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, 1996   COMMISSION FILE NUMBER 1-3924

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

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

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

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

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

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

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

 Number of shares of common stock outstanding at March 1, 1997:  8,655,773
     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 February 28, 1997 American Stock Exchange closing price
of $48.125 per share, the aggregate market value of the Registrant's
outstanding voting stock held by non-affiliates was approximately $288.0
million.

                    DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of Registrant's annual report to stockholders for the
fiscal year ended December 31, 1996 are incorporated by reference under
Part II. 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.

                                   PART I


ITEM 1.        BUSINESS

GENERAL

          MAXXAM Inc. and its majority and wholly owned subsidiaries are
collectively referred to herein as the "Company" or "MAXXAM" unless
otherwise indicated or the context indicates otherwise.  The Company,
through Kaiser Aluminum Corporation ("Kaiser") and Kaiser's principal
operating subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), is a
fully integrated aluminum company.  The Company's voting interest in Kaiser
is approximately 62% on a fully diluted basis.  See "--Aluminum
Operations."  In addition, the Company is engaged in forest products
operations through its wholly owned subsidiary, MAXXAM Group Inc. ("MGI")
and MGI's wholly owned subsidiaries, The Pacific Lumber Company and its
wholly owned subsidiaries (collectively referred to herein as "Pacific
Lumber," unless the context indicates otherwise), and Britt Lumber Co.,
Inc. ("Britt").  See "--Forest Products Operations."  MGI is a wholly owned
subsidiary of MAXXAM Group Holdings Inc. ("MGHI"), which is in turn a
wholly owned subsidiary of the Company.  The Company is also engaged in (a)
real estate investment and development, managed through MAXXAM Property
Company, and (b) other commercial operations through subsidiaries,
including a Class 1 thoroughbred and quarter horse racing facility located
in the greater Houston metropolitan area.  See "--Real Estate and Other
Operations."  See Note 11 to the Consolidated Financial Statements
(contained in the Company's Annual Report to Stockholders--see Item 8) for
certain financial information by industry segment and geographic area.

          This Annual Report on Form 10-K contains statements which
constitute"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995.  These statements appear in a
number of places in this section (see Item 1. "Business--Aluminum
Operations" and "--Forest Products Operations--Regulatory and Environmental
Factors" and Item 3. "Legal Proceedings").  Such statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates,""will," "should," "plans" or "anticipates" or
the negative thereof or other variations thereon or comparable terminology,
or by discussions of strategy.  Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and
involve significant risks and uncertainties, and that actual results may
vary materially from those in the forward-looking statements as a result of
various factors.  These factors include the effectiveness of management's
strategies and decisions, general economic and business conditions,
developments in technology, new or modified statutory or regulatory
requirements and changing prices and market conditions.  This report and
the financial portion of the Company's 1996 Annual Report to Shareholders
(see Items 6 to 8 of this report) identify other factors that could cause
such differences.  No assurance can be given that these are all of the
factors that could cause actual results to vary materially from the
forward-looking statements.

ALUMINUM OPERATIONS

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

     INDUSTRY OVERVIEW

          Primary aluminum is produced by the refining of bauxite into alumina
and the reduction of alumina into primary aluminum. Approximately two pounds
of bauxite are required to produce one pound of alumina, and approximately two
pounds of alumina are required to produce one pound of primary aluminum.
Aluminum's valuable physical properties include its light weight, corrosion
resistance, thermal and electrical conductivity and high tensile strength.

          Demand

          The packaging, transportation and construction industries are the
principal consumers of aluminum in the United States, Japan Germany, France,
Italy and the United Kingdom.  In the packaging industry, which accounted for an
estimated 21% of 1996 aluminum consumption in these countries, aluminum's
recyclability and weight advantages have enabled it to gain market share from
steel and glass, primarily in the beverage container area.  Nearly all beer cans
and soft drink cans manufactured for the United States market are made of
aluminum. Kaiser believes that growth in the packaging area is likely to
continue through the 1990s due to general population increase and to further
penetration of the beverage container market in emerging markets.  Kaiser
believes that growth in demand for can sheet in the United States will follow
the growth in population, offset, in part, by the effects of the use of
lighter gauge aluminum for can sheet and of plastic container production.

          In the transportation industry, which accounted for an estimated 30%
of aluminum consumption in the United States, Japan, Germany, France, Italy
and the United Kingdom during 1996, automotive manufacturers use aluminum
instead of steel, ductile iron or copper for an increasing number of
components, including radiators, wheels, suspension components, and engines,
in order to meet more stringent environmental, safety, and fuel efficiency
standards.  Kaiser believes that sales of aluminum to the transportation
industry have considerable growth potential due to projected increases in
the use of aluminum in automobiles.  In addition, Kaiser believes that
consumption of aluminum in the construction industry will follow the cyclical
growth pattern of that industry, and will benefit from higher growth in Asian
and Latin American economies.

          Supply

          As of year-end 1996, world aluminum capacity from 179 smelting
facilities was approximately 22.9 million tons per year (all references to
tons in this report refer to metric tons of 2,204.6 pounds).  World
production of primary aluminum for 1996 increased approximately 4.5%
compared to 1995.  Net exports of aluminum from the former Sino Soviet bloc
increased approximately 200% from 1990 levels to an estimated 1.9 million
tons as of year-end 1996.  In addition, one smelter continued to increase
production following its start-up in 1995, and a number of producers
restarted idled capacity in late 1995 and early 1996.  These exports, as
well as new and restarted capacity, contributed to an increase in London
Metal Exchange ("LME") stocks of primary aluminum which peaked in October
1996 at 970,000 tons.  At the end of 1996, LME stocks of primary aluminum had
declined to 951,275 tons.  See "--Industry Trends."

          Based upon information currently available, Kaiser believes that
moderate additions will be made during 1997-1999 to world alumina and primary
aluminum production capacity.  The increases in alumina capacity are
expected to come from one new refinery which began operations in 1996 and
incremental expansions of existing refineries.  In addition, Kaiser believes
that there is an estimated 1.6 million tons of unutilized world smelting
capacity.  The increases in primary aluminum capacity during 1997-1999 are
expected to come from two new smelters which may begin operations in 1997,
two relocated smelters that are expected to resume operations in 1998, and
the remainder principally from incremental expansions of existing smelters.

     INDUSTRY TRENDS

          Primary aluminum prices have historically been subject to significant
cyclical price fluctuations.  During the first half of 1996, the average
Midwest United States transaction price ("AMT Price") for primary aluminum
remained relatively stable in the $.75 per pound range.  However, during the
second half of the year the AMT Price fell, reaching a low of $.65 per pound
for October 1996, before recovering late in the year.  During 1996, the AMT
Price for primary aluminum was approximately $.72 per pound, compared to
$.86, $.72 and $.54 per pound in 1995, 1994 and 1993, respectively.  The AMT
Price for primary aluminum for the week ended March 14, 1997, was
approximately $.81 per pound.

          The significant improvement in prices during 1994 and 1995 resulted
from strong growth in Western world consumption of aluminum and the
curtailment of production in response to lower prices in prior periods by
many producers worldwide.  In 1995, production of primary aluminum increased
and consumption of aluminum continued to grow, but at a much lower rate than
in 1994.  In general, the overall aluminum market was strongest in the first
half of 1995. By the second half of 1995, orders and shipments for certain
products had softened and the rate of decline in LME inventories had leveled
off.  By the end of 1995, some small increases in LME inventories occurred,
and prices of aluminum weakened from first-half levels.  This trend continued
throughout most of 1996.  Net reported primary aluminum inventories increased
by approximately 62,000 tons in 1996 based upon reports of the LME and the
International Primary Aluminium Institute ("IPAI"), following substantial
declines of 764,000 and 1,153,000 tons in 1994 and 1995, respectively.
However, since year-end 1996, LME stocks of primary aluminum have continued
to decline from their October 1996 peak level.

