...............................................      180.8       124.8
   Other accrued liabilities...............................................................      313.5       194.7
   Payable to affiliates...................................................................       78.3        85.8
   Short-term borrowings and current maturities of long-term debt..........................      100.6        46.0
                                                                                            ----------- -----------
        Total current liabilities..........................................................      992.0       766.8
Long-term debt, less current maturities....................................................    1,882.8     1,956.8
Accrued postretirement medical benefits....................................................      667.4       688.9
Other noncurrent liabilities...............................................................      779.9       810.1
                                                                                            ----------- -----------
        Total liabilities..................................................................    4,322.1     4,222.6
                                                                                            ----------- -----------
Commitments and contingencies
Minority interests.........................................................................      132.8       142.7
Stockholders' equity:
   Preferred stock, $0.50 par value; 12,500,000 shares authorized; Class A $0.05
      Non-Cumulative Participating Convertible Preferred Stock; 669,355 shares issued......        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.....................................................................      (68.2)     (102.1)
   Accumulated other comprehensive loss....................................................       (0.5)       (0.7)
    Treasury stock, at cost (shares held:  preferred - 845; common - 3,315,008
      and 2,805,608, respectively).........................................................     (112.8)     (100.0)
                                                                                            ----------- -----------
        Total stockholders' equity.........................................................       49.1        27.8
                                                                                            ----------- -----------
                                                                                            $  4,504.0  $  4,393.1
                                                                                            =========== ===========


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


                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
               (In millions of dollars, except share information)


                                                                                    Years Ended December 31,
                                                                             --------------------------------------
                                                                                2000         1999          1998
                                                                             -----------  -----------  ------------
Net sales:
   Aluminum................................................................  $  2,169.8   $  2,083.6   $   2,302.4
   Forest products.........................................................       200.1        187.8         233.6
   Real estate.............................................................        47.2         52.0          58.6
   Racing..................................................................        30.9         27.3          24.1
                                                                             -----------  -----------  ------------
                                                                                2,448.0      2,350.7       2,618.7
                                                                             -----------  -----------  ------------
Cost and expenses:
   Cost of sales and operations:
      Aluminum.............................................................     1,798.3      1,898.5       1,952.2
      Forest products......................................................       157.4        159.5         155.3
      Real estate..........................................................        24.1         29.7          33.5
      Racing...............................................................        19.5         15.9          15.7
   Selling, general and administrative expenses............................       168.7        170.4         171.0
   Impairment of assets....................................................        51.2         19.8          45.0
   Depreciation, depletion and amortization................................        98.2        108.4         120.4
                                                                             -----------  -----------  ------------
                                                                                2,317.4      2,402.2       2,493.1
                                                                             -----------  -----------  ------------

Operating income (loss)....................................................       130.6        (51.5)        125.6

Other income (expense):
   Gains on sales of timberlands...........................................        60.0        239.8             -
   Gain on involuntary conversion at Gramercy facility.....................           -         85.0             -
   Investment, interest and other income (expense), net....................        62.7         18.3          36.3
   Interest expense........................................................      (185.9)      (190.1)       (201.3)
   Amortization of deferred financing costs................................        (7.1)        (7.0)         (7.2)
                                                                             -----------  -----------  ------------
Income (loss) before income taxes and minority interests ..................        60.3         94.5         (46.6)
Credit (provision) for income taxes........................................       (27.1)       (43.7)         32.1
Minority interests.........................................................        (3.2)        22.8          (0.2)
                                                                             -----------  -----------  ------------
Income (loss) before extraordinary items...................................        30.0         73.6         (14.7)
Extraordinary items:
   Loss on early extinguishment of debt, net of income tax benefit
        of $22.9...........................................................           -            -         (42.5)
   Gains on repurchases of debt, net of income tax provision of $2.4.......         3.9            -             -
                                                                             -----------  -----------  ------------
Net income (loss)..........................................................  $     33.9   $     73.6   $     (57.2)
                                                                             ===========  ===========  ============

Basic earnings (loss) per common share:
   Income (loss) before extraordinary items................................  $     4.34   $    10.49   $     (2.10)
   Extraordinary items.....................................................        0.57            -         (6.07)
                                                                             -----------  -----------  ------------
   Net income (loss).......................................................  $     4.91   $    10.49   $     (8.17)
                                                                             ===========  ===========  ============

Diluted earnings (loss) per common and common equivalent share:
   Income (loss) before extraordinary items................................  $     3.95   $     9.49   $     (2.10)
   Extraordinary items.....................................................        0.52            -         (6.07)
                                                                             -----------  -----------  ------------
   Net income (loss).......................................................  $     4.47   $     9.49   $     (8.17)
                                                                             ===========  ===========  ============



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

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

Balance, December 31, 1999.......       0.3     7.0        5.0    225.3    (102.1)    (0.7)   (100.0)    27.8
   Net income....................         -       -          -        -      33.9        -         -     33.9   $ 33.9
   Increase in pension liability.         -       -          -        -         -     (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
                                  ========== ======= =========  ======== ========= ======== ========= ========




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



                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (In millions of dollars)


                                                                                         Years Ended December 31,
                                                                                       ----------------------------
                                                                                         2000      1999      1998
                                                                                       --------  --------  --------
Cash flows from operating activities:
   Net income (loss).................................................................. $  33.9   $  73.6   $ (57.2)
   Adjustments to reconcile net income (loss) to net cash provided
      by (used for) operating activities:
      Depreciation, depletion and amortization........................................    98.2     108.4     120.4
      Non-cash impairments - aluminum operations......................................    63.2      19.8      45.0
      Extraordinary loss (gains) on early extinguishments (repurchases) of debt, net..    (3.9)        -      42.5
      Stock-based compensation expense................................................       -      11.7         -
      Net gains on marketable securities..............................................   (27.9)    (18.2)     (8.6)
      Gains on sales of timberlands...................................................   (60.0)   (239.8)        -
      Gain on involuntary conversion at Gramercy facility.............................       -     (85.0)        -
      Net gains on other asset dispositions...........................................   (51.9)    (45.3)        -
      Minority interests..............................................................     3.2     (22.8)      0.2
      Amortization of deferred financing costs and discounts on long-term debt........     7.1       7.3      17.9
      Equity in (earnings) loss of unconsolidated affiliates, net of dividends received   18.7      (4.6)     (0.5)
      Increase (decrease) in cash resulting from changes in:
        Receivables...................................................................  (167.5)     24.4      70.1
        Inventories...................................................................   113.7      (4.7)     38.7
        Prepaid expenses and other assets.............................................    18.2     (60.4)     24.3
        Accounts payable..............................................................   (29.1)     59.9      (4.7)
        Accrued and deferred income taxes.............................................     5.3      19.7     (23.9)
        Payable to affiliates and other accrued liabilities...........................    66.9      16.8     (47.4)
        Accrued interest..............................................................    (2.3)        -       4.0
        Long-term assets and long-term liabilities....................................   (66.0)     20.7     (53.7)
      Other...........................................................................    19.0      (6.6)      4.3
                                                                                       --------  --------  --------
        Net cash provided by (used for) operating activities..........................    38.8    (125.1)    171.4
                                                                                       --------  --------  --------
Cash flows from investing activities:
   Net proceeds from dispositions of property and investments.........................   252.2     375.1      23.1
   Net sales (purchases) of marketable securities.....................................    42.0      (4.8)     73.8
   Capital expenditures, net of accounts payable of $34.6 in 2000.....................  (288.3)    (95.8)   (122.1)
   Restricted cash withdrawals used to acquire timberlands............................     0.8      12.9       8.9
   Investments in subsidiaries and joint ventures.....................................    (2.6)        -     (10.6)
   Other..............................................................................     2.7      (3.3)      2.9
                                                                                       --------  --------  --------
        Net cash provided by (used for) investing activities..........................     6.8     284.1     (24.0)
                                                                                       --------  --------  --------
Cash flows from financing activities:
   Proceeds from issuances of long-term debt..........................................    32.4       2.9     875.5
   Premiums for early retirement of debt..............................................       -         -     (45.5)
   Redemptions, repurchases of and principal payments on long-term debt...............   (44.6)    (19.6)   (804.0)
   Net borrowings under revolving and short-term credit facilities....................    62.2      10.4      16.0
   Restricted cash withdrawals (deposits), net........................................     0.2    (170.3)      7.3
   Treasury stock repurchases.........................................................   (12.8)        -     (35.1)
   Incurrence of deferred financing costs.............................................    (2.5)     (0.7)    (23.4)
   Other..............................................................................    (3.0)     (0.2)     (8.6)
                                                                                       --------  --------  --------
        Net cash provided by (used for) financing activities..........................    31.9    (177.5)    (17.8)
                                                                                       --------  --------  --------
Net increase (decrease) in cash and cash equivalents..................................    77.5     (18.5)    129.6
Cash and cash equivalents at beginning of year........................................   275.7     294.2     164.6
                                                                                       --------  --------  --------
Cash and cash equivalents at end of year.............................................. $ 353.2   $ 275.7   $ 294.2
                                                                                       ========  ========  ========

   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", 63% owned as of December 31, 2000), 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 Puerto
      Rico, Arizona and California.

-     Racing operations, through Sam Houston Race Park, Ltd. ("SHRP, LTD."), a
      Texas limited partnership, in which the Company owned a 99.0% interest as
      of December 31, 2000.  SHRP, Ltd. owns and operates a Class 1 pari-mutuel
      horse racing facility in the greater Houston metropolitan area.  SHRP,
      Ltd. also owns and operates Valley Race Park, 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.

      Liquidity and Cash Resources
      Kaiser has significant near-term debt maturities, and Kaiser's ability to
make payments on and refinance its debt depends on its ability to generate cash
in the future. In addition to being impacted by power sales and normal operating
items, Kaiser's near-term liquidity and cash flows will also be affected by the
Gramercy incident, net payments for asbestos-related liabilities and possible
proceeds from asset dispositions. For discussions of these matters, see Notes 3,
5, 12 and 17.

      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 17 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. In
addition, net sales and cost of sales and operations for 1999 and 1998 which are
attributable to the Company's aluminum operations have been restated to conform
to a new accounting principle that requires freight charges to be included in
cost of sales and operations. The amount of such restatement was $39.3 million
and $46.0 million for 1999 and 1998, respectively.

   Summary of Significant Accounting Policies

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

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

      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.

      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 No. 66, "Accounting for Sales of Real Estate."
In accordance with SFAS 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
      Hedging transactions using derivative financial instruments are primarily
designed to mitigate Kaiser's exposure to changes in prices for certain of the
products which Kaiser sells and consumes and, to a lesser extent, to mitigate
Kaiser's exposure to changes in foreign currency exchange rates. Kaiser does not
utilize derivative financial instruments for trading or other speculative
purposes. Kaiser's derivative activities are initiated within guidelines
established by Kaiser's management and approved by Kaiser's board of directors.
Hedging transactions are executed centrally on behalf of all of Kaiser's
business segments to minimize transaction costs, monitor consolidated net
exposures and allow for increased responsiveness to changes in market factors.

      Most of Kaiser's hedging activities involve the use of option contracts
(which establish a maximum and/or minimum amount to be paid or received) and
forward sales contracts (which effectively fix or lock-in the amount Kaiser will
pay or receive). Option contracts typically require the payment of an up-front
premium in return for the right to lock-in a minimum or maximum price. Forward
sales contracts do not require an up-front payment and are settled by the
receipt or payment of the amount by which the price at the settlement date
varies from the contract price. Consistent with guidelines in place through
December 31, 2000, 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 reflected 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 be 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 1998, 1999 or 2000.

      Deferred gains or losses as of December 31, 2000, were included in prepaid
expenses and other current assets and other accrued liabilities. See Note 18.

      Beginning with the quarterly period ending March 31, 2001, the Company
will begin reporting derivative activities consistent with Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and Hedging Activities" ("SFAS NO. 133"). Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivatives and Certain
Hedging Activities-An Amendment of FASB Statement No. 133" ("SFAS NO. 138"),
which amends certain requirements of SFAS No. 133, was issued in June 2000. SFAS
No. 133 requires companies to recognize all derivative instruments as assets or
liabilities in the balance sheet and to measure those instruments at fair value.
Changes in the market value of the Company's derivative instruments represent
unrealized gains or losses. Such unrealized gains or losses will change based on
prevailing market prices at each subsequent balance sheet date, until the
transaction occurs. Under SFAS No. 133, these changes are reflected as an
increase or reduction in stockholders' equity through either other comprehensive
income or net income, depending on the nature of the hedging instrument used and
its effectiveness at offsetting changes in market prices for the hedged item. To
the extent that changes in the market value of the Company's hedging positions
are initially recorded in other comprehensive income, such changes are reversed
from other comprehensive income (net of any fluctuations in other "open hedging"
positions) and are reflected in traditional net income upon the occurrence of
the transactions to which the hedges relate. As of December 31, 2000, the amount
of the Company's other comprehensive income adjustments were not significant, so
there was not a significant difference between net income and comprehensive
income. However, differences between comprehensive income and net income may
become significant in future periods as a result of SFAS No. 133. In general,
SFAS No. 133 will result in material fluctuations in comprehensive income, net
income and stockholders' equity in periods of price volatility.

      SFAS No. 133 requires that as of the date of the initial adoption, the
difference between the market value of derivative instruments and the previous
carrying amount of those derivatives recorded on the Company's consolidated
balance sheet be reported in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle. As
previously discussed, this impact will be reflected in the Company's first
quarter 2001 financial statements. The adoption of SFAS No. 133 resulted in a
pre-tax benefit of $21.2 million to other comprehensive income and a pre-tax
charge of $18.9 million to earnings. See Note 18 for additional discussions
regarding Kaiser's derivatives.

      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. Diluted earnings (loss) per share calculations also include the
dilutive effect of the Class A Preferred Stock (which is convertible into Common
Stock) as well as common and preferred stock options.


                                                                                   Years Ended December 31,
                                                                         ------------------------------------------------
                                                                              2000            1999             1998
                                                                         --------------  --------------   ---------------
Weighted average common shares outstanding - Basic.....................    6,910,358       7,013,547      7,000,663
Weighted average number of common and common
   equivalent shares - Diluted.........................................    7,580,436(2)    7,755,147(2)   7,812,377(1)(2)

------------------
(1)  The impact of outstanding convertible stock and stock options of 811,714
     shares was excluded from the weighted average share calculation for the
     year ended December 31, 1998, as its effect would have been antidilutive.
(2)  Options to purchase 940,183, 496,083 and 81,475 shares of Common Stock
     outstanding during the years ended December 31, 2000, 1999 and 1998,
     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.    Segment Information

      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                 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
                             1998          2,302.4       233.6      58.6          24.1            -        2,618.7

Operating income (loss)      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)
                             1998             96.5        40.9         -           1.8        (13.6)         125.6

Investment, interest and
   other income (expense)    2000             (4.3)       20.5      24.7             -         21.8           62.7
                             1999            (35.9)       26.9      21.1          (0.2)         6.4           18.3
                             1998              3.5         9.7      15.8           0.7          6.6           36.3

Interest expense and
   amortization of deferred
   financing costs           2000            109.6        64.2       2.4             -         16.8          193.0
                             1999            110.1        66.5       2.2           0.5         17.8          197.1
                             1998            110.0        75.3       1.5           3.4         18.3          208.5

Depreciation, depletion
   and amortization          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
                             1998             93.2        22.5       3.2           1.0          0.5          120.4

Income (loss) before
   income taxes and
   minority interests        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
                             1998            (10.0)      (24.7)     14.4          (1.0)       (25.3)         (46.6)

Capital expenditures         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
                             1998             77.6        22.0      22.2           1.0          0.1          122.9

Investments in and advances
   to unconsolidated
   affiliates                2000             77.8           -       7.7             -            -           85.5
                             1999             96.9           -      15.7             -            -          112.6

Total assets                 2000          3,292.5       726.3     165.4          40.8        279.0        4,504.0
                             1999          3,142.7       843.8     190.4          38.0        178.2        4,393.1


      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, 2000, 1999 and 1998 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,
                                                                               ------------------------------------
                                                                                  2000         1999         1998
                                                                               -----------  ----------  -----------
Net gains on power sales (Note 5)............................................  $    159.5   $       -   $        -
Gramercy related items  (Note 3):
   Incremental maintenance...................................................       (11.5)          -            -
   Insurance deductibles, etc................................................           -        (5.0)           -
   LIFO inventory charge.....................................................        (7.0)          -            -
Impairment charges:
   Washington smelters (Note 5)..............................................       (33.0)          -            -

   Charges associated with product line exits................................       (18.2)          -            -
   Micromill (Note 6)........................................................           -       (19.1)       (45.0)
Restructuring charges........................................................        (9.4)          -            -
Labor settlement (2000) and incremental strike-related costs (1998)..........       (38.5)          -        (60.0)
                                                                               -----------  ----------  -----------
                                                                               $     41.9   $   (24.1)  $   (105.0)
                                                                               ===========  ==========  ===========

      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 restructuring charges represent employee benefit and other costs for
the elimination of approximately 50 jobs reflecting a reduced emphasis on
technology sales; reduced salaried employee requirements at Kaiser's Tacoma
facility given its current curtailment; and employee benefit and other costs
associated with the consolidation or elimination of certain corporate staff
functions. The corporate restructuring initiatives in 2000 involve a group of
approximately 50 employees. As of December 31, 2000, the total remaining
liability associated with both restructuring efforts was $2.8 million. It is
anticipated that all remaining costs will be incurred during 2001.

      The incremental strike-related costs in 1998 reflect the adverse impact on
the Company's profitability due to the USWA strike in September 1998.

      The aluminum segment's income (loss) before income taxes and minority
interests for the years ended December 31, 2000, 1999 and 1998 include 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,
                                                                                ------------------------------------
                                                                                   2000         1999         1998
                                                                                ----------   ----------   ----------
Asbestos-related charges (Note 17)..............................................$   (43.0)   $   (53.2)   $   (12.7)
Gain on sale of Pleasanton complex (Note 6).....................................     22.0            -            -
Lease obligation adjustment (Note 17)...........................................     17.0            -            -
Mark-to-market gains (losses) (Note 18).........................................     11.0        (32.8)           -
Gain on involuntary conversion at Gramercy facility.............................        -         85.0            -
Gain on sale of interests in AKW (Note 6).......................................        -         50.5            -
Environmental cost insurance recoveries.........................................        -            -         12.0
All other, net..................................................................    (11.3)        (0.4)         4.2
                                                                                ----------   ----------   ----------
                                                                                $    (4.3)   $    49.1    $     3.5
                                                                                ==========   ==========   ==========

      Forest Products
      The forest products segment's income (loss) before income taxes and
minority interests included a non-recurring, non-operating pre-tax gain on the
sale of the Owl Creek grove of $60.0 million in December 2000 and a
non-recurring, non-operating pre-tax gain on the sale of the Headwaters
Timberlands of $239.8 million in March 1999. See Note 6.

      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 $19.2 million, $8.9 million and $8.9 million the years ended
December 31, 2000, 1999 and 1998, 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,
                                                                                -----------------------------------
                                                                                   2000        1999        1998
                                                                                ----------  ----------  -----------
Aluminum:
   Bauxite and alumina........................................................  $   590.5   $   524.8   $    581.0
   Primary aluminum...........................................................      806.0       673.5        624.2
   Flat-rolled products.......................................................      521.0       591.3        732.7
   Engineered products........................................................      564.9       556.8        595.3
   Commodities marketing......................................................      (25.4)       18.3         60.5
   Minority interests and eliminations........................................     (287.2)     (281.1)      (291.3)
                                                                                ----------  ----------  -----------
      Total aluminum sales....................................................  $ 2,169.8   $ 2,083.6   $  2,302.4
                                                                                ==========  ==========  ===========

Forest products:
   Lumber.....................................................................  $   175.3   $   165.3   $    211.6
   Other forest products......................................................       24.8        22.5         22.0
                                                                                ----------  ----------  -----------
      Total forest product sales..............................................  $   200.1   $   187.8   $    233.6
                                                                                ==========  ==========  ===========

Real estate:
   Real estate and development................................................  $    26.5   $    34.2   $     41.2
   Resort and other commercial operations.....................................       20.7        17.8         17.4
                                                                                ----------  ----------  -----------
      Total real estate sales.................................................  $    47.2   $    52.0   $     58.6
                                                                                ==========  ==========  ===========

Racing operations:
   Net commissions from wagering..............................................  $    20.3   $    18.1   $     16.2
   Other......................................................................       10.6         9.2          7.9
                                                                                ----------  ----------  -----------
      Total racing sales......................................................  $    30.9   $    27.3   $     24.1
                                                                                ==========  ==========  ===========

      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      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
                                         1998           2,060.3         237.0        89.8       231.6      2,618.7

Long-lived assets                        2000           1,266.4         290.3        80.8        73.8      1,711.3
                                         1999           1,174.8         288.2        84.1        90.2      1,637.3


      Major Customers and Export Sales
      For the years ended December 31, 2000, 1999 and 1998, sales to any one
customer did not exceed 10% of consolidated revenues. Export sales were less
than 10% of total revenues in 2000, 1999 and 1998.

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. In
connection with the settlement of the U.S. Mine Safety and Health
Administration's ("MSHA") investigation of the incident, Kaiser is paying a fine
of $0.5 million, but Kaiser has denied the alleged violations. 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.

      Kaiser has significant amounts of insurance coverage related to the
Gramercy incident. Deductibles and self-retention provisions under the insurance
coverage for the incident total $5.0 million, which amounts were charged to cost
of sales and operations in 1999 (Note 2). Kaiser's insurance coverage has five
separate components: property damage, clean-up and site preparation, business
interruption, liability and workers' compensation. The insurance coverage
components are discussed below.

      Property Damage
      Kaiser's insurance policies provide that Kaiser will be reimbursed for the
costs of repairing or rebuilding the damaged portion of the facility using new
materials of like kind and quality with no deduction for depreciation. 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 classified as
long-term receivables and other assets at December 31, 1999. The full amount of
the receivable was collected in 2000. Additional recoveries are possible. See
"Timing and Amount of Additional Insurance Recoveries" below.

      Clean-up and Site Preparation
      The Gramercy facility incurred incremental costs for clean up and other
activities during 1999 and 2000. These clean-up and site preparation activities
have been offset by accruals of approximately $24.0 million for estimated
insurance recoveries, of which $10.0 million was accrued in 2000.

      Business Interruption
      Kaiser's insurance policies provide for the reimbursement of specified
continuing expenses incurred during the interruption period plus lost profits
(or less expected losses) plus other expenses incurred as a result of the
incident. Operations at the Gramercy facility and a sister facility in Jamaica,
which supplies bauxite to Gramercy, will continue to incur operating expenses
until full production at the Gramercy facility is restored. Through December
2000, Kaiser purchased alumina from third parties, in excess of the amounts of
alumina available from other Kaiser-owned facilities, to supply these customers'
needs as well as to meet intersegment requirements. The excess cost of such open
market purchases was substantially offset by insurance recoveries. However, the
insurers have alleged that certain sublimits within Kaiser's insurance coverage
have been reached, and accordingly, any additional excess purchase costs
incurred in 2001 will be substantially unreimbursed. However, as the facility is
approaching 75% of its newly-rated production capacity, any such unreimbursed
costs will be limited. The insurers have also asserted that no additional
business interruption amounts are due after November 30, 2000. After considering
all of the foregoing items, Kaiser recorded expected business interruption
insurance recoveries totaling $151.0 million, of which $110.0 million was
recorded in the year ended December 31, 2000, as a reduction of cost of sales
and operations, which amounts substantially offset actual expenses incurred
during these periods. Such business interruption insurance amounts represent
estimates of Kaiser's business interruption coverage based on discussions with
the insurance carriers and their representatives and are therefore subject to
change. See "Timing and Amount of Additional Insurance Recoveries" below.

      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 had been completely curtailed. However, in accordance with
an agreement with Kaiser's insurers, during the second half of 2000, Kaiser
recorded a depreciation charge of $14.3 million, of which $1.5 million was
recorded in the fourth quarter, 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 has 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 have
agreed to reimburse Kaiser this amount. Since production at the facility was
partially restored during December 2000, normal depreciation has commenced. Such
depreciation will exceed prior historical rates primarily due to the capital
costs on the newly constructed assets.

      Liability
      The incident has also resulted in more than ninety 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. The aggregate amount of damages sought in the lawsuits and
other claims cannot be determined at this time; however, Kaiser does not believe
the damages will exceed the amount of coverage under its liability policies.

      Workers' Compensation
      While it is presently impossible to determine the aggregate amount of
claims that may be incurred, Kaiser believes that any amount in excess of the
coverage limitations will not have a material effect on its consolidated
financial position or liquidity. However, it is possible that as additional
facts become available, additional charges may be required and such charges
could be material to the period in which they are recorded.