          Increased production of primary aluminum due to restarts of certain
previously idled capacity, the continued increase in production by a smelter
in South Africa following its start-up in 1995, and the continued high level of
exports from the Commonwealth of Independent States ("CIS") contributed to
increased supplies of primary aluminum to the Western world in 1996. While
the economies of the major aluminum consuming regions - the United States,
Japan, Western Europe, and Asia - are, in the aggregate, performing
relatively well, the Company believes that the reduction of aluminum
inventories by customers, as prices have continued to decline, has mitigated
the growth in primary aluminum demand that normally accompanies growth in
economic and industrial activity.

          Western world demand for alumina and the price of alumina declined
in 1994 in response to the curtailment of Western world smelter production of
primary aluminum, partially offset by increased usage of Western world
alumina by smelters in the CIS and in the People's Republic of China ("PRC").
Increased Western world production of primary aluminum, as well as continued
imports of Western world alumina by the CIS and the PRC, during 1995 resulted
in higher demand for Western world alumina and significantly stronger alumina
pricing.  In 1996, however, the alumina market softened, primarily as a result
of increased alumina production and decreased alumina exports to the CIS and
the PRC, resulting in lower alumina prices.  However, increases in primary
aluminum production as well as reductions in alumina production during the
second half of 1996 resulted in stronger alumina pricing in late 1996.

          United States shipments of domestic fabricated aluminum products in
1995 were near 1994 levels, although in 1995 demand for can sheet in the
United States softened relative to 1994.  United States shipments of
domestic fabricated aluminum products in 1996 are believed to have been at
approximately 1995 levels, although in 1996 demand for can sheet in the
United States softened relative to 1995.

     KAISER OPERATIONS

          General

          Kaiser, through KACC, operates in all principal aspects of the
aluminum industry--the mining of bauxite, the refining of bauxite into
alumina, the production of primary aluminum from alumina, and the
manufacture of fabricated (including semi-fabricated) aluminum products.  In
addition to the production utilized by Kaiser in its operations, Kaiser sells
significant amounts of alumina and primary aluminum in domestic and
international markets.  In 1996, Kaiser produced approximately 2,838,000
tons of alumina, of which approximately 73% was sold to third parties, and
produced approximately 473,200 tons of primary aluminum, of which
approximately 75% was sold to third parties.  Kaiser is also a major
domestic supplier of fabricated aluminum products.  In 1996, Kaiser shipped
approximately 327,100 tons of fabricated aluminum products to third parties,
which accounted for approximately 5% of the total tonnage of United States
domestic shipments.  A majority of Kaiser's fabricated products are
sold to distributors or used by customers as components in the manufacture
and assembly of finished end-use products.

          The following table sets forth total shipments and intracompany
transfers of Kaiser's alumina, primary aluminum, and fabricated aluminum
operations:


<TABLE>
<CAPTION>


                                                     Years Ended December 31,
                                            -----------------------------------------
                                                 1996          1995          1994
                                            ------------- ------------- -------------
                                                      (In thousands of tons)
<S>                                         <C>           <C>           <C>
ALUMINA:
          Shipments to Third Parties              2,073.7       2,040.1       2,086.7
          Intracompany Transfers                    912.4         800.6         820.9

PRIMARY ALUMINUM:
          Shipments to Third Parties                355.6         271.7         224.0
          Intracompany Transfers                    128.3         217.4         225.1

FABRICATED ALUMINUM PRODUCTS:
          Shipments to Third Parties                327.1         368.2         399.0

</TABLE>

          Sensitivity to Prices and Hedging Programs

          Kaiser's operating results are sensitive to changes in the prices
of alumina, primary aluminum and fabricated aluminum products, and also
depend to a significant degree upon the volume and mix of all products sold
and on Kaiser's hedging strategies.  Primary aluminum prices have
historically been subject to significant cyclical price fluctuations.
Alumina prices, as well as fabricated aluminum product prices (which vary
considerably among products), are significantly influenced by changes in
the price of primary aluminum and generally lag behind primary aluminum
prices for periods of up to three months.  From time to time in the
ordinary course of business, Kaiser enters into hedging transactions to
provide price risk management in respect of its net exposure resulting from
(i) anticipated sales of alumina, primary aluminum and fabricated aluminum
products, less (ii) expected purchases of certain items, such as aluminum
scrap, rolling ingot and bauxite, whose prices fluctuate with the price of
primary aluminum.  Forward sales contracts are used by Kaiser to
effectively lock-in or fix the price that Kaiser will receive for its
shipments.  Kaiser also uses option contracts (i) to establish a minimum
price for its product shipments, (ii) to establish a "collar" or range of
price for its anticipated sales, and/or (iii) to permit Kaiser to realize
possible upside price movements.  See Notes 1 and 10 to the Company's
Consolidated Financial Statements.

          Profit Enhancement and Cost Reduction Initiative

          In October 1996, Kaiser established a goal of achieving
significant cost reductions and profit improvements by the end of 1997,
with the full effect planned to be realized  in 1998 and beyond, measured
against 1996 results.  To achieve this goal, Kaiser plans reductions in
production costs, decreases in corporate general and administrative
expenses, and enhancements to product mix and volume throughput.  There can
be no assurance that the initiative will result in the desired cost
reductions and other profit improvements.

          Production Operations--General

          Kaiser's operations are conducted through KACC's decentralized
business units which compete throughout the aluminum industry.

-    The alumina business unit, which mines bauxite and obtains additional
     bauxite tonnage under long-term contracts, produced approximately 7%
     of world alumina produced in 1996, as reported by the IPAI.  During
     1996, Kaiser's shipments of bauxite to third parties represented
     approximately 25% of the bauxite mined by Kaiser.  In addition,
     Kaiser's third party shipments of alumina represented approximately
     73% of the alumina produced by Kaiser.  Kaiser's share of world
     alumina capacity, as reported by the IPAI, was approximately 6% in
     1996.

-    The primary aluminum products business unit operates two wholly owned
     domestic smelters and two foreign smelters in which Kaiser holds
     significant ownership interests.  During 1996, Kaiser's shipments of
     primary aluminum to third parties represented approximately 75% of its
     primary aluminum production.  Kaiser's share of world primary aluminum
     capacity, as reported by the IPAI, was approximately 2% in 1996.

-    Fabricated aluminum products are manufactured by two business units--
     lat-rolled products and engineered products.  The products include
     heat-treated products, body, lid, and tab stock for beverage
     containers, sheet and plate products, screw machine stock, redraw rod,
     forging stock, truck wheels and hubs, air bag canisters, engine
     manifolds, and other castings, forgings and extruded products, which
     are manufactured at plants located in principal marketing areas of the
     United States and Canada.  The aluminum utilized in Kaiser's
     fabricated products operations is comprised of primary aluminum,
     obtained both internally and from third parties, and scrap metal
     purchased from third parties.

          Production Operations--Bauxite and Alumina

          The following table lists Kaiser's bauxite mining and alumina
refining facilities as of December 31, 1996:


<TABLE>
<CAPTION>

                                                                      Annual
                                                                    Production      Total
                                                                     Capacity       Annual
                                                       Company     Available to   Production
        Activity           Facility      Location     Ownership    the Company     Capacity
----------------------- ------------- ------------- ------------- ------------- -------------
                                                                      (tons)        (tons)
<S>                     <C>           <C>           <C>           <C>           <C>
Bauxite Mining          KJBC(1)       Jamaica              49%        4,500,000     4,500,000
                        Alpart(2)     Jamaica              65%        2,275,000     3,500,000
                                                                  ------------- -------------
                                                                      6,775,000     8,000,000
                                                                  ============= =============

Alumina Refining        Gramercy      Louisiana           100%        1,050,000     1,050,000
                        Alpart(2)     Jamaica              65%          942,500     1,450,000
                        QAL(3)        Australia          28.3%          973,500     3,440,000
                                                                  ------------- -------------
                                                                      2,966,000     5,940,000
                                                                  ============= =============

<FN>
---------------
(1)  Although Kaiser owns 49% of Kaiser Jamaica Bauxite Company ("KJBC"), it has the right to receive all of such entity's output.
(2)  Alumina Partners of Jamaica ("Alpart") bauxite is refined into alumina at the Alpart alumina refinery.
(3)  Queensland Alumina Limited ("QAL").

</TABLE>

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

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

          Kaiser owns a 28.3% interest in QAL, which owns the largest and
one of the most efficient alumina refineries in the world, located in
Queensland, Australia. QAL refines bauxite into alumina, essentially on a
cost basis, for the account of its stockholders under long-term tolling
contracts. The stockholders, including Kaiser, purchase bauxite from
another QAL stockholder under long-term supply contracts.  Kaiser has
contracted with QAL to take approximately 792,000 tons per year of capacity
or pay standby charges.  Kaiser is unconditionally obligated to pay amounts
calculated to service its share ($94.4 million at December 31, 1996) of
certain debt of QAL, as well as other QAL costs and expenses, including
bauxite shipping costs.

          Kaiser's principal customers for bauxite and alumina consist of
other aluminum producers that purchase bauxite and reduction-grade alumina,
trading intermediaries who resell raw materials to end-users, and users of
chemical-grade alumina.  All of Kaiser's third-party sales of bauxite in
1996 were made to two customers, the largest of which accounted for
approximately 79% of such sales.  Kaiser also sold alumina to fifteen
customers, the largest and top five of which accounted for approximately
21% and 79% of such sales, respectively.  See "--Competition."  Kaiser
believes that among alumina producers it is the world's second largest
seller of alumina to third parties. Kaiser's strategy is to sell a
substantial portion of the bauxite and alumina available to it in excess of
its internal refining and smelting requirements under multi-year sales
contracts.  See also "--Sensitivity to Prices and Hedging Programs."

          Production Operations--Primary Aluminum Products

          The following table lists Kaiser's primary aluminum smelting
facilities as of December 31, 1996:

<TABLE>
<CAPTION>

                                                    Annual
                                                     Rated         Total
                                                    Capacity       Annual         1996
                                      Company     Available to     Rated       Operating
       Location         Facility     Ownership    the Company     Capacity        Rate
 ------------------- ------------- ------------- ------------- ------------- -------------
                                                     (tons)        (tons)
 <S>                 <C>           <C>           <C>           <C>           <C>
 Domestic
      Washington     Mead                100%          200,000       200,000       106%
      Washington     Tacoma              100%           73,000        73,000       100%
                                                 ------------- -------------
                                                       273,000       273,000
                                                 ------------- -------------
 International
      Ghana          Valco(1)             90%          180,000       200,000        68%
      Wales, United
           Kingdom   Anglesey(2)          49%           55,000       112,000       118%
                                                 ------------- -------------
                                                       235,000       312,000
                                                 ------------- -------------

           Total                                       508,000       585,000
                                                 ============= =============

<FN>

------------------------------
(1)  Valco Aluminium Company Limited ("Valco")
(2)  Anglesey Aluminium Limited ("Anglesey")

</TABLE>

          Kaiser owns two smelters located at Mead and Tacoma, Washington,
where alumina is processed into primary aluminum.  The Mead facility uses
pre-bake technology and produces primary aluminum.  Approximately 53% of
Mead's 1996 production was used at Kaiser's Trentwood fabricating facility
and the balance was sold to third parties.  The Tacoma plant uses Soderberg
technology and produces primary aluminum and high-grade, continuous-cast,
redraw rod, which currently commands a premium price in excess of the price
of primary aluminum.  Both smelters have achieved significant production
efficiencies through retrofit technology and a variety of cost controls,
leading to increases in production volume and enhancing their ability to
compete with newer smelters.  Kaiser has also commenced the modernization
and expansion of the carbon baking furnace at its Mead smelter at an
estimated cost of approximately $52.0 million.  This project is expected to
lower costs, enhance safety and improve the environmental performance of
the facility and is expected to be completed in late 1998.

          Electric power represents an important production cost for Kaiser
at its aluminum smelters.  In 1995, Kaiser successfully restructured
electric power purchase agreements for its facilities in the Pacific
Northwest, which resulted in significantly lower electric power costs in
1996 for the Mead and Tacoma, Washington, smelters compared to 1995
electric power costs.  Kaiser expects to continue to benefit from these
savings in electric power costs at these facilities in 1997.  However, a
number of lawsuits challenging the restructuring have been filed and the
effect, if any, of such lawsuits on Kaiser's power purchase and
transmission arrangements is not known at this time.

          Kaiser manages, and owns a 90% interest in, the 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 long-term tolling contracts which provide for proportionate payments
by the participants.  Kaiser's share of the primary aluminum is sold to
third parties. Power for the Valco smelter is supplied under an agreement
which expires in 2017.  The agreement indexes two-thirds of the price of
the contract quantity of power to the market price of primary aluminum.
The agreement also provides for a review and adjustment of the base power
rate and the price index every five years.  The most recent review was
completed in April 1994 for the 1994-1998 period.  The Volta River
Authority has allocated to Valco sufficient electric power to operate at
80% of its annual rated capacity through December 31, 1997.

          Kaiser owns a 49% interest in the Anglesey aluminum smelter and
port facility at Holyhead, Wales.  The Anglesey smelter uses pre-bake
technology.  Kaiser supplies 49% of Anglesey's alumina requirements and
purchases 49% of Anglesey's aluminum output.  Kaiser sells its share of
Anglesey's output to third parties.  Power for the Anglesey aluminum
smelter is supplied under an agreement which expires in 2001.

          Kaiser has developed and installed proprietary retrofit and
control technology in all of its smelters, as well as at third party
locations.  This technology--which includes the redesign of the cathodes
and anodes that conduct electricity through reduction cells, improved
"feed" systems that add alumina to the cells, and a computerized system
that controls energy flow in the cells--has significantly contributed to
increased and more efficient production of primary aluminum and enhances
Kaiser's ability to compete with the industry's newer smelters. Kaiser is
actively engaged in efforts to license this technology and sell technical
and managerial assistance to other producers worldwide, and may participate
in joint ventures or similar business partnerships which employ Kaiser's
technical and managerial knowledge.  See "--Research and Development."

          Kaiser's principal primary aluminum customers consist of large
trading intermediaries and metal brokers, who resell primary aluminum to
fabricated product manufacturers, and large and small international
aluminum fabricators.  In 1996, Kaiser sold its primary aluminum production
not utilized for internal purposes to approximately 45 customers, the
largest and top five of which accounted for approximately 16% and 54% of
such sales, respectively.  See "--Competition." Marketing and sales efforts
are conducted by a small staff located at the business unit's headquarters
in Pleasanton, California, and by senior executives of Kaiser who
participate in the structuring of major sales transactions.  A majority of
the business unit's sales are based upon long-term relationships with metal
merchants and end-users.

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

          Flat-Rolled Products.  The flat-rolled products business unit,
the largest of Kaiser's fabricated products businesses, operates the
Trentwood sheet and plate mill at Spokane, Washington.  In addition, Kaiser
broke ground on its first commercial Micromill(TM) facility, near Reno,
Nevada.  The Micromill(TM) process is a proprietary, compact, high-speed
process for continuous casting and rolling of a thin-strip aluminum sheet
from molten metal.  Kaiser expects the Nevada facility to be in a start-up
mode in the first half of 1997, and anticipates beginning limited customer
shipments by the second half of 1997.  See "-- Research and Development."