      Timing and Amount of Additional Insurance Recoveries
      Through December 31, 2000, Kaiser had recorded $289.3 million of estimated
insurance recoveries related to the property damage, clean-up and site
preparation and business interruption aspects of the Gramercy incident and had
collected $252.6 million of such amounts. Through February 2001, an additional
$10.0 million had been received with respect to the estimated recoveries at
year-end 2000 and an additional $7.0 million is expected in March 2001. The
remaining balance of approximately $20.0 million and any additional amounts
possibly due to Kaiser are not expected to be recovered until Kaiser and the
insurers resolve their differences. Kaiser and the insurers are currently
negotiating an arbitration agreement as a means of resolving their differences.
Kaiser anticipates that the remaining issues will not be resolved until late
2001 or early 2002. Kaiser continues to believe that a minimum of approximately
$290.0 million of insurance recoveries are probable, that additional amounts are
owed to Kaiser by the insurers, and that the likelihood of any refund by Kaiser
of amounts previously received from the insurers is remote. However, no
assurances can be given as to the ultimate outcome of this matter or its impact
on Kaiser's near-term liquidity and results of operations.

      Kaiser does not intend to record any additional insurance-related
recoveries in 2001 unless and until agreed to by the insurers or until the
arbitration process is completed. As such, Kaiser's future operating results
will be adversely affected until all of the additional costs/lost profits
related to the Gramercy plant's start-up and return to full production are
eliminated or until any amounts related to 2001 ultimately determined to be due
to Kaiser through negotiation with the insurers or as a part of the arbitration
process are received.

      Other
      During the third quarter of 2000, Kaiser incurred approximately $11.5
million of normal recurring maintenance expenditures for the Gramercy facility
(which amounts were reflected in cost of sales and operations; see Note 2) that
otherwise would have been incurred in the ordinary course of business over the
next one to three years. Kaiser chose to undertake this maintenance now in order
to avoid normal operational outages that otherwise would have occurred once the
facility resumes production.

4.    Labor Dispute, Settlement and Related Costs

      Prior to the settlement of the labor dispute discussed below, Kaiser was
operating five of its U.S. facilities with salaried employees and other
employees as a result of the September 30, 1998, strike by the United
Steelworkers of America ("USWA") and the subsequent "lock-out" by Kaiser in
January 1999. The labor dispute was settled in September 2000. The Company has
recorded a one-time pre-tax charge of $38.5 million in its results of operations
for the year ended December 31, 2000, to reflect the incremental, non-recurring
impacts of the labor settlement, including severance and other contractual
obligations for non-returning workers. At December 31, 2000, the total remaining
liability associated with the labor settlement charge was $16.3 million. It is
anticipated that substantially all remaining costs will be incurred during 2001
or early 2002.

      During the period of the strike and subsequent lock-out, the Company
continued to accrue certain benefits (such as pension and other postretirement
benefit costs/liabilities) for the USWA members, which accruals were based on
the terms of the previous USWA contract. The difference between the amounts
accrued for the returning workers and the amounts agreed to in the settlement
with the USWA resulted in an approximate $33.6 million increase in the Company's
accumulated pension obligation and an approximate $33.4 million decrease in the
Company's accumulated other postretirement benefit obligations. In accordance
with generally accepted accounting principles in the United States, these
amounts will be amortized to expense over the employees' expected remaining
years of service.

      On March 1, 2001, in connection with the USWA settlement agreement, Kaiser
redeemed all of its Cumulative (1985 Series A) and Cumulative (1985 Series B)
Preference Stock. See Note 15.

5.    Pacific Northwest Power Sales and Operating Level

      Power Sales
      In response to the unprecedented high market prices for power in the
Pacific Northwest, Kaiser temporarily curtailed the primary aluminum production
at the Tacoma and Mead, Washington, smelters during the second half of 2000 and
sold a portion of the power that it had under contract through September 30,
2001. Kaiser recorded net pre-tax gains of approximately $159.5 million in 2000
as a result of these power sales. The net gain amounts were composed of gross
proceeds of $207.8 million, of which $88.0 million (included in receivables -
other at December 31, 2000) was received through February 28, 2001. The gross
proceeds were offset by employee-related expenses, incremental excess power
costs, a non-cash LIFO inventory charge and other fixed commitments, which
amounts are expected to be paid through September 2001. The resulting net gains
have been reflected in cost of sales and operations (see Note 2).

      In a series of transactions completed during the first quarter of 2001,
Kaiser agreed to sell a substantial majority of the remaining power that it had
under contract through September 2001. These power sales, before consideration
of any applicable non-energy costs (which have yet to be determined), are
expected to result in pre-tax gains, of approximately $260.0 million in the
first quarter of 2001. Approximately one-half of the net proceeds are expected
to be received in late March 2001, with the balance being received periodically
through October 2001. Kaiser continues to have power available for sale covering
the period from June 2001 through August 2001. Based on the forward price for
power experienced during the first quarter of 2001, the value of the remaining
power that Kaiser has under contract that can be sold is estimated to be between
$20.0 million and $40.0 million.

      Future Power Supply
      During October 2000, Kaiser signed a new power contract with the
Bonneville Power Administration ("BPA") under which the BPA will provide
Kaiser's operations in the State of Washington with power during the period from
October 2001 through September 2006. Power costs under the new contract are
expected to exceed the cost of power under Kaiser's current BPA contract by
between 20% to 60% and, perhaps, by as much as 100% in certain periods.
Additional provisions of the new BPA contract include a take-or-pay requirement,
an additional cost recovery mechanism under which Kaiser's base power rate could
be increased and clauses under which Kaiser's power allocation could be
curtailed, or its costs increased, in certain instances. Kaiser does not have
any remarketing rights under the new BPA contract. Kaiser has the right to
terminate the contract until certain pricing and other provisions of the BPA
contract are finalized, which is expected to occur in mid-2001.

      Depending on the ultimate price for power under the terms of the new BPA
contract or the availability of an alternate power supply at an acceptable
price, Kaiser may be unable to operate the Mead and Tacoma smelters in the near
or long-term. Under Kaiser's contract with the USWA, Kaiser is liable for
certain severance and supplemental unemployment benefits for laid-off workers.
Costs related to the period from January 1, 2001, to September 30, 2001, have
been accrued to the extent the costs were fixed and determinable. However,
Kaiser may become liable for additional costs. In particular, Kaiser would
become liable for certain early retirement benefits for the USWA workers at the
Mead and Tacoma facilities if such facilities are not restarted prior to late
2002 or early 2003. Such costs could be significant and would adversely impact
Kaiser's operating results and liquidity.


6.    Significant Acquisitions and Dispositions

      Kaiser's Acquisitions and Disposition
      During September 2000, Kaiser sold its Pleasanton, California, office
complex because the complex had become surplus to Kaiser's needs. Net proceeds
from the sale were approximately $51.6 million and resulted in a net pre-tax
gain of $22.0 million which is included in investment, interest and other income
(expense) net.

      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, consisting of cash payments of $15.1 million and
assumed current liabilities of $1.0 million. The purchase price was allocated to
the assets acquired based on their estimated fair values, of which approximately
$1.1 million was allocated to property, plant and equipment and $2.8 million was
allocated to receivables, inventory and prepaid expenses. The excess of the
purchase price over the fair value of the assets acquired (goodwill) was
approximately $12.2 million and is being amortized on a straight-line basis over
20 years. Total revenues for the Chandler facility were approximately $13.8
million for the year ended December 31, 1999 (unaudited).

      During the quarter ended March 31, 2000, Kaiser, in the ordinary course of
business, sold certain non-operating properties for total proceeds of
approximately $12.0 million. The sale did not have a material impact on Kaiser's
operating results for the year ended December 31, 2000 (see Note 2).

      In February 2000, Kaiser completed the sale of 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 did not have a material impact on Kaiser's 2000 operating results (see Note
2).

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

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

      Headwaters Transactions
      On March 1, 1999, the United States and California acquired the Headwaters
Timberlands, approximately 5,600 acres of timberlands containing a significant
amount of virgin old growth timber, from Pacific Lumber and its wholly owned
subsidiary, Salmon Creek. Salmon Creek received $299.9 million for its 4,900
acres, and for its 700 acres Pacific Lumber received the 7,700 acre Elk River
Timberlands, which Pacific Lumber contributed to Scotia LLC in June 1999. See
Note 17 below for a discussion of additional agreements entered into on March 1,
1999.

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

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

      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, was sold for $22.4 million resulting in a pre-tax gain of
approximately $11.3 million.

7.    Cash, Marketable Securities and Other Investments

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

      Marketable securities consist primarily of investments in debt securities
and long and short positions in corporate common stocks and option contracts.
The Company determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Debt securities are classified as "held-to-maturity" when
the Company has the positive intent and ability to hold the securities to
maturity. Debt securities which the Company does not have the intent or ability
to hold to maturity are classified as "available-for-sale." "Held-to-maturity"
securities are stated at amortized cost. Debt securities classified as
"held-to-maturity" as of December 31, 2000 and 1999, totaled $18.9 million and
$169.1 million, respectively, and had a fair market value of $18.9 million and
$168.5 million, respectively. "Available-for-sale" securities are carried at
fair market value, with the unrealized gains and losses included in other
comprehensive income and reported in 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, 2000 were: 2000
- net unrealized gains of $1.0 million and net realized gains of $24.5 million;
1999 - net unrealized losses of $1.4 million and net realized gains of $18.8
million; and 1998 - net unrealized losses of $3.8 million and net realized gains
of $11.9 million.

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

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


                                                                                               December 31,
                                                                                       ----------------------------
                                                                                           2000           1999
                                                                                       ------------- --------------
Current assets:
   Cash and cash equivalents:
      Amounts held as security for short positions in marketable securities..........  $       30.9  $        44.8
      Other restricted cash and cash equivalents.....................................          36.7            9.3
                                                                                       ------------- --------------
                                                                                               67.6           54.1
                                                                                       ------------- --------------
   Marketable securities, restricted:
      Amounts held in SAR Account....................................................          16.3           15.9
                                                                                       ------------- --------------

Long-term restricted cash, marketable securities and other investments:
   Amounts held in SAR Account.......................................................         144.4          153.2
   Amounts held in Prefunding Account................................................           2.5            3.3
   Other amounts restricted under the Timber Notes Indenture.........................           0.4            0.4
   Other long-term restricted cash...................................................          11.7            2.1
   Less: Amounts attributable to Timber Notes held in SAR Account....................         (52.7)             -
                                                                                       ------------- --------------
                                                                                              106.3          159.0
                                                                                       ------------- --------------

Total restricted cash and marketable securities......................................  $      190.2  $       229.0
                                                                                       ============= ==============

        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 Pacific Company LLC's (a
limited liability company wholly owned by Pacific Lumber, "SCOTIA LLC") Class
A-1, Class A-2 and Class A-3 Timber Collateralized Notes due 2028 (the "TIMBER
NOTES"). See Note 12 for further discussion on the SAR Account. Amounts held in
the "Prefunding Account" by the trustee are to be used by Scotia LLC to acquire
additional timberlands. The current portion of the SAR Account is determined
based on the liquidity needs of Scotia LLC which corresponds directly with the
current portion of Scheduled Amortization.

8.    Inventories

      Inventories are stated at the lower of cost or market. Cost for the
aluminum and forest products operations inventories is primarily determined
using the last-in, first-out ("LIFO") method 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,
                                                                                               --------------------
                                                                                                 2000       1999
                                                                                               ---------  ---------
Aluminum operations:
   Finished fabricated products............................................................... $   54.6   $  118.5
   Primary aluminum and work in process.......................................................    126.9      189.4
   Bauxite and alumina........................................................................     88.6      124.1
   Operating supplies and repair and maintenance parts........................................    126.1      114.1
                                                                                               ---------  ---------
                                                                                                  396.2      546.1
                                                                                               ---------  ---------
Forest products operations:
   Lumber.....................................................................................     34.0       23.2
   Logs.......................................................................................     21.1       21.4
                                                                                               ---------  ---------
                                                                                                   55.1       44.6
                                                                                               ---------  ---------
                                                                                               $  451.3   $  590.7
                                                                                               =========  =========

      Inventories at December 31, 2000 have been reduced by LIFO inventory
charges totaling $24.1 million. The non- recurring LIFO 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).

9.    Property, Plant and Equipment

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

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


                                                                                                 December 31,
                                                                         Estimated Useful   -----------------------
                                                                               Lives           2000        1999
                                                                         -----------------  ----------  -----------
Land and improvements...................................................     5 - 30 years   $   207.9   $    236.2
Buildings...............................................................     5 - 45 years       278.4        303.6
Machinery and equipment.................................................     3 - 22 years     1,744.1      1,590.8
Construction in progress................................................                        133.9         69.5
                                                                                            ----------  -----------
                                                                                              2,364.3      2,200.1
Less:  accumulated depreciation.........................................                     (1,033.0)      (977.9)
                                                                                            ----------  -----------
                                                                                            $ 1,331.3   $  1,222.2
                                                                                            ==========  ===========


      Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was $88.8 million, $101.5 million and $97.7 million, respectively.

      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 5).
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. The estimated fair value was based on anticipated
future cash flows discounted at a rate commensurate with the risk involved.

      As a result of the changes in strategic course in 1999 and 1998, the
carrying value of the Micromill assets was reduced by recording impairment
charges of $19.1 million and $45.0 million in 1999 and 1998, respectively.

10.     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 Queensland Alumina Limited ("QAL") (28.3%
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, 2000 and 1999, Kaiser's net receivables from
these affiliates were not material. In addition, the1999 and 1998 summary income
statement information includes results for AKW which was sold on April 1, 1999
(see Note 6). The Company's equity in earnings of AKW was $2.5 million and $7.8
million for the years ended December 31, 1999 and 1998, respectively.

      Kaiser was a founding partner (during 2000) in MetalSpectrum, LLC, an
independent neutral online site to serve manufacturers, distributors and
customers in the specialty metals business. Since Kaiser's interest in
MetalSpectrum is less than 10%, it is being accounted for on the cost basis.


                                                                                                 December 31,
                                                                                            -----------------------
                                                                                               2000         1999
                                                                                            ----------  -----------
                                                                                           (In millions of dollars)
Current assets............................................................................  $   350.1   $    370.4
Long-term assets (primarily property, plant and equipment, net)...........................      327.3        344.1
                                                                                            ----------  -----------
   Total assets...........................................................................  $   677.4   $    714.5
                                                                                            ==========  ===========

Current liabilities.......................................................................  $   144.1   $    120.4
Long-term liabilities (primarily long-term debt)..........................................      331.4        368.3
Stockholders' equity......................................................................      201.9        225.8
                                                                                            ----------  -----------
   Total liabilities and stockholders' equity.............................................  $   677.4   $    714.5
                                                                                            ==========  ===========


                                                                                      Years Ended December 31,
                                                                               ------------------------------------
                                                                                  2000         1999        1998
                                                                               -----------  ----------  -----------
                                                                                     (In millions of dollars)
Net sales..................................................................... $    602.9   $   594.9   $    659.2
Costs and expenses............................................................     (617.1)     (582.9)      (651.7)
Credit (provision) for income taxes...........................................       (4.5)        0.8         (2.7)
                                                                               -----------  ----------  -----------
Net income (loss)............................................................. $    (18.7)  $    12.8   $      4.8
                                                                               ===========  ==========  ===========

Kaiser's equity in earnings (loss)............................................ $     (4.8)  $     4.9   $      5.4
                                                                               ===========  ==========  ===========

Dividends received............................................................ $      8.3   $       -   $      5.5
                                                                               ===========  ==========  ===========


      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, 1999 and 1998.

      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
$235.7 million, $223.7 million, and $235.1 million, in the years ended December
31, 2000, 1999, and 1998, respectively.

      Other Investees
      The Company and Westbrook Firerock LLC ("WESTBROOK") each holds a 50%
interest in a joint venture which develops and manages a real estate project in
Arizona. At December 31, 2000, the joint venture had assets of $41.7 million,
liabilities of $25.3 million and equity of $16.4 million. At December 31, 1999,
the joint venture had assets of $43.1 million, liabilities of $17.4 million and
equity of $25.7 million. For the years ended December 31, 2000 and 1999, the
joint venture had income of $9.7 million and $3.7 million, respectively. For the
year ended December 31, 1998, the joint venture's income was not significant.

      The Company and SunCor Development Company ("SUNCOR") each hold a 50%
interest in a joint venture which develops and manages a real estate project in
Arizona. At December 31, 2000, the joint venture had assets of $11.3
million, liabilities of $8.5 million and equity of $2.8 million. At December 31,
1999, the joint venture had assets of $19.7 million, liabilities of $10.2
million and equity of $9.5 million. For the years ended December 31, 2000, 1999
and 1998, the joint venture had income of $1.3 million, $4.8 million and $3.8
million, respectively.

11.   Short-term Borrowings

      During 2000 and 1999, the Company had average short-term borrowings
outstanding of $14.7 million and $18.5 million, respectively, under the debt
instruments described below. The weighted average interest rate during 2000 and
1999 was 8.4% and 7.2%, respectively.

      MAXXAM Loan Agreement (the "CUSTODIAL TRUST AGREEMENT")
      As of December 31, 2000, the Company had borrowings of $13.4 million
outstanding under the Custodial Trust Agreement. This term loan bears interest
at LIBOR plus 2% per annum and is secured by 7,915,000 shares of Kaiser common
stock. The loan matures on October 22, 2001.

      Pacific Lumber Credit Agreement
      The "PACIFIC LUMBER CREDIT AGREEMENT," a senior secured credit facility
which expires on October 31, 2001, allows for borrowings of up to $60.0 million,
all of which may be used for revolving borrowings, $20.0 million of which may be
used for standby letters of credit and $30.0 million of which may be used for
timberland acquisitions. Borrowings are secured by all of Pacific Lumber's
domestic accounts receivable and inventory. Borrowings for timberland
acquisitions are also secured by the acquired timberlands and, commencing in
April 2001, are to be repaid annually from 50% of Pacific Lumber's excess cash
flow (as defined). The remaining excess cash flow is available for dividends.
Upon maturity of the facility, all outstanding borrowings used for timberland
acquisitions will convert to a term loan repayable over four years. As of
December 31, 2000, borrowings of $37.0 million and letters of credit of $12.5
million were outstanding, and no borrowings were available under the agreement.

      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, 2000, the
Required Liquidity Amount was $62.0 million. The Scotia LLC Line of Credit
expires on July 15, 2001. Annually, Scotia LLC will request that the banks
extend the Scotia LLC Line of Credit for a period of not less than 364 days. If
not extended, Scotia LLC may draw upon the full amount available. Borrowings
under the Scotia LLC Line of Credit generally bear interest at the Base Rate (as
defined in the agreement) plus 0.25% or at a one month or six month LIBOR rate
plus 1% at any time the borrowings have not been continually outstanding for
more than six months. As of December 31, 2000, Scotia LLC had no borrowings
outstanding under the Scotia LLC Line of Credit.

12.     Long-term Debt

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

                                                                                                 December 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------
KACC Credit Agreement.....................................................................  $    30.4   $     10.4
9 7/8% KACC Senior Notes due February 15, 2002, net of discount...........................      224.8        224.6
10 7/8% KACC Senior Notes due October 15, 2006, including premium.........................      225.5        225.6
12 3/4% KACC Senior Subordinated Notes due February 1, 2003...............................      400.0        400.0
Alpart CARIFA Loans.......................................................................       56.0         60.0
Other aluminum operations debt............................................................       52.7         52.2
12% MGHI Senior Secured Notes due August 1, 2003..........................................      118.8        125.2
6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028..................      136.7        152.6
7.11% Scotia LLC Class A-2 Timber Collateralized Notes due July 20, 2028..................      243.2        243.2
7.71% Scotia LLC Class A-3 Timber Collateralized Notes due July 20, 2028..................      463.3        463.3
Other notes and contracts, primarily secured by receivables, buildings, real estate
   and equipment..........................................................................       41.5         27.2
                                                                                            ----------  -----------
                                                                                              1,992.9      1,984.3
      Less: current maturities............................................................      (50.2)       (27.5)
           Timber Notes held in SAR Account...............................................      (59.9)           -
                                                                                            ----------  -----------
                                                                                            $ 1,882.8   $  1,956.8
                                                                                            ==========  ===========

      As of December 31, 2000 and 1999, the estimated fair value of debt,
including current maturities, was $1,636.8 million and $1,897.5 million,
respectively. The estimated fair value of debt is determined based on the quoted
market prices for the publicly traded issues and on the current rates offered
for borrowings similar to the other debt. Some of the Company's publicly traded
debt issues are thinly traded financial instruments; accordingly, their market
prices at any balance sheet date may not be representative of the prices which
would be derived from a more active market.

      1994 KACC Credit Agreement (as amended)
      KACC is able to borrow under this facility through August 15, 2001 by
means of revolving credit advances and letters of credit (up to $125.0 million)
in an aggregate amount equal to the lesser of $300.0 million or a borrowing base
relating to eligible accounts receivable plus eligible inventory. As of December
31, 2000, $155.3 million (of which $69.3 million could have been used for
letters of credit) was available under the KACC Credit Agreement. The KACC
Credit Agreement is unconditionally guaranteed by Kaiser and by certain
significant subsidiaries of KACC. Outstanding balances bear interest at a spread
(which varies based on the results of a financial test) over either a base rate
or LIBOR, at KACC's option. The interest rate at December 31, 2000 was 11.0%. As
of February 28, 2001, there were $94.0 million of borrowings outstanding under
the KACC Credit Agreement and remaining availability of approximately $120.0
million. However, proceeds of approximately $130.0 million related to 2001 power
sales are expected to be received at or near March 30, 2001, and an additional
$130.0 million of power proceeds will be received periodically through October
2001 with respect to other power sales made during the first quarter of 2001.

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

      It is Kaiser's intention to extend or replace the KACC Credit Agreement
prior to its expiration. However, in order for the KACC Credit Agreement to be
extended, on a short-term basis, beyond August 2001, Kaiser will have to have a
plan to retire and/or refinance the $225.0 million of KACC 9 7/8% Senior Notes
due February 2002 (the "KACC 9 7/8% SENIOR NOTES"). For the KACC Credit
Agreement to be extended past February 2003, both the KACC 9 7/8% Senior Notes
and the KACC 12 3/4% Senior Subordinated Notes due February 2003 (the "KACC
Senior Subordinated Notes"), will have to be retired and/or refinanced. As of
February 28, 2001, Kaiser had received approval from the KACC Credit Agreement
lenders to purchase up to $50.0 million of the KACC 9 7/8% Senior Notes. As of
February 28, 2001, Kaiser has purchased approximately $1.0 million of the KACC
9 7/8% Senior Notes. Kaiser is considering the possible sale of part or all of
its interest in certain operating assets. The contemplated transactions are in
various stages of development. Kaiser expects that at least one operating asset
will be sold. Kaiser has multiple transactions under way. It is unlikely,
however, that it would consummate all of the transactions under consideration.
Further, there can be no assurance as to the likelihood, timing or terms of such
sales. Kaiser would expect to use the proceeds from any such sales for debt
reduction, capital spending or some combination thereof.

      10 7/8 % KACC Senior Notes due 2006 (the "KACC 10 7/8% SENIOR NOTES"),
       9 7/8 % KACC Senior Notes and
      12 3/4 % KACC Senior Subordinated Notes (collectively, the "KACC NOTES")

      The KACC Notes, are guaranteed, jointly and severally, by certain
subsidiaries of KACC. The indentures governing the KACC Notes, (the "KACC
Indentures") restrict, among other things, KACC's ability to incur debt,
undertake transactions with affiliates, and pay dividends. Furthermore, the KACC
Indentures provide that KACC must offer to purchase the KACC Notes upon the
occurrence of a Change of Control (as defined therein).

      Alpart CARIFA Loans
      In December 1991, Alumina Partners of Jamaica ("ALPART," a majority owned
subsidiary of KACC) entered into a loan agreement with the Caribbean Basin
Projects Financing Authority ("CARIFA"). As of December 31, 2000, Alpart's
obligations under the loan agreement were secured by two letters of credit
aggregating $59.7 million. KACC was a party to one of the two letters of credit
in the amount of $38.8 million in respect of its ownership interest in Alpart.
Alpart has also agreed to indemnify bondholders of CARIFA for certain tax
payments that could result from events, as defined, that adversely affect the
tax treatment of the interest income on the bonds.

      During March 2000, Alpart redeemed $4.0 million principal amount of the
CARIFA loans. During March 2001, Alpart redeemed an additional $34.0 million
principal amount of the CARIFA loans, and accordingly, Kaiser's letter of credit
securing the loans was reduced to $15.3 million. The March 2001 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.