          The Trentwood facility is Kaiser's largest fabricating plant and
accounted for approximately 63% of Kaiser's 1996 fabricated aluminum
products shipments.  The business unit supplies the aerospace and general
engineering markets (producing heat-treat products), the beverage container
market (producing body, lid and tab stock) and the specialty coil markets
(producing automotive brazing sheet, wheel, and tread products), both
directly and through distributors.

          Kaiser continues to implement changes to the process and product
mix of its Trentwood rolling mill in an effort to maximize its
profitability and maintain full utilization of the facility.  Kaiser has
approved an expansion of its heat-treat capacity to approximately 60,000
tons from approximately 45,000 tons, which will enable Kaiser to increase
the range of its heat-treat products, including wide heat-treated sheet for
the aerospace market, enhance the quality of its heat-treated products, and
improve Trentwood's operating efficiency.  The project is estimated to cost
approximately $45.0 million and to take approximately two years to
complete.  Global sales of Kaiser's heat-treat products have increased
significantly over the last several years and are made primarily to the
aerospace and general engineering markets, which are experiencing growth in
demand.

          Kaiser's flat-rolled products are also sold to beverage container
manufacturers located in the western United States and in the Asian Pacific
Rim countries where the Trentwood plant's location provides Kaiser with a
transportation advantage.  Quality of products for the beverage container
industry and timeliness of delivery are the primary bases on which Kaiser
competes.  Kaiser has made significant capital expenditures at Trentwood
during the past several years in rolling technology and process control to
improve the metal integrity, shape and gauge control of its products.
Kaiser believes that such improvements have enhanced the quality of its
products for the beverage container industry and the capacity and
efficiency of its manufacturing operations.  Kaiser believes that it is one
of the highest quality producers of aluminum beverage can stock in the
world.

          In 1996, the business unit shipped products to approximately 150
customers in the aerospace, transportation and industrial ("ATI") markets,
most of whom were distributors who sell to a variety of industrial
end-users.  The top five customers in the ATI markets for flat-rolled
products accounted for approximately 15% of the business unit's revenue.
In 1996, the flat-rolled products business unit had approximately 40
domestic and foreign can stock customers.  The largest and top five of such
customers accounted for approximately 18% and 35%, respectively, of the
business unit's revenue.  See "--Competition."  The marketing staff for the
flat-rolled products business unit is located at the Trentwood facility and
in Pleasanton, California.  Sales are made directly to end-use customers
from eight sales offices located throughout the United States.
International customers are served by sales offices in England and Japan
and by independent sales agents in Asia and Latin America.

          Engineered Products.  The engineered products business unit is
headquartered in Detroit, Michigan, and operates soft-alloy extrusion
facilities in Los Angeles, California; Santa Fe Springs, California;
Sherman, Texas; and London, Ontario, Canada; a cathodic protection business
located in Tulsa, Oklahoma, that also extrudes both aluminum and magnesium;
rod and bar facilities in Newark, Ohio, and Jackson, Tennessee, which
produce screw machine stock, redraw rod, forging stock, and billet; and a
facility in Richland, Washington, which produces seamless tubing in both
hard and soft alloys for the automotive, other transportation, export,
recreation, agriculture, and other industrial markets. Each of the
soft-alloy extrusion facilities has fabricating capabilities and provides
finishing services.  Major markets for extruded products are in the
transportation industry, to which the business unit provides extruded
shapes for automobiles, trucks, trailers, cabs and shipping containers, and
in the distribution, durable goods, defense, building and construction,
ordnance and electrical markets.  The sales and engineering office in
Detroit, Michigan, works with car makers and other customers, the Center
for Technology (see "- Research and Development") and plant personnel to
create new automotive component designs and improve existing products.

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

          In 1996, the engineered products business unit had approximately
990 customers, the largest and top five of which accounted for
approximately 13% and 31%, respectively, of the business unit's revenue.
Sales are made directly from plants, as well as marketing locations across
the United States.   See "-- Competition."

          In September 1996, Kaiser entered into a letter of intent with
Accuride Corporation ("Accuride"), a business unit of Phelps Dodge
Corporation, to form a joint-venture to design, manufacture and market
aluminum wheels for the commercial ground transportation industry.  The
formation of the joint venture,  subject to various conditions including
third-party consents, is expected to occur in the second quarter of 1997.

     COMPETITION

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

          Primary aluminum and, to some degree, alumina are commodities
with generally standard qualities, and competition in the sale of these
commodities is based primarily upon price, quality and availability.
Kaiser also competes with a wide range of domestic and international
fabricators in the sale of fabricated aluminum products.  Competition in
the sale of fabricated products is based upon quality, availability, price
and service, including delivery performance.  Kaiser concentrates its
fabricating operations on selected products in which it has production
expertise, high-quality capability, and geographic and other competitive
advantages.  Kaiser believes that, assuming the current relationship between
worldwide supply and demand for alumina and primary aluminum does not change
materially, the loss of any one of its customers, including intermediaries,
would not have a material adverse effect on its financial condition,
results of operations or liquidity.

     RESEARCH AND DEVELOPMENT

          Kaiser conducts research and development activities principally
at two facilities - the Center for Technology ("CFT") in Pleasanton,
California, and the Primary Aluminum Products Division Technology Center
("DTC") adjacent to the Mead smelter in Washington.  Net expenditures for
company-sponsored research and development activities were $20.5 million in
1996, $18.5 million in 1995, and $16.7 million in 1994.  Kaiser's research
staff totaled 156 at December 31, 1996.  Kaiser estimates that research and
development net expenditures will be approximately $22 million in 1997.

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

          The largest and most notable single project being developed at
CFT and the Reno, Nevada, facility is a unique Micromill(TM) casting facility
for the production of can sheet from molten metal using a continuous cast
process.  The capital and conversion costs of Kaiser's Micromill(TM)
facilities are expected to be significantly lower than conventional rolling
mills.  The use of a Micromill(TM) facility is also expected to result in
lower transportation costs due to the ability to strategically locate a
Micromill(TM) facility in close proximity to a manufacturing facility.
Micromill(TM) facilities are expected to be particularly well suited to take
advantage of the rapid growth in demand for can sheet expected in emerging
markets in Asia and Latin America where there is limited indigenous supply.
Kaiser believes that Micromill(TM) facilities should also be capable of
manufacturing other sheet products at relatively low capital and operating
costs.  The Micromill(TM) technology is based on a proprietary thin-strip,
high-speed, continuous-belt casting technique linked directly to hot and
cold rolling mills.  The major advantage of the process is that the sheet
is continuously manufactured from molten metal, unlike the conventional
process in which the metal is first cast into large, solid ingots and
subsequently rolled into sheet through a series of highly capital-intensive
steps.  The first Micromill(TM) facility, which was constructed in Nevada
during 1996 as a demonstration and production facility, achieved
operational start-up in the fourth quarter of 1996.  Kaiser expects that
the Nevada Micromill(TM) will be in a start-up mode for the first half of 1997
and will be able to commence limited shipments to customers in the second
half of 1997.  If Kaiser is successful in proving and commercializing its
Micromill(TM) technology, Micromill(TM) facilities could represent an important
source of future growth.  There can be no assurance that Kaiser will be
able to successfully develop and commercialize the technology for use at
full-scale facilities.  Kaiser is currently financing the capital cost of
the construction of the Nevada Micromill(TM), estimated to be approximately
$70 million, from available general corporate resources.