      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 March 15, 2001, the MGHI Notes are also secured by a
pledge of 25,055,775 shares of the Kaiser common stock owned by MGHI, the common
stock of MGI and the Intercompany Note (defined below). Interest on the MGHI
Notes is payable semi-annually.

      The net proceeds from the offering of the MGHI Notes after expenses were
approximately $125.0 million, all of which was loaned to 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, 2000, $47.0 million of interest had
been deferred and added to principal. An additional $9.0 million of interest was
deferred and added to principal on February 1, 2001.

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

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

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

      In connection with the sale of the Headwaters Timberlands, Salmon Creek
received proceeds of $299.9 million in cash. See Note 6. On November 18, 1999,
$169.0 million of funds from the sale of the Headwaters Timberlands were
contributed to Scotia LLC and set aside in the SAR Account. Amounts in the SAR
Account are part of the collateral securing the Timber Notes and will be used to
make principal payments to the extent that other available amounts are
insufficient to pay Scheduled Amortization on the Class A-1 and Class A-2 Timber
Notes. In addition, during the six years beginning January 20, 2014, amounts in
the SAR Account will be used to amortize the Class A-3 Timber Notes as set forth
in the Timber Notes Indenture, as amended. Funds may from time to time be
released to Scotia LLC from the SAR Account if the amount in the account exceeds
the then Required Scheduled Amortization Reserve Balance (as defined in the
Timber Notes Indenture). If the balance in the SAR Account falls below the
Required Scheduled Amortization Reserve Balance, up to 50% of any Remaining
Funds (funds that could otherwise be released to Scotia LLC free of the lien
securing the Timber Notes) is required to be used on each monthly deposit date
to replenish the SAR Account. The amount attributable to Timber Notes held in
the SAR Account of $52.7 million reflected in Note 7 represents $59.9 million
principal amount of reacquired Timber Notes. Repurchases made during the year
ended December 31, 2000, resulted in an extraordinary gain of $3.8 million, net
of tax.

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

      Maturities
      Scheduled maturities of long-term debt outstanding at December 31, 2000
are as follows (in millions):


                                                                  Years Ending December 31,
                                         --------------------------------------------------------------------------
                                            2001        2002        2003         2004         2005      Thereafter
                                         ----------  ----------- -----------  -----------  -----------  -----------
KACC Credit Agreement................... $    30.4   $        -  $        -   $        -   $        -   $        -
KACC 9 7/8% Senior Notes................         -        224.8           -            -            -            -
KACC 10 7/8% Senior Notes...............         -            -           -            -            -        225.5
KACC 12 3/4% Senior Subordinated Notes..         -            -       400.0            -            -            -
Alpart CARIFA Loans.....................         -            -           -            -            -         56.0
Other aluminum operations debt..........       1.2          0.2         0.2          0.2          0.2         50.7
MGHI Notes..............................        -             -       118.8            -            -            -
Timber Collateralized Notes.............      16.3         17.2        19.3         22.2         25.1        683.2
Other...................................       2.3          6.4         0.8          0.9          0.9         30.2
                                         ----------  ----------- -----------  -----------  -----------  -----------
                                         $    50.2   $    248.6  $    539.1   $     23.3   $     26.2   $  1,045.6
                                         ==========  =========== ===========  ===========  ===========  ===========


      Capitalized Interest
      Interest capitalized during the years ended December 31, 2000, 1999 and
1998 was $7.0 million, $3.5 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, 2000, 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 March 15, 2001, the Company and MGHI have
pledged a total of 32,970,775 shares of Kaiser common stock (representing a
41.4% interest in Kaiser) under various indentures and loan agreements.

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


                                                                                     Years Ended December 31,
                                                                                -----------------------------------
                                                                                   2000        1999         1998
                                                                                ----------  ----------  -----------
Domestic......................................................................      (44.2)  $   109.5   $   (118.7)
Foreign.......................................................................      104.5       (15.0)        72.1
                                                                                ----------  ----------  -----------
                                                                                     60.3   $    94.5   $    (46.6)
                                                                                ==========  ==========  ===========

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

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

                                                                                     Years Ended December 31,
                                                                                -----------------------------------
                                                                                   2000        1999        1998
                                                                                ----------  ----------  -----------
Current:
   Federal....................................................................  $    (1.8)  $    (0.6)  $     (1.8)
   State and local............................................................       (0.2)          -         (0.4)
   Foreign....................................................................      (35.3)      (23.1)       (16.5)
                                                                                ----------  ----------  -----------
                                                                                    (37.3)      (23.7)       (18.7)
                                                                                ----------  ----------  -----------
Deferred:
   Federal....................................................................       25.7        (8.9)        54.9
   State and local............................................................       (6.6)      (18.2)         8.4
   Foreign....................................................................       (8.9)        7.1        (12.5)
                                                                                ----------  ----------  -----------
                                                                                     10.2       (20.0)        50.8
                                                                                ----------  ----------  -----------
                                                                                $   (27.1)  $   (43.7)  $     32.1
                                                                                ==========  ==========  ===========

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


                                                                                     Years Ended December 31,
                                                                                -----------------------------------
                                                                                   2000        1999         1998
                                                                                ----------  ----------  -----------
Income (loss) before income taxes and minority interests .....................  $    60.3   $    94.5   $    (46.6)
                                                                                ==========  ==========  ===========

Amount of federal income tax credit (provision) based upon the statutory rate.  $   (21.1)  $   (33.1)  $     16.3
Revision of prior years' tax estimates and other changes in valuation
   allowances ................................................................       (2.3)        4.1         14.5
Percentage depletion..........................................................        3.0         2.8          3.2
Foreign taxes, net of federal tax benefit.....................................       (3.2)       (3.2)        (1.9)
State and local taxes, net of federal tax effect..............................       (3.2)      (12.7)        (0.6)
Other.........................................................................       (0.3)       (1.6)         0.6
                                                                                ----------  ----------  -----------
                                                                                $   (27.1)  $   (43.7)  $     32.1
                                                                                ==========  ==========  ===========

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

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


                                                                                                 December 31,
                                                                                               2000        1999
                                                                                            ----------  -----------
Deferred income tax assets:
   Postretirement benefits other than pensions............................................  $   271.9   $    279.3
   Loss and credit carryforwards..........................................................      266.2        254.2
   Other liabilities......................................................................      286.5        283.0
   Costs capitalized only for tax purposes................................................       63.0         63.7
   Real estate............................................................................       28.8         33.4
   Timber and timberlands.................................................................       28.1         32.2
   Other..................................................................................       30.7         38.7
   Valuation allowances...................................................................     (137.3)      (141.4)
                                                                                            ----------  -----------
      Total deferred income tax assets, net...............................................      837.9        843.1
                                                                                            ----------  -----------
Deferred income tax liabilities:
   Property, plant and equipment..........................................................     (112.1)      (109.5)
   Deferred gains on sales of timber and timberlands......................................     (130.4)      (104.3)
   Other..................................................................................      (43.6)       (85.7)
                                                                                            ----------  -----------
      Total deferred income tax liabilities...............................................     (286.1)      (299.5)
                                                                                            ----------  -----------
Net deferred income tax assets............................................................  $   551.8   $    543.6
                                                                                            ==========  ===========

      As of December 31, 2000, $464.2 million of the net deferred income tax
assets listed above are attributable to Kaiser. A principal component of this
amount is the $238.1 million tax benefit, net of certain valuation allowances,
associated with the accrual for postretirement benefits other than pensions. The
future tax deductions with respect to the turnaround of this accrual will occur
over a 30 to 40 year period. If such deductions create or increase a net
operating loss, Kaiser has the ability to carry forward such loss for 20 taxable
years. For reasons discussed below, the Company believes a long-term view of
profitability is appropriate and has concluded that this net deferred income tax
asset will more likely than not be realized. Included in the remaining $226.1
million of Kaiser's net deferred income tax assets is $101.4 million
attributable to the tax benefit of loss and credit carryforwards, net of
valuation allowances. A substantial portion of the valuation allowances for
Kaiser relate to loss and credit carryforwards. The Company evaluated all
appropriate factors to determine the proper valuation allowances for these
carryforwards, including any limitations concerning their use, the year the
carryforwards expire and the levels of taxable income necessary for utilization.
With regard to future levels of income, the Company believes that Kaiser, based
on the cyclical nature of its business, its history of operating earnings and
its expectations for future years, will more likely than not generate sufficient
taxable income to realize the benefit attributable to the loss and credit
carryforwards for which valuation allowances were not provided.

      The net deferred income tax assets listed above which are not attributable
to Kaiser are $87.6 million as of December 31, 2000. This amount includes $133.6
million attributable to the tax benefit of loss and credit carryforwards, net of
valuation allowances. The Company evaluated all appropriate factors in
determining the realizability of the deferred tax assets attributable to loss
and credit carryforwards, including any limitations on their use, the year the
carryforwards expire and the levels of taxable income necessary for utilization.
Based on this evaluation of the appropriate factors to determine the proper
valuation allowances for these carryforwards, the Company believes that it is
more likely than not that it will realize the benefit for the carryforwards for
which valuation allowances were not provided. The deferred income tax
liabilities related to deferred gains on sales of timber and timberlands are a
result of the sales of the Headwaters Timberlands (1999) and the Owl Creek grove
(2000).

      As of December 31, 2000 and 1999, $64.0 million and $51.1 million,
respectively, of the net deferred income tax assets listed above are included in
prepaid expenses and other current assets. Certain other portions of the
deferred income tax liabilities listed above are included in other accrued
liabilities and other noncurrent liabilities.

      The following table presents the estimated tax attributes for federal
income tax purposes at December 31, 2000 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...............................  $     24.2        2020   $       -            -
   Prior year net operating losses...............................       338.1        2019        84.9         2019
   General business tax credits..................................         0.2        2002         1.0         2011
   Foreign tax credits...........................................           -           -        67.1         2005
   Alternative minimum tax credits...............................         1.8  Indefinite        25.8   Indefinite

Alternative Minimum Tax Attribute Carryforwards:
   Current year net operating loss...............................  $     24.2        2020   $       -            -
   Prior year net operating losses...............................       344.2        2019        45.3         2019
   Foreign tax credits...........................................           -           -        89.8         2005


      The income tax credit (provision) related to other comprehensive income
was $(0.1) million and $0.7 million for the years ended December 31, 2000 and
1999, respectively. There was no tax provision related to other comprehensive
income for the year ended December 31, 1998.

14.     Employee Benefit and Incentive Plans

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

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

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


                                                                      Pension Benefits      Medical/Life Benefits
                                                                   -----------------------  -----------------------
                                                                               Years Ended December 31,
                                                                   ------------------------------------------------
                                                                      2000         1999        2000        1999
                                                                   -----------  ----------  ----------  -----------
Change in benefit obligation:
   Benefit obligation at beginning of year.......................  $    856.3   $   924.5   $   621.8   $    623.6
   Service cost..................................................        21.4        17.5         5.7          5.6
   Interest cost.................................................        64.5        63.5        45.5         42.0
   Plan participants' contributions..............................           -           -         1.1          0.4
   Actuarial (gain) loss.........................................        10.9       (51.6)       81.0         (1.0)
   Currency exchange rate change.................................           -        (5.7)          -            -
   Curtailments, settlements and amendments......................        33.7         0.4       (33.0)           -
   Benefits paid.................................................       (94.2)      (92.3)      (55.4)       (48.8)
                                                                   -----------  ----------  ----------  -----------
      Benefit obligation at end of year                                 892.6       856.3       666.7        621.8
                                                                   -----------  ----------  ----------  -----------

Change in plan assets:
   Fair value of plan assets at beginning of year................       916.1       850.1           -            -
   Actual return on assets.......................................       (20.4)      142.1           -            -
   Employer contributions........................................        10.8        16.2        54.3         48.4
   Plan participants' contributions..............................           -           -         1.1          0.4
   Benefits paid.................................................       (94.2)      (92.3)      (55.4)       (48.8)
                                                                   -----------  ----------  ----------  -----------
   Fair value of plan assets at end of year......................       812.3       916.1           -            -
                                                                   -----------  ----------  ----------  -----------

   Benefit obligation in excess of (less than) plan assets.......        80.3       (59.8)      666.7        621.8
   Unrecognized actuarial gain (loss)............................        36.9       152.5       (19.2)        60.9
   Unrecognized prior service costs..............................       (46.0)      (16.2)       78.2         57.8
   Adjustment required to recognize minimum liability............         1.8         1.2           -            -
   Intangible asset and other....................................         3.0         2.6           -            -
                                                                   -----------  ----------  ----------  -----------
      Accrued benefit liability..................................  $     76.0   $    80.3   $   725.7   $    740.5
                                                                   ===========  ==========  ==========  ===========


      With respect to Kaiser's pension plans, the benefit obligation was $835.8
million and $806.0 million as of December 31, 2000 and 1999, respectively. The
benefit obligation exceeded Kaiser's fair value of plan assets by $77.8 million
as of December 31, 2000. Kaiser's fair value of plan assets was less than this
obligation by $51.8 million as of December 31, 1999.

      The postretirement medical/life benefit obligation attributable to
Kaiser's plans was $658.2 million and $615.4 million as of December 31, 2000 and
1999, respectively. The postretirement medical/life benefit liability recognized
in the Company's Consolidated Balance Sheet attributable to Kaiser's plans was
$714.9 million and $729.8 million as of December 31, 2000 and 1999,
respectively.


                                                            Pension Benefits             Medical/Life Benefits
                                                     ------------------------------  ------------------------------
                                                                        Years Ended December 31,
                                                     --------------------------------------------------------------
                                                       2000       1999      1998       2000      1999       1998
                                                     ---------  --------  ---------  --------- ---------  ---------
Components of net periodic benefit costs:
   Service cost....................................  $   21.4   $  17.5   $   16.8   $    5.7  $    5.6   $    4.6
   Interest cost...................................      64.5      63.5       63.1       45.5      42.0       37.9
   Expected return on assets.......................     (81.9)    (76.3)     (72.3)         -         -          -
   Amortization of prior service costs.............       4.0       3.4        3.3      (12.9)    (12.1)     (12.5)
   Recognized net actuarial (gain) loss............      (2.5)      0.7        1.4       (0.3)     (0.2)      (7.2)
                                                     ---------  --------  ---------  --------- ---------  ---------
   Net periodic benefit costs......................       5.5       8.8       12.3       38.0      35.3       22.8
   Curtailments, settlements and other.............       0.1       0.4        3.2          -         -          -
                                                     ---------  --------  ---------  --------- ---------  ---------
      Adjusted net periodic benefit costs..........  $    5.6   $   9.2   $   15.5   $   38.0  $   35.3   $   22.8
                                                     =========  ========  =========  ========= =========  =========


      The net periodic pension costs attributable to Kaiser's plans was $3.6
million, $5.4 million and $9.1 million for the years ended December 31, 2000,
1999 and 1998, respectively.

      Included in the net periodic postretirement medical/life benefit cost is
$37.5million, $34.6 million and $22.2 million for the years ended December 31,
2000, 1999 and 1998, respectively, attributable to Kaiser's plans.

      The aggregate fair value of plan assets and accumulated benefit obligation
for pension plans with plan assets in excess of accumulated benefit obligations
were $843.7 million and $805.4 million, respectively, as of December 31, 2000,
and $836.4 million and $729.3 million, respectively, as of December 31, 1999.


                                                                    Pension Benefits        Medical/Life Benefits
                                                                ------------------------  -------------------------
                                                                             Years Ended December 31,
                                                                ---------------------------------------------------
                                                                  2000    1999     1998     2000     1999     1998
                                                                ------- -------  -------  -------  -------  -------
Weighted-average assumptions:
   Discount rate..............................................     7.8%    7.8%     7.0%     7.8%     7.8%    7.0%
   Expected return on plan assets.............................     9.5%    9.5%     9.5%       -        -       -
   Rate of compensation increase..............................     4.0%    4.0%     5.0%     4.0%     4.0%    4.0%


      In 2000, the average annual assumed rate of increase in the per capita
cost of covered benefits (i.e. health care cost trend rate) is 8.0% for all
participants. The assumed rate of increase is assumed to decline gradually to
5.0% in 2009 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, 2000 would have the following effects (in
millions):


                                                                                  1-Percentage-     1-Percentage-
                                                                                  Point Increase    Point Decrease
                                                                                 ----------------  ----------------
Effect on total of service and interest cost components......................... $       6.9       $    (5.1)
Effect on the postretirement benefit obligations................................        69.4           (49.0)

      Savings and Incentive Plans
      The Company has various defined contribution savings plans designed to
enhance the existing retirement programs of participating employees. Kaiser has
an unfunded incentive compensation program which provides incentive compensation
based upon performance against annual plans and over rolling three-year periods.
Expenses incurred by the Company for all of these plans were $7.7 million, $7.8
million and $9.3 million for the years ended December 31, 2000, 1999 and 1998,
respectively.

15.   Minority Interests

      Minority interests represent the following (in millions):


                                                                                                 December 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------
Kaiser:
   Common stock, par $.01.................................................................  $    31.7   $     25.0
   Minority interests attributable to Kaiser's subsidiaries...............................      101.1        117.7
                                                                                            ----------  -----------
                                                                                            $   132.8   $    142.7
                                                                                            ==========  ===========

      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. No additional Redeemable Preference Stock is expected to be issued. In
connection with the USWA settlement agreement (see Note 4), during March 2001,
Kaiser redeemed all of the Cumulative 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 $5.5 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,
2000 and 1999, outstanding shares of $100 Preference Stock were 9,250 and
19,538, respectively.

      Kaiser Common Stock Incentive Plans
      Kaiser has a total of 8,000,000 shares of Kaiser common stock reserved for
issuance under its incentive compensation programs. At December 31, 2000,
1,861,752 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.


                                           2000                        1999                        1998
                                --------------------------  --------------------------- ---------------------------
                                   Shares        Price         Shares        Price         Shares        Price
                                ------------  ------------  ------------  ------------- ------------- -------------
Outstanding at beginning of
   year.......................    4,239,210   $     10.24     3,049,122   $       9.98       819,752  $      10.45
Granted.......................      757,335         10.23     1,218,068          11.15     2,263,170          9.79
Exercised.....................            -                      (7,920)          7.25       (10,640)         7.25
Expired or forfeited..........     (620,598)        11.08       (20,060)         11.02       (23,160)         9.60
                                ------------                ------------                -------------
Outstanding at end of year....    4,375,947         10.24     4,239,210          10.24     3,049,122          9.98
                                ============                ============                =============

Exercisable at end of year....    2,380,491   $     10.18     1,763,852   $      10.17     1,261,262  $      10.09
                                ============                ============                =============

      Options exercisable at December 31, 2000, had exercise prices ranging from
$6.13 to $12.75 and a weighted average remaining contractual life of 3.4 years.

16.   Stockholders' Equity

      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 338,192 and
910,000 shares, respectively, were available to be awarded at December 31, 2000.
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 1998, 1999 and
2000 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.

                                           2000                        1999                        1998
                                --------------------------  --------------------------- ---------------------------
                                   Shares         Price        Shares         Price        Shares         Price
                                ------------  ------------  ------------  ------------- ------------- -------------
Outstanding at beginning of
   year.......................      401,400   $     44.36       302,000   $      41.88       296,800  $      38.47
Granted.......................      199,800         16.08       107,500          51.12        79,500         48.93
Exercised.....................            -             -        (6,600)         38.31       (53,200)        33.09
Expired or forfeited..........            -             -        (1,500)         56.00       (21,100)        42.03
                                ------------                ------------                -------------
Outstanding at end of year....      601,200         34.96       401,400          44.36       302,000         41.93
                                ============                ============                =============

Exercisable at end of year....      225,500   $     41.09       160,400   $      38.42       107,700  $      36.32
                                ============                ============                =============


      The following table summarizes information about stock options outstanding
as of December 31, 2000:


                                                       Weighted Average
        Range of                                          Remaining                    Weighted Average              Options
    Exercise Prices               Shares               Contractual Life                 Exercise Price             Exercisable
------------------------     -----------------    --------------------------       -------------------------     ----------------
    $15.90 - $16.38                   199,800              10.0 years                   $         16.08                       -
         $28.00                         6,000               1.9 years                             28.00                    6,000
    $30.38 - $45.50                   234,900               6.3 years                             39.59                  149,800
    $46.80 - $56.00                   160,500               7.1 years                             51.95                   69,700
                             -----------------                                                                   ----------------
                                      601,200               7.7 years                             34.96                  225,500
                             =================                                                                   ================

      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 2,300 shares of
common stock in 2000 and 1,800 shares for each of the years 1999 and 1998. The
weighted average exercise prices of these options are $26.19, $62.00 and $60.94
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, 2000, options for 6,000 shares were exercisable.

      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 Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company calculated pro forma
compensation cost for all stock options granted using the "fair value" method.
The fair values of the stock options granted were estimated using the
Black-Scholes option pricing model. The Company's pro forma income (loss) before
extraordinary item and diluted earnings per share before extraordinary items
would have been $25.5 million and $3.37 per share, respectively, for the year
ended December 31, 2000, $69.1 million and $8.91 per share, respectively, for
the year ended December 31, 1999, and $(17.8) million and $(2.54) per share,
respectively, for the year ended December 31, 1998.

      Shares Reserved for Issuance
      At December 31, 2000, the Company had 2,446,702 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, 2000, 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 99.1% of the Company's Class A Preferred Stock
and 42.4% of the Company's common stock (resulting in combined voting control of
approximately 70.6% 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.

17.   Commitments and Contingencies

      Commitments
      Minimum rental commitments under operating leases at December 31, 2000 are
as follows: years ending December 31, 2001 - $44.0 million; 2002 - $38.7
million; 2003 - $34.9 million; 2004 - $31.0 million; 2005 - $27.7 million;
thereafter - $80.5 million. Rental expense for operating leases was $48.6
million, $47.3 million and $39.6 million for the years ended December 31, 2000,
1999 and 1998, respectively. The minimum future rentals receivable under
noncancellable subleases at December 31, 2000 were $132.3 million.

      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

      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. The following
table presents the changes in such accruals, which are primarily included in
other noncurrent liabilities (in millions):


                                                                                     Years Ended December 31,
                                                                                -----------------------------------
                                                                                   2000        1999        1998
                                                                                ----------  ----------  -----------
Balance at beginning of year..................................................  $    48.9   $    50.7   $     29.7
Additional accruals...........................................................        2.6         1.6         24.5
Less expenditures.............................................................       (5.4)       (3.4)        (3.5)
                                                                                ----------  ----------  -----------
Balance at end of year........................................................  $    46.1   $    48.9   $     50.7
                                                                                ==========  ==========  ===========

      These environmental accruals represent Kaiser's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and Kaiser's
assessment of the likely remediation action to be taken. Kaiser expects that
these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $3.0 million to $12.0 million for the years 2001 through
2005 and an aggregate of approximately $21.0 million thereafter.

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

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

      The following table presents the changes in number of such claims pending
for the years ended December 31, 2000, 1999, and 1998.

                                                                                     Years Ended December 31,
                                                                                -----------------------------------
                                                                                   2000        1999        1998
                                                                                ----------  ----------  -----------
Number of claims at beginning of year.........................................    100,000      86,400       77,400
Claims received...............................................................     30,600      29,300       22,900
Claims settled or dismissed...................................................    (19,800)    (15,700)     (13,900)
                                                                                ----------  ----------  -----------
Number of claims at end of year...............................................    110,800     100,000       86,400
                                                                                ==========  ==========  ===========
Number of claims at end of period (included above) covered by agreements under
   which Kaiser expects to settle over an extended period.....................     66,900      31,900       30,000
                                                                                ==========  ==========  ===========


      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 2010). 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 2010 and, accordingly, no accrual has
been recorded for any costs which may be incurred beyond 2010, Kaiser expects
that such costs are likely to continue beyond 2010, 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 pace of claims review and processing by such
carriers and on the resolution of any disputes regarding coverage under such
policies. Kaiser believes that substantial recoveries from the insurance
carriers are probable. Kaiser reached this conclusion after considering its
prior insurance-related recoveries in respect of asbestos-related claims,
existing insurance policies, and the advice of Heller Ehrman White &
McAuliffe LLP with respect to applicable insurance coverage law relating to the
terms and conditions of those policies. 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. The litigation is intended, among other things, to:
(1) ensure that the insurers provide Kaiser with timely and appropriate
reimbursement payments for asbestos-related settlements and related legal costs
incurred; and (2) to resolve certain issues between the parties with respect to
how specific provisions of the applicable insurance policies are to be applied.
Given the significance of expected asbestos-related payments in 2001 and 2002
based on settlement agreements in place at December 31, 2000, the receipt of
timely and appropriate reimbursements from such insurers is critical to Kaiser's
liquidity. The court is not expected to try the case until late 2001 or 2002.
Kaiser is continuing to receive cash payments from the insurers.