          Kaiser licenses its technology and sells technical and managerial
assistance to other producers worldwide.  Kaiser's technology has been
installed in alumina refineries, aluminum smelters and rolling mills
located in the United States, Jamaica, Sweden, Germany, Russia, India,
Australia, Korea, New Zealand, Ghana, United Arab Emirates and the United
Kingdom.  Kaiser has technical services contracts with smelters in Wales,
Africa, Europe, the Middle East and India.  Kaiser's revenue from
technology sales and technical assistance to third parties was $3.6 million
in 1996, $5.7 million in 1995 and $10.0 million in 1994.

     BUSINESS DEVELOPMENT

          Kaiser is actively pursuing opportunities to grow in targeted
areas of its portfolio, by internal investment and by acquisition, both
domestically and internationally.  Kaiser is pursuing opportunities to
increase its participation in emerging markets by using its technical
expertise and capital to form joint ventures or acquire equity in
aluminum-related facilities in foreign countries where it can apply its
proprietary technology.  Kaiser has created Kaiser Aluminum International
to identify growth opportunities in targeted emerging markets and develop
the needed country competence to complement Kaiser's product and process
competence in capitalizing on such opportunities.  Kaiser has focused its
efforts on countries that are expected to be important suppliers of
aluminum and/or large customers for aluminum and alumina, including
Venezuela--where Kaiser is the Qualified Operator in one of five consortia
seeking to participate in the privatization of Venezuela's aluminum
industry--the PRC, Russia and other members of the CIS, and India.
Kaiser's proprietary retrofit technology has been installed by Kaiser at
various third party locations throughout the world and is an integral part
of Kaiser's initiatives for participating in new and existing smelting
facilities.  See "--Research and Development."

          In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a
subsidiary of Kaiser, entered into a Joint Venture Agreement and related
agreements (the "Joint Venture Agreements") with the Lanzhou Aluminum
Smelters ("LAS") of the China National Nonferrous Metals Industry
Corporation relating to the formation and operation of Yellow River
Aluminum Industry Company Limited, a Sino-foreign joint equity enterprise
organized under PRC law (the "Joint Venture").  KYRIL contributed $9.0
million to the capital of the Joint Venture in July 1995.  The parties to
the Joint Venture are currently engaged in discussions concerning the
future of the Joint Venture.  Governmental approval in the PRC will be
necessary in order to implement any arrangements agreed to by the parties,
and there can be no assurance such approvals will be obtained.  At a
meeting of the Board of Directors of the Joint Venture held on January 16,
1997, LAS reported that negotiations had begun with an investor which might
be interested in buying KYRIL's interest in the Joint Venture.  In light of
such report, the directors adopted a resolution that, among other things,
(i) contained an agreement to continue until June 30, 1997, discussions
concerning the future of the Joint Venture, (ii) provided that KYRIL
granted to LAS the right to seek a buyer to purchase KYRIL's equity
interest in the Joint Venture, and (iii) provided that if a buyer to
purchase KYRIL's equity interest in the Joint Venture was not found by June
30, 1997, the Joint Venture would be terminated and dissolved.

          Kaiser, through its engineered products business unit, has
entered into contracts to form two small joint venture companies in the
PRC.  Kaiser indirectly acquired equity interests of approximately 45% and
49%, respectively, in these two companies which will manufacture aluminum
extrusions, in exchange for the contribution to those companies of certain
used equipment, technology, services and cash.  The majority equity
interests in the two companies are owned by affiliates of Guizhou Guang Da
Construction Company.

     EMPLOYEES

          During 1996, Kaiser employed an average of approximately 9,600
persons, compared with an average of approximately 9,500 employees in 1995,
and 9,700 employees in 1994.  At December 31, 1996, Kaiser's work force was
approximately 9,500, including a domestic work force of approximately
5,900, of whom approximately 4,000 were paid at an hourly rate.  Most
hourly paid domestic employees are covered by collective bargaining
agreements with various labor unions.  Approximately 75% of such employees
are covered by a master agreement (the "Labor Contract") with the United
Steelworkers of America ("USWA") which expires September 30, 1998.  The
Labor Contract covers Kaiser's plants in Spokane (Trentwood and Mead) and
Tacoma, Washington; Gramercy, Louisiana; and Newark, Ohio.

          The Labor Contract provides for base wages at all covered plants.
In addition, workers covered by the Labor Contract may receive quarterly or
more frequent bonus payments based on various indices of profitability,
productivity, efficiency, and other aspects of specific plant or
departmental performance, as well as, in certain cases, the price of
alumina or primary aluminum.  Pursuant to the Labor Contract, base wage
rates were raised effective January 2, 1995, were raised again effective
November 6, 1995, and will be raised an additional amount effective
November 3, 1997, and an amount in respect of the cost of living adjustment
under the previous master agreement will be phased into base wages during
the term of the Labor Contract.  In the second quarter of 1995, Kaiser
acquired up to $2,000 of preference stock held in a stock plan for the
benefit of certain employees covered by the Labor Contract and in the first
half of 1998 will acquire up to an additional $4,000 of such preference
stock held in such plan for the benefit of substantially the same
employees.  In addition, a profitability test was satisfied and, therefore,
Kaiser acquired during 1996 up to an additional $1,000 of such preference
stock held in such plan for the benefit of substantially the same
employees.  Kaiser made comparable acquisitions of preference stock held
for the benefit of certain salaried employees.

          The contract covering Alpart's employees expired in April 1996,
and contract negotiations are ongoing.  Management considers Kaiser's
employee relations to be satisfactory.

     ENVIRONMENTAL MATTERS

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

          From time to time, Kaiser is subject, with respect to its current
and former operations, to fines or penalties assessed for alleged breaches
of the Environmental and Health Laws and to claims and litigation brought
by federal, state or local agencies and by private parties seeking remedial
or other enforcement action under the Environmental and Health Laws or
damages related to alleged injuries to health or to the environment,
including claims with respect to certain waste disposal sites and the
remediation of sites presently or formerly operated by Kaiser.  See "Legal
Proceedings--Kaiser Litigation--Environmental Litigation."  Kaiser
currently is subject to a number of lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA").
Kaiser, along with certain other entities, has been named as a Potentially
Responsible Party ("PRP") for remedial costs at certain third-party sites
listed on the National Priorities List under CERCLA and, in certain
instances, may be exposed to joint and several liability for those costs or
damages to natural resources. Kaiser's Mead, Washington, facility has been
listed on the National Priorities List under CERCLA.  By letter dated June
18, 1996, the Washington State Department of Ecology advised Kaiser that
there are several options for remediation at the Mead facility that would
be acceptable to the Department.  Kaiser expects that one of these remedial
options will be agreed upon and incorporated into a consent decree in 1997.
In addition, in connection with certain of its asset sales, Kaiser has
agreed to indemnify the purchasers with respect to certain liabilities (and
associated expenses) resulting from acts or omissions arising prior to such
dispositions, including environmental liabilities.

          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 9 to the Consolidated
Financial Statements, each under the heading "Environmental Contingencies"
for further information.

     PROPERTIES

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

          Kaiser's obligations under its credit agreement are secured by,
among other things, mortgages on its major domestic plants (other than the
Gramercy alumina refinery and Nevada Micromill ).

     LEGAL PROCEEDINGS

          See "Legal Proceedings--Kaiser Litigation" for a description of
certain legal proceedings in which Kaiser is involved.

FOREST PRODUCTS OPERATIONS

GENERAL

          The Company engages in forest products operations through MGI and
its wholly owned subsidiaries, Pacific Lumber and Britt, and Pacific
Lumber's subsidiaries, Scotia Pacific and Salmon Creek. Pacific Lumber,
which has been in continuous operation for over 125 years, engages in
several principal aspects of the lumber industry--the growing and
harvesting of redwood and Douglas-fir timber, the milling of logs into
lumber products and the manufacturing of lumber into a variety of
value-added finished products. Britt manufactures redwood and cedar fencing
and decking products from small diameter logs, a substantial portion of
which Britt acquires from Pacific Lumber (as Pacific Lumber cannot
efficiently process them in its own mills).

PACIFIC LUMBER OPERATIONS

     TIMBERLANDS

          Pacific Lumber owns and manages approximately 193,000 acres of
virtually contiguous commercial timberlands located in Humboldt County
along the northern California coast, which has very favorable soil and
climate conditions.  These timberlands contain approximately three-quarters
redwood and one-quarter Douglas-fir timber, are located in close proximity
to Pacific Lumber's four sawmills and contain an extensive network of
roads.  Approximately 179,000 acres of Pacific Lumber's timberlands are
owned by Scotia Pacific (the "Scotia Pacific Timberlands").  Pacific Lumber
has the exclusive right to harvest (the "Pacific Lumber Harvest Rights")
approximately 8,000 non-contiguous acres of the Scotia Pacific Timberlands
consisting substantially of virgin old growth redwood and virgin old growth
Douglas-fir timber located on numerous small parcels throughout the Scotia
Pacific Timberlands.  Substantially all of Scotia Pacific's assets,
including the Scotia Pacific Timberlands and the GIS (defined below), are
pledged as security for Scotia Pacific's 7.95% Timber Collateralized Notes
due 2015 (the "Timber Notes").  Pacific Lumber harvests and purchases from
Scotia Pacific all of the logs harvested from the Scotia Pacific
Timberlands.  See "--Relationships With Scotia Pacific and Britt" for a
description of this and other relationships among Pacific Lumber, Scotia
Pacific and Britt.  Approximately 6,000 acres of Pacific Lumber's
timberlands are owned by Salmon Creek.

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

          Pacific Lumber engages in extensive efforts to supplement the
natural regeneration of timber and increase the amount of timber on its
timberlands.  Pacific Lumber is required to comply with California forestry
regulations regarding reforestation, which generally require that an area
be reforested to specified standards within an established period of time.
Pacific Lumber also actively engages in efforts to establish timberlands
from open areas such as pasture land.  Regeneration of redwood timber
generally is accomplished through the natural growth of new redwood sprouts
from the stump remaining after a redwood tree is harvested.  Such new
redwood sprouts grow quickly, thriving on existing mature root systems.  In
addition, Pacific Lumber supplements natural redwood regeneration by
planting redwood seedlings.  Douglas-fir timber grown on Pacific Lumber's
timberlands is regenerated almost entirely by planting seedlings.  During
1996, Pacific Lumber planted an estimated 529,000 redwood and Douglas-fir
seedlings.

     HARVESTING PRACTICES

          The ability of Pacific Lumber to sell logs or lumber products
will depend, in part, upon its ability to obtain regulatory approval of
timber harvesting plans ("THPs").  THPs are required to be developed by
registered professional foresters and must be filed with, and approved by,
the California Department of Forestry ("CDF") prior to the harvesting of
timber.  Each THP is designed to comply with applicable laws and
regulations.  The CDF's evaluation of proposed THPs incorporates review and
analysis of such THPs by several California and federal agencies and public
comments received with respect to such THPs.  An approved THP is applicable
to specific acreage and specifies the harvesting method and other
conditions relating to the harvesting of the timber covered by such THP.
See "--Regulatory and Environmental Factors" for information regarding a
critical habitat designation, sustained yield regulations and similar
matters concerning Pacific Lumber and its operations.  Pacific Lumber
maintains a detailed geographical information system covering its
timberlands (the "GIS").  The GIS covers numerous aspects of Pacific
Lumber's properties, including timber type, tree class, wildlife data,
roads, rivers and streams.  By carefully monitoring and updating this data
base and conducting field studies, Pacific Lumber's foresters are better
able to develop detailed THPs addressing the various regulatory
requirements.  Pacific Lumber also utilizes a Global Positioning System
("GPS") which allows precise location of geographic features through
satellite positioning.

          Pacific Lumber employs a variety of well-accepted methods of
selecting trees for harvest.  These methods, which are designed to achieve
optimal regeneration, are referred to as "silvicultural systems" in the
forestry profession.  Silvicultural systems range from very light thinnings
aimed at enhancing the growth rate of retained trees to clear cutting which
results in the harvest of all trees in an area and replacement with a new
forest stand.  In between are a number of varying levels of partial
harvests which can be employed.  Pacific Lumber's foresters select the
appropriate silvicultural system for any given site based upon the specific
conditions of that site.  The systems chosen are those which will most
closely emulate those natural processes that result in the cycling of
natural forest stands.  Due to the magnitude of its timberlands and
conservative application of silvicultural systems, Pacific Lumber has
historically conducted harvesting operations on approximately 5% of its
timberlands in any given year.

     PRODUCTION FACILITIES

          Pacific Lumber owns four highly mechanized sawmills and related
facilities located in Scotia, Fortuna and Carlotta, California.  The
sawmills historically have been supplied almost entirely from timber
harvested from Pacific Lumber's timberlands.  Since 1986, Pacific Lumber
has implemented numerous technological advances that have increased the
operating efficiency of its production facilities and the recovery of
finished products from its timber.  Over the past three years, Pacific
Lumber's annual lumber production has averaged approximately 289 million
board feet, with approximately 291, 290 and 286 million board feet produced
in 1996, 1995 and 1994, respectively.  The Fortuna sawmill produces
primarily common grade lumber.  During 1996, the Fortuna mill produced
approximately 99 million board feet of lumber.  The Carlotta sawmill
produces both common and upper grade redwood lumber.  During 1996, the
Carlotta mill produced approximately 63 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 1996, Sawmills "A" and "B" produced 88 million and 41 million
board feet of lumber, respectively.

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

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

          In addition, Pacific Lumber owns and operates a modern
25-megawatt cogeneration power plant which is fueled almost entirely by the
wood residue from Pacific Lumber's milling and finishing operations.  This
power plant generates substantially all of the energy requirements of
Scotia, California, the town adjacent to Pacific Lumber's timberlands where
several of its manufacturing facilities are located.  Pacific Lumber sells
surplus power to Pacific Gas and Electric Company.  In 1996, the sale of
surplus power accounted for approximately 1% of Pacific Lumber's total
revenues.

     PRODUCTS

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

<TABLE>
<CAPTION>

                              Year Ended December 31, 1996              Year Ended December 31, 1995
                       ----------------------------------------- -----------------------------------------
                         % of Total                                % of Total
                           Lumber      % of Total                    Lumber      % of Total
                         Production      Lumber      % of Total    Production      Lumber      % of Total
       Product             Volume       Revenues      Revenues       Volume       Revenues      Revenues
                       ------------- ------------- ------------- ------------- ------------- -------------
<S>                    <C>           <C>           <C>           <C>           <C>           <C>
Upper grade redwood
     lumber                      13%           33%           28%           17%           38%           31%
Common grade redwood
     lumber                      53%           42%           35%           54%           40%           32%
                       ------------- ------------- ------------- ------------- ------------- -------------
     Total redwood
          lumber                 66%           75%           63%           71%           78%           63%
                       ------------- ------------- ------------- ------------- ------------- -------------
Upper grade Douglas-
     fir lumber                   3%            6%            5%            3%            5%            4%
Common grade Douglas-
     fir lumber                  27%           16%           13%           23%           14%           11%
                       ------------- ------------- ------------- ------------- ------------- -------------
     Total Douglas-
          fir lumber             30%           22%           18%           26%           19%           15%
                       ------------- ------------- ------------- ------------- ------------- -------------
Other grades of
     lumber                       4%            3%            2%            3%            3%            4%
                       ------------- ------------- ------------- ------------- ------------- -------------
     Total lumber               100%          100%           83%          100%          100%           82%
                       ============= ============= ============= ============= ============= =============
Logs                                                          9%                                        7%
                                                   =============                             =============
Hardwood chips                                                2%                                        4%
Softwood chips                                                4%                                        5%
                                                   -------------                             -------------
     Total wood chips                                         6%                                        9%
                                                   =============                             =============
</TABLE>

          Lumber.  Pacific Lumber primarily produces and markets lumber.
In 1996, Pacific Lumber sold approximately 307 million board feet of
lumber, which accounted for approximately 83% of Pacific Lumber's total
revenues.  Lumber products vary greatly by the species and quality of the
timber from which it is produced.  Lumber is sold not only by grade (such
as "upper" grade versus "common" grade), but also by board size and the
drying process associated with the lumber.