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


                                                                                                December 31,
                                                                                         --------------------------
                                                                                            2000           1999
                                                                                         -----------   ------------
Liability (current portion of $130.0 and $53.0, respectively) ........................   $    492.4    $     387.8
Receivable (included in long-term receivables and other assets)(1) ...................       (406.3)        (315.5)
                                                                                         -----------   ------------

                                                                                         $     86.1    $      72.3
                                                                                         ===========   ============
----------------
(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, 2000 and 1999, $36.9 million and $25.0
      million, respectively, of the receivable amounts relate to costs paid. The
      remaining receivable amounts relate to costs that are expected to be paid
      by Kaiser in the future.


                                                                     Year Ended December 31,
                                                              ------------------------------------     Inception
                                                                 2000        1999         1998          To Date
                                                              ----------  ----------  ------------  ---------------
Payments made, including related legal costs...............   $    99.5   $    24.6   $      18.5   $        220.5
Insurance recoveries.......................................       (62.8)       (6.6)        (19.9)          (131.3)
                                                              ----------  ----------  ------------  ---------------
                                                              $    36.7   $    18.0   $      (1.4)  $         89.2
                                                              ==========  ==========  ============  ===============


                                                                                December 31, 2000
                                                              -----------------------------------------------------
                                                                 2001 and 2002        2003 to 2005      Thereafter
                                                              -------------------  ------------------   -----------
Expected annual payment amounts, before considering insurance
   recoveries.................................................  $110.0 - $135.0       $25.0 - $50.0       $125.0


      Kaiser continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from
Kaiser's underlying assumptions. This process resulted in Kaiser reflecting
charges of $43.0 million, $53.2 million, and $12.7 million (included in
investment, interest and other income (expense), net) in the years ended
December 31, 2000, 1999, and 1998, respectively, for asbestos-related claims,
net of expected insurance recoveries, based on recent cost and other trends
experienced by Kaiser and other companies. While uncertainties are inherent in
the final outcome of these asbestos matters and it is presently impossible to
determine the actual costs that ultimately may be incurred and insurance
recoveries that will be received, management believes that, based on the factors
discussed in the preceding paragraphs, the resolution of asbestos-related
uncertainties and the incurrence of asbestos-related costs net of related
insurance recoveries should not have a material adverse effect on the Company's
consolidated financial position or liquidity. However, as Kaiser's estimates are
periodically re-evaluated, additional charges may be necessary and such charges
could be material to the results of the period in which they are recorded.

      Labor Matters
      In connection with the USWA strike and subsequent lock-out by Kaiser,
which was settled in September 2000, certain allegations of unfair labor
practices ("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 commenced in November
2000 and is continuing. Kaiser is unable to estimate when the trial will be
completed. 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. 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. 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 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 the Company'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.

      Forest Products Operations
      Regulatory and environmental matters play a significant role in the
Company's forest products business, which is subject to a variety of California
and federal laws and regulations, as well as the HCP and SYP (defined below) and
Pacific Lumber's timber operator's license, dealing with timber harvesting
practices, threatened and endangered species and habitat for such species, and
air and water quality. As further described in Note 6, on March 1, 1999, Pacific
Lumber and the Company consummated the Headwaters Agreement with the United
States and California. In addition to the transfer of the Headwaters Timberlands
described in Note 6, a sustained yield plan (the "SYP") and a multiple- species
habitat conservation plan (the "HCP") were approved and incidental take permits
related to the HCP (the "PERMITS") were issued.

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

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

      Lawsuits are pending and threatened which seek to prevent the Company from
implementing the HCP and/or the SYP, implementing certain of the Company's
approved THPs or carrying out certain other operations. On December 2, 1997, a
lawsuit entitled Jennie Rollins, et al. v. Charles Hurwitz, John Campbell,
Pacific Lumber, MAXXAM Group Holdings Inc., Scotia Pacific Holding Company,
MAXXAM Group Inc., MAXXAM Inc., Barnum Timber Company, et al. (the "Rollins
lawsuit") was filed. On March 5, 2001, the parties in the Rollins lawsuit
reached an agreement to settle this matter. Substantially all of the amounts to
be paid to the plaintiffs will be paid by the Company's insurers. Still pending
is a similar lawsuit, also filed on December 2, 1997, entitled Kristi Wrigley,
et al. v. Charles Hurwitz, John Campbell, Pacific Lumber, MAXXAM Group Holdings
Inc., Scotia Pacific Holding Company, MAXXAM Group Inc., MAXXAM Inc., Scotia
Pacific Company LLC, et al. (the "Wrigley lawsuit"). This action alleges, among
other things, that the defendants' logging practices have contributed to an
increase in flooding and damage to domestic water systems in a portion of the
Elk River watershed.

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

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

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

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

      OTS Contingency and Related Matters
      On December 26, 1995, the United States Department of Treasury's Office of
Thrift Supervision ("OTS") initiated a formal administrative proceeding against
the Company and others by filing a Notice of Charges (the "NOTICE"). The Notice
alleges, among other things, misconduct by the Company, Federated, Mr. Charles
Hurwitz and others (the "RESPONDENTS") with respect to the failure of United
Savings Association of Texas ("USAT"), a wholly owned subsidiary of United
Financial Group ("UFG"). At the time of receivership, the Company owned
approximately 13% of the voting stock of UFG. The Notice claims, among other
things, that the Company was a savings and loan holding company, that with
others it controlled USAT, and that, as a result of such status, it was
obligated to maintain the net worth of USAT. The Notice makes numerous other
allegations against the Company and the other Respondents, including that
through USAT it was involved in prohibited transactions with Drexel Burnham
Lambert Inc. The hearing on the merits of this matter commenced on September 22,
1997 and concluded on March 1, 1999. On February 10, 1999, the OTS and FDIC
settled with all of the Respondents (except Mr. 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 claims, among other things, that the remaining Respondents, Mr.
Hurwitz, the Company and Federated, are jointly and severally liable to pay
either $821.3 million in restitution or reimbursement of $362.6 million for
alleged unjust enrichment. The OTS also claims that each remaining Respondent
should be required to pay $4.6 million in civil money penalties, and that Mr.
Hurwitz should be prohibited from engaging in the banking industry. The
Respondents' brief claims that none of them has any liability in this matter. A
recommended decision by the administrative law judge could be made at any time.
A final agency decision would thereafter be issued by the OTS Director. Such
decision would then be subject to appeal by any of the parties to the federal
appellate court.

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

      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, 2000, such fees
were in excess of $30.0 million.

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

      The Company has concluded that it is unable to determine a reasonable
estimate of the loss (or range of loss), if any, that could result from the OTS
and FDIC matters. Accordingly, it is impossible to assess the ultimate outcome
of these matters or their potential impact on the Company; however, any adverse
outcome of these matters could have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity. With
respect to the Kahn lawsuit, although it is impossible to assess the ultimate
outcome of this matter, 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.

18.   Derivative Financial Instruments and Related Hedging Programs

      In conducting its business, Kaiser uses various instruments, including
forward contracts and options, 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 with foreign subsidiaries and affiliates.

      As Kaiser's hedging activities are generally designed to lock-in a
specified price or range of prices, gains or losses on the derivative contracts
utilized in these hedging activities (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 will be followed for reporting results
beginning with the first quarter of 2001. The following table summarizes
Kaiser's hedging positions at December 31, 2000:


                                                                                    Estimated
                                                                                   Percent of
                                                                                  Annual Sales/
                                                                        Notional    Purchases   Carrying   Market
                 Commodity                           Period              Amount      Hedged       Value     Value
------------------------------------------ --------------------------- ---------- ------------- --------- ---------

Aluminum (in tons):
   Option contracts.......................            2001                362,000      82%(1)   $   18.2  $    3.1
   Option contracts.......................            2002                262,000      52%(1)       10.9      13.4
   Option contracts.......................            2003                 42,000       9%(1)        1.8       1.7

Energy-Natural gas (in MMBtu's per day):
   Option contracts and swaps.............  January 2001 to June 2001      27,900      24%           1.3      21.8

Foreign currency- Australian dollars (millions):
   Forwards and option contracts..........            2001               A$ 160.0      80%           1.4      (5.2)
   Options contract.......................        2002 to 2005           A$  90.0      56%          12.2      13.3

---------------------
(1)   As of February 28, 2001, the estimated percentages of annual sales of
      primary aluminum (equivalents) hedged for 2001, 2002 and 2003 were 82%,
      63% and 14%, respectively.

      During late 1999 and early 2000, Kaiser entered into a series of
transactions with a counterparty that provided Kaiser with a premium over the
forward market prices at the date of the transaction for 2,000 tons of primary
aluminum per month during the period January 2000 through June 2001. Kaiser also
contracted with the counterparty to receive certain fixed prices (also above the
forward market prices at the date of the transaction) on 4,000 tons of primary
aluminum per month over a three year period commencing October 2001, unless
market prices during certain periods decline below a stipulated "floor" price,
in which case the fixed price sales portion of the transactions terminate. The
price at which the October 2001 and later transactions terminate is well below
current market prices. While Kaiser believes that the October 2001 and later
transactions are consistent with its stated hedging objectives, these positions
do not qualify for treatment as a "hedge" under both the pre-January 1, 2001,
and post-December 31, 2000, accounting guidelines. Accordingly, these positions
are "marked-to-market" each period. See Note 2 for mark-to-market pre-tax gains
(losses) associated with the transactions for the years ended December 31, 2000,
1999 and 1998.

      As of December 31, 2000, Kaiser had sold forward approximately 100% and
80% of the alumina available to it in excess of its projected internal smelting
requirements for 2001 and 2002, respectively, at prices indexed to future prices
of primary aluminum.

19.     Supplemental Cash Flow and Other Information


                                                                                     Years Ended December 31,
                                                                                -----------------------------------
                                                                                   2000        1999        1998
                                                                                ----------  ----------  -----------
                                                                                           (In millions)
Supplemental information on non-cash investing and financing activities:
   Repurchases of debt using restricted cash and marketable securities........  $    52.4   $       -   $        -
   Contribution of property and inventory in exchange for joint
      venture interest........................................................          -           -          8.7
   Acquisition of assets subject to other liabilities.........................          -           -          0.8
   Purchases of marketable securities and other investments using
      restricted cash ........................................................        0.4        15.9            -
   Repayment of short-term debt issued to repurchase
      treasury stock..........................................................          -           -        (35.1)

Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized interest.................................  $   183.5   $   189.9   $    186.6
   Income taxes paid, net.....................................................       19.6        27.0         16.7


20.   Quarterly Financial Information (Unaudited)

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


                                                                           Three Months Ended
                                                     --------------------------------------------------------------
                                                        March 31         June 30      September 30     December 31
                                                     --------------  --------------  --------------  --------------
2000:
   Net sales(1)....................................  $       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 per common share:
      Income (loss) before extraordinary items.....  $        0.48   $        1.49   $       (2.54)  $        4.96
      Extraordinary items, net.....................           0.20               -            0.07            0.29
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        0.68   $        1.49   $       (2.47)  $        5.25
                                                     ==============  ==============  ==============  ==============
   Diluted earnings 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
                                                     ==============  ==============  ==============  ==============
1999:
   Net sales(1)....................................  $       555.7   $       600.0   $       593.7   $       601.3
   Operating income (loss).........................          (35.2)           (2.6)          (19.1)            5.4
   Net income (loss)...............................          112.1           (18.1)          (37.4)           17.0
   Earnings (loss) per share:
      Basic........................................          16.02           (2.59)          (5.35)           2.41
      Diluted......................................          14.35           (2.59)          (5.35)           2.19

---------------------
(1)   Net sales for the quarterly periods prior to the quarter ended December
      31, 2000, have been restated by $10.0 million, $10.3 million and $8.1
      million for the first, second and third quarters of 2000, respectively,
      and by $10.9 million, $11.2 million, $8.4 million and $8.8 million for the
      first, second, third and fourth quarters of 1999, respectively, to conform
      to a new accounting principle that requires freight charges to be included
      in cost of sales and operations.