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

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

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

          Logs.  Pacific Lumber currently sells certain logs that, due to
their size or quality, cannot be efficiently processed by its mills into
lumber.  The majority of these logs are purchased by Britt.  The balance
are purchased by surrounding mills which do not own sufficient timberlands
to support their mill operations.  See "--Relationships With Scotia Pacific
and Britt" below.  Except for the agreement with Britt described below,
Pacific Lumber does not have any significant contractual relationships with
third parties relating to the purchase of logs.  Pacific Lumber has
historically not purchased significant quantities of logs from third
parties; however, Pacific Lumber may from time to time purchase logs from
third parties for processing in its mills or for resale to third parties
if, in the opinion of management, economic factors are advantageous to
Pacific Lumber.

          Wood Chips.  Pacific Lumber uses a whole-log chipper to produce
wood chips from hardwood trees which would otherwise be left as waste.
These chips are sold to third parties primarily for the production of
facsimile and other specialty papers.  Pacific Lumber also produces
softwood chips from the wood residue and waste from its milling and
finishing operations.  These chips are sold to third parties for the
production of wood pulp and paper products.

     BACKLOG AND SEASONALITY

          Pacific Lumber's backlog of sales orders at December 31, 1996 and
1995 was approximately $21.3 million and approximately $11.5 million,
respectively, the substantial portion of which was delivered in the first
quarter of the next fiscal year.  Pacific Lumber has historically
experienced lower first quarter sales due largely to the general decline in
construction-related activity during the winter months.  As a result,
Pacific Lumber's results in any one quarter are not necessarily indicative
of results to be expected for the full year.

     MARKETING

          The housing, construction and remodeling markets are the primary
markets for Pacific Lumber's lumber products. Pacific Lumber's policy is to
maintain a wide distribution of its products both geographically and in
terms of the number of customers. Pacific Lumber sells its lumber products
throughout the country to a variety of accounts, the large majority of
which are wholesalers, followed by retailers, industrial users, exporters
and manufacturers. Upper grades of redwood and Douglas-fir lumber are sold
throughout the entire United States, as well as to export markets. Common
grades of redwood lumber are sold principally west of the Mississippi
River, with California accounting for approximately 66% of these sales in
1996.  Common grades of Douglas-fir lumber are sold primarily in
California.  In 1996, the largest and top five of Pacific Lumber's
customers accounted for approximately 9% and 24%, respectively, of total
revenues.  Exports of lumber accounted for approximately 5% of Pacific
Lumber's total revenues in 1996.  Pacific Lumber markets its products
through its own sales staff which focuses primarily on domestic sales.

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

     COMPETITION

          Pacific Lumber's lumber is sold in highly competitive markets.
Competition is generally based upon a combination of price, service,
product availability and product quality. Pacific Lumber's products compete
not only with other wood products but with metals, masonry, plastic and
other construction materials made from non-renewable resources. The level
of demand for Pacific Lumber's products is dependent on such broad factors
as overall economic conditions, interest rates and demographic trends. In
addition, competitive considerations, such as total industry production and
competitors' pricing, as well as the price of other construction products,
affect the sales prices for Pacific Lumber's lumber products. Pacific
Lumber currently enjoys a competitive advantage in the upper grade redwood
lumber market due to the quality of its timber holdings and relatively low
cost production operations.  Competition in the common grade redwood and
Douglas-fir lumber market is more intense, and Pacific Lumber competes with
numerous large and small lumber producers.

     EMPLOYEES

          As of March 1, 1997, Pacific Lumber had approximately 1,600
employees, none of whom are covered by a collective bargaining agreement.

     RELATIONSHIPS WITH SCOTIA PACIFIC AND BRITT

          In March 1993, Pacific Lumber consummated its offering of $235
million of 10-1/2% Senior Notes due 2003 (the "Pacific Lumber Senior
Notes") and Scotia Pacific consummated its offering of $385 million of
Timber Notes.  Upon the closing of such offerings, Pacific Lumber, Scotia
Pacific and Britt entered into a variety of agreements.  Pacific Lumber and
Scotia Pacific entered into a Services Agreement (the "Services Agreement")
and an Additional Services Agreement (the "Additional Services Agreement").
Pursuant to the Services Agreement, Pacific Lumber provides operational,
management and related services with respect to the Scotia Pacific
Timberlands containing timber of Scotia Pacific ("Scotia Pacific Timber")
not performed by Scotia Pacific's own employees.  Such services include,
but are not limited to, the furnishing of all equipment, personnel and
expertise not within Scotia Pacific's possession and reasonably necessary
for the operation and maintenance of the Scotia Pacific Timberlands
containing Scotia Pacific Timber.  In particular, Pacific Lumber is
required to regenerate Scotia Pacific Timber, prevent and control loss of
Scotia Pacific Timber by fires, maintain a system of roads throughout the
Scotia Pacific Timberlands, take measures to control the spread of disease
and insect infestation affecting Scotia Pacific Timber and comply with
environmental laws and regulations.  Pacific Lumber is also required (to
the extent necessary) to assist Scotia Pacific personnel in updating the
GIS and to prepare and file, on Scotia Pacific's behalf, all pleadings and
motions and otherwise diligently pursue appeals of any denial of any THP
and related matters.  As compensation for these and the other services to
be provided by Pacific Lumber, Scotia Pacific pays a fee which is adjusted
on January 1 of each year based on a specified government index relating to
wood products.  The fee was approximately $112,000 per month in 1996 and is
expected to be approximately $115,200 per month in 1997.  Pursuant to the
Additional Services Agreement, Scotia Pacific provides Pacific Lumber with
a variety of services, including (a) assisting Pacific Lumber to operate,
maintain and harvest its own timber properties, (b) updating and providing
access to the GIS with respect to information concerning Pacific Lumber's
own timber properties, and (c) assisting Pacific Lumber with its statutory
and regulatory compliance.  Pacific Lumber pays Scotia Pacific a fee for
such services equal to the actual cost of providing such services, as
determined in accordance with generally accepted accounting principles.

          Pacific Lumber and Scotia Pacific also entered into a Master
Purchase Agreement (the "Master Purchase Agreement").  The Master Purchase
Agreement governs all purchases of logs by Pacific Lumber from Scotia
Pacific.  Each purchase of logs by Pacific Lumber from Scotia Pacific is
made pursuant to a separate log purchase agreement (which incorporates the
terms of the Master Purchase Agreement) for the Scotia Pacific Timber
covered by an approved THP.  Each log purchase agreement generally
constitutes an exclusive agreement with respect to the timber covered
thereby, subject to certain limited exceptions.  The purchase price must be
at least equal to the SBE Price (as defined below).  The Master Purchase
Agreement provides that if the purchase price equals or exceeds (i) the
price for such species and category thereof set forth on the structuring
schedule applicable to the Timber Notes and (ii) the SBE Price, then such
price shall be deemed to be the fair market value of such logs.  The Master
Purchase Agreement defines the "SBE Price," for any species and category of
timber, as the stumpage price for such species and category as set forth in
the most recent "Harvest Value Schedule" published by the California State
Board of Equalization ("SBE") applicable to the timber sold during the
period covered by such Harvest Value Schedule.  Such Harvest Value
Schedules are published for the purpose of computing yield taxes and
generally are released every six months.  As Pacific Lumber purchases logs
from Scotia Pacific pursuant to the Master Purchase Agreement, Pacific
Lumber is responsible, at its own expense, for harvesting and removing the
standing Scotia Pacific Timber covered by approved THPs, and the purchase
price is therefore based upon "stumpage prices."  Title to the harvested
logs does not pass to Pacific Lumber until the logs are transported to
Pacific Lumber's log decks and measured.  Substantially all of Scotia
Pacific's revenues are derived from the sale of logs to Pacific Lumber
under the Master Purchase Agreement.