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, 2000 and 1999
           Consolidated Statement of Operations for the Years Ended December 31, 2000,
                1999 and 1998
           Consolidated Statement of Stockholders' Equity (Deficit) for the Years Ended
                December 31, 2000, 1999 and 1998
           Consolidated Statement of Cash Flows for the Years Ended December 31, 2000,
                1999 and 1998
           Notes to Consolidated Financial Statements

      2.   Financial Statement Schedules:

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

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

(b)   Reports on Form 8-K

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


(c)   Exhibits

      Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 95), 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,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------
Assets

Current assets:
   Cash and cash equivalents..............................................................  $    99.6   $     30.1
   Marketable securities..................................................................       15.7         14.5
   Other current assets...................................................................       17.6         18.8
                                                                                            ----------  -----------
      Total current assets................................................................      132.9         63.4
Deferred income taxes.....................................................................       73.2         73.6
Investment in subsidiaries................................................................      144.4        164.1
Other assets..............................................................................        2.3          2.0
                                                                                            ----------  -----------
                                                                                            $   352.8   $    303.1
                                                                                            ==========  ===========

Liabilities and Stockholders' Equity

Current liabilities:
   Accounts payable and other accrued liabilities.........................................  $    11.0   $     11.1
   Short-term borrowings..................................................................       13.4         18.5
                                                                                            ----------  -----------
      Total current liabilities...........................................................       24.4         29.6
Payables to subsidiaries, net of receivables and advances.................................      258.7        227.1
Other noncurrent liabilities..............................................................       20.6         18.6
                                                                                            ----------  -----------
      Total liabilities...................................................................      303.7        275.3
                                                                                            ----------  -----------

Stockholders' equity:
   Preferred stock, $0.50 par value; 12,500,000 shares authorized; Class A $0.05
      Non-Cumulative Participating Convertible Preferred Stock; 669,355
      shares issued.......................................................................        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....................................................................      (68.2)      (102.1)
   Accumulated other comprehensive loss...................................................       (0.5)        (0.7)
   Treasury stock, at cost (shares held: preferred - 845; common: 3,315,008 and
       2,805,608, respectively)...........................................................     (112.8)      (100.0)
                                                                                            ----------  -----------
      Total stockholders' equity..........................................................       49.1         27.8
                                                                                            ----------  -----------
                                                                                            $   352.8   $    303.1
                                                                                            ==========  ===========



     See notes to consolidated financial statements and accompanying notes.

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                                   MAXXAM INC.

                    STATEMENT OF OPERATIONS (Unconsolidated)
                            (In millions of dollars)


                                                                                     Years Ended December 31,
                                                                                -----------------------------------
                                                                                   2000        1999        1998
                                                                                ----------  ----------  -----------
Investment, interest and other income (expense), net..........................  $    14.1   $     4.5   $      6.7
Intercompany interest income (expense), net...................................      (20.4)      (18.2)       (16.8)
Interest expense..............................................................       (1.5)       (1.6)        (1.9)
General and administrative expenses...........................................      (16.1)      (22.6)       (12.8)
Equity in earnings (loss) of subsidiaries.....................................       45.7       101.7        (47.3)
                                                                                ----------  ----------  -----------
Income (loss) before income taxes.............................................       21.8        63.8        (72.1)
Credit for income taxes.......................................................       12.1         9.8         14.9
                                                                                ----------  ----------  -----------
Net income (loss).............................................................  $    33.9   $    73.6   $    (57.2)
                                                                                ==========  ==========  ===========


     See notes to consolidated financial statements and accompanying notes.



     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                                   MAXXAM INC.

                    STATEMENT OF CASH FLOWS (Unconsolidated)
                            (In millions of dollars)


                                                                                     Years Ended December 31,
                                                                                -----------------------------------
                                                                                   2000        1999        1998
                                                                                ----------  ----------  -----------
Cash flows from operating activities:
   Net income (loss)..........................................................  $    33.9   $    73.6   $    (57.2)
   Adjustments to reconcile net income (loss) to net cash provided
      by (used for) operating activities:
      Equity in (earnings) loss of subsidiaries...............................      (45.7)     (101.7)        47.3
      Restricted common stock grant - compensation expense....................          -        11.7            -
      Net gains on marketable securities......................................      (12.8)       (6.6)        (5.6)
      Increase (decrease) in receivables, prepaids and other assets...........        5.4         0.7         (5.6)
      Increase in accrued and deferred income taxes...........................       (2.4)        3.3         12.0
      Increase (decrease) in accounts payable and other liabilities...........        2.2       (10.5)       (16.0)
      Other...................................................................          -         0.7         (3.6)
                                                                                ----------  ----------  -----------
        Net cash used for operating activities................................      (19.4)      (28.8)       (28.7)
                                                                                ----------  ----------  -----------

Cash flows from investing activities:
   Net sales (purchases) of marketable securities.............................       11.6        (0.1)        31.2
   Dividends received from subsidiaries.......................................       61.0        10.0         10.0
   Investments in and net advances from (to) subsidiaries.....................       35.2        15.2         (6.7)
   Capital expenditures.......................................................       (1.0)       (0.6)        (0.2)
                                                                                ----------  ----------  -----------
        Net cash provided by investing activities.............................      106.8        24.5         34.3
                                                                                ----------  ----------  -----------

Cash flows from financing activities:
   Short-term borrowings......................................................       (5.1)          -         16.0
   Redemption, repurchase of and principal payments on long-term debt.........          -           -            -
   Treasury stock repurchases.................................................      (12.8)          -        (35.1)
                                                                                ----------  ----------  -----------
        Net cash used for financing activities................................      (17.9)          -        (19.1)
                                                                                ----------  ----------  -----------

Net increase (decrease) in cash and cash equivalents..........................       69.5        (4.3)       (13.5)
Cash and cash equivalents at beginning of year................................       30.1        34.4         47.9
                                                                                ----------  ----------  -----------
Cash and cash equivalents at end of year......................................  $    99.6   $    30.1   $     34.4
                                                                                ==========  ==========  ===========

Supplementary schedule of non-cash investing and financing activities:
   Repayment of short-term debt issued to
      repurchase treasury stock...............................................  $       -   $       -   $    (35.1)
   Deferral of interest payment on intercompany note payable..................       16.7        15.0          7.8
   Distribution of assets from subsidiaries...................................       33.3         1.9          4.1
Supplemental disclosure of cash flow information:
   Interest paid..............................................................  $     1.3   $     1.4   $      1.8
   Income taxes paid (refunded), net..........................................          -         2.8         (0.3)


     See notes to consolidated financial statements and accompanying notes.

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                                   MAXXAM INC.

                          NOTES TO FINANCIAL STATEMENTS


1.    Deferred Income Taxes

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

2.    Short-term Borrowings

      During 2000 and 1999, the Company had average short-term borrowings
outstanding of $14.0 million and $18.5 million, respectively, under the
Custodial Trust Agreement. The weighted average interest rate during 2000 and
1999 was 7.2%, and 7.2%, respectively.

3.    Notes Payable to Subsidiaries, Net of Notes Receivable and Advances

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


                                                                                                 December 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------
Note payable to MGHI, interest at 11%.....................................................  $   164.5   $    147.8
Unsecured note payable to MCO Properties Inc., interest at 6%.............................       24.5         23.1
Unsecured notes payable to MAXXAM Property Company, interest at 7%........................       13.8         13.0
Net advances..............................................................................       20.6          7.9
                                                                                            ----------  -----------
                                                                                            $   223.4   $    191.8
                                                                                            ==========  ===========

      In January 2001, the Company elected to defer all of the $9.0 million
interest payment due on the note payable to MGHI on February 1, 2001. The
deferred amount effectively increases the note payable balance to $173.5
million.


                                   SIGNATURES

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



                                                                              MAXXAM INC.


Date:   March 28, 2001                           By:                     /S/ PAUL N. SCHWARTZ
                                                     --------------------------------------------------------------
                                                                            Paul N. Schwartz
                                                                               President

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



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


Date:   March 28, 2001                           By:                     /S/ J. KENT FRIEDMAN
                                                     --------------------------------------------------------------
                                                                            J. Kent Friedman
                                                                     Vice Chairman of the Board and
                                                                            General Counsel


Date:   March 28, 2001                           By:                   /S/ ROBERT J. CRUIKSHANK
                                                     --------------------------------------------------------------
                                                                          Robert J. Cruikshank
                                                                                Director


Date:   March 28, 2001                           By:                      /S/ EZRA G. LEVIN
                                                     --------------------------------------------------------------
                                                                             Ezra G. Levin
                                                                                Director


Date:   March 28, 2001                           By:                   /S/ STANLEY D. ROSENBERG
                                                     --------------------------------------------------------------
                                                                          Stanley D. Rosenberg
                                                                                Director


Date:   March 28, 2001                           By:                   /S/ MICHAEL J. ROSENTHAL
                                                     --------------------------------------------------------------
                                                                          Michael J. Rosenthal
                                                                                Director


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


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


                                INDEX OF EXHIBITS


Exhibit
Number                                Description
-------   ----------------------------------------------------------------------
 3.1      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     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")
 4.50     Amended and Restated Credit Agreement between The Pacific Lumber
          Company ("Pacific Lumber") and Bank of America National Trust and
          Savings Association, dated as of December 18, 1998 (the "Pacific
          Lumber Credit Agreement") (incorporated herein by reference to Exhibit
          4.7 to MGHI's Annual Report on Form 10-K for the year ended December
          31, 1998; File No. 333-18723)
 4.51     Amendment, dated as of January 31, 2000, to the Pacific Lumber Credit
          Agreement (incorporated by reference to Exhibit 4.11 to MGHI's Annual
          Report on Form 10-K for the year ended December 31, 1999; File No.
          333-18723)
 4.52     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)
 4.53     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)
*4.54     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 Regulationss.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
 4.55     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)
 4.56     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)
*4.57     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.
10.1      Tax Allocation Agreement, dated as of December 23, 1996, between the
          Company and MGHI (incorporated herein by reference to Exhibit 10.1 to
          MGHI's Registration Statement on Form S-4; Registration No. 333-18723)
10.2      Tax Allocation Agreement, dated as of December 21, 1989, between the
          Company and KACC (incorporated herein by reference to Exhibit 10.21 to
          Amendment No. 6 to the Registration Statement of KACC on Form S-1;
          Registration No. 33-30645)
10.3      Tax Allocation Agreement, dated as of February 26, 1991,
          between Kaiser and the Company (incorporated herein by
          reference to Exhibit 10.23 to Amendment No. 2 to the
          Registration Statement of Kaiser on Form S-1; Registration
          No. 33-37895)
10.4      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)
10.5      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)
10.6      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)
10.7      Tax Allocation Agreement, dated as of March 23, 1993, among
          Pacific Lumber, Scotia Pacific Holding Company ("Scotia
          Pacific"), Salmon Creek Corporation ("Salmon Creek") and the
          Company (incorporated herein by reference to Exhibit 10.1 to
          Amendment No. 3 to the Form S-1 Registration Statement of
          Scotia Pacific; Registration No. 33-55538)
10.8      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)
10.9      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)
10.10     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)
10.11     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")
10.12     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)
10.13     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)
10.14     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)
10.15     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")
10.16     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)
10.17     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)
10.18     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)
10.19     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)
10.20     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")
10.21     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)
10.22     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)
10.23     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)
10.24     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)
10.25     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)
10.26     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
10.27     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")
10.28     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)
10.29     MAXXAM 1994 Non-Employee Director Stock Plan (incorporated herein by
          reference to Exhibit 99 to the Company 1994 Proxy Statement)
10.30     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)
10.31     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)
10.32     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)
10.33     MAXXAM 1994 Executive Bonus Plan (incorporated herein by reference to
          Exhibit 99 to the Company 1994 Proxy Statement)
10.34     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)
10.35     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")
10.36     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)
10.37     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)
10.38     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)
10.39     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)
10.40     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)
10.41     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)
10.42     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)
10.43     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)
10.44     Kaiser 1995 Executive Incentive Compensation Program (incorporated
          herein by reference to Exhibit 99 to Kaiser's Proxy Statement dated
          April 26, 1995)
10.45     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)
10.46     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")
10.47     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)
10.48     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")
10.49     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)
10.50     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)
10.51     Description of Kaiser Severance Protection and Change of
          Control Benefits Program (incorporated herein by reference to
          Exhibit 10.22 to Kaiser's Annual Report in Form 10-K for the
          fiscal year ended December 31, 1998; File No. 1-9447)
10.52     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)
10.53     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)
10.54     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)
*21       List of the Company's Subsidiaries
*23       Consent of Arthur Andersen LLP

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* Included with this filing`