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

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

BRITT LUMBER OPERATIONS

     BUSINESS

          Britt is located in Arcata, California, approximately 45 miles
north of Pacific Lumber's headquarters. Britt's primary business is the
processing of small diameter redwood logs into wood fencing products for
sale to retail and wholesale customers. Britt was incorporated in 1965 and
operated as an independent manufacturer of fence products until July 1990,
when it was purchased by a subsidiary of the Company. Britt purchases small
diameter (6 to 11 inch) and short length (6 to 12 feet) redwood logs from
Pacific Lumber and a variety of different diameter and different length
logs from various timberland owners. Britt processes logs at its mill into
a variety of different fencing products, including "dog-eared" 1" x 6"
fence stock in six and eight foot lengths, 4" x 4" fence posts in 6 through
12 foot lengths, and other fencing products in 6 through 12 foot lengths.
Britt's purchases of logs from third parties are generally consummated
pursuant to short-term contracts of twelve months or less. See "--Pacific
Lumber Operations--Relationships With Scotia Pacific and Britt" for a
description of Britt's log purchases from Pacific Lumber.

     MARKETING

          In 1996, Britt sold approximately 79 million board feet of lumber
products to approximately 75 different customers.  Over one-half of Britt's
1996 lumber sales were in northern California. The remainder of its 1996
sales were in southern California and ten other western states. The largest
and top five of such customers accounted for approximately 27% and 68%,
respectively, of such 1996 sales. Britt markets its products through its
own salesmen to a variety of customers, including distribution centers,
industrial remanufacturers, wholesalers and retailers.

          Britt's backlog of sales orders at December 31, 1996 and 1995 was
approximately $4.2 million and $3.2 million, respectively, the substantial
portion of which was delivered in the first quarter of the next fiscal
year.

     FACILITIES AND EMPLOYEES

          Britt's manufacturing operations are conducted on 12 acres of
land, 10 acres of which are leased on a long-term fixed-price basis from an
unrelated third party. Fence production is conducted in a 46,000 square
foot mill. An 18 acre log sorting and storage yard is located one quarter
of a mile away. The mill was constructed in 1980, and capital expenditures
to enhance its output and efficiency are made periodically. Britt's (single
shift) mill capacity, assuming 40 production hours per week, is estimated
at 37.4 million board feet of fencing products per year.  As of March 1,
1997, Britt employed approximately 120 people, none of whom are covered by
a collective bargaining agreement.

     COMPETITION

          Management estimates that Britt accounted for approximately
one-third of the redwood fence market in 1996. Britt competes primarily
with the northern California mills of Louisiana Pacific, Georgia Pacific
and Eel River.

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

          Regulatory and environmental issues play a significant role in
Pacific Lumber's forest products operations.  Pacific Lumber's forest
products operations are subject to a variety of California and federal laws
and regulations dealing with timber harvesting, endangered species and
critical habitat, and air and water quality.  Moreover, these laws and
regulations are modified from time to time and are subject to judicial and
administrative interpretation.  These laws include the California Forest
Practice Act (the "Forest Practice Act"), which requires that timber
harvesting operations be conducted in accordance with detailed requirements
set forth in the Forest Practice Act and in the regulations promulgated
thereunder by the California Board of Forestry (the "BOF").  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 fish, wildlife and plants which have been declared to
be endangered or threatened.  The California Environmental Quality Act
("CEQA") provides, in general, for protection of the environment of the
state, including protection of air and water quality and of fish and
wildlife.  In addition, the California Water Quality Act and Federal Clean
Water Act require, in part, that Pacific Lumber's operations be conducted
so as to reasonably protect the water quality of nearby rivers and streams.
Pacific Lumber is subject to certain pending matters described below which
could have a material adverse effect on the consolidated financial
position, results of operations or liquidity of Pacific Lumber, and in turn
MGI and MGHI.  There can be no assurance that certain pending or future
legislation, governmental regulations or judicial or administrative
decisions will not have a material adverse effect on Pacific Lumber.

          In March 1992, the marbled murrelet was approved for listing as
endangered under the CESA.  In October 1992, the United States Fish and
Wildlife Service ("USFWS") issued its final rule listing the marbled
murrelet as a threatened species under the ESA in the tri-state area of
Washington, Oregon and California.  Pacific Lumber has incorporated, and
will continue to incorporate as required, mitigation measures into its THPs
to protect and maintain habitat for the marbled murrelet on its
timberlands.  The BOF requires Pacific Lumber to conduct pre-harvest
marbled murrelet surveys to provide certain site specific mitigations in
connection with THPs covering virgin old growth timber and unusually dense
stands of residual old growth timber.  Such surveys can only be conducted
during a portion of the murrelet's nesting and breeding season, which
extends from April through mid-September.  Accordingly, such surveys are
expected to delay the review and approval process with respect to certain
of the THPs filed by Pacific Lumber.  The results of such surveys to date
(based upon current survey protocols) have indicated that Pacific Lumber
has approximately 6,600 acres (all containing virgin or residual old growth
timber) which are occupied marbled murrelet habitat.  Pacific Lumber is
unable to predict when or if it will be able to harvest this acreage.

          In May 1996, the USFWS published its final designation of
critical habitat for the marbled murrelet (the "Final Designation"),
designating over four million acres as critical habitat for the marbled
murrelet.  Although nearly all of the designated habitat is public land,
approximately 33,000 acres of Pacific Lumber's timberlands are included in
the Final Designation, the substantial portion of such acreage being young
growth timber.  The bulk of Pacific Lumber's 6,600 acres of occupied
marbled murrelet habitat falls within the 33,000 acres of Pacific Lumber's
timberlands included in the Final Designation.  In order to mitigate the
impact of the Final Designation, particularly with respect to timberlands
occupied by the marbled murrelet, Pacific Lumber over the last few years
has attempted to develop a habitat conservation plan for the marbled
murrelet (the "Murrelet HCP").  Due to, among other things, the unfavorable
response of the USFWS to Pacific Lumber's initial Murrelet HCP efforts,
Pacific Lumber and its subsidiaries filed two actions (the "Takings
Litigation") alleging that certain portions of their timberlands have been
"taken" and seeking just compensation.  See Item 3. "Legal Proceedings--
Pacific Lumber Litigation" for a description of the Takings Litigation.
Pursuant to an agreement entered into by the Company, MAXXAM, the United
States and the State of California on September 28, 1996 (the "Headwaters
Agreement") and described below under "--Headwaters Agreement," the Takings
Litigation has been stayed at the request of the parties.

          It is impossible for the Company to determine the potential
adverse effect of the Final Designation on Pacific Lumber's consolidated
financial position, results of operations or liquidity until such time as
various regulatory and legal issues are resolved; however, if Pacific
Lumber is unable to harvest, or is severely limited in harvesting, on
timberlands designated as critical habitat for the marbled murrelet, such
effect could be materially adverse to Pacific Lumber (and in turn MGI and
MGHI).  If Pacific Lumber is unable to harvest or is severely limited in
harvesting, it intends to seek just compensation from the appropriate
governmental agencies on the grounds that such restrictions constitute a
governmental taking.  There continue to be other regulatory actions and
lawsuits seeking to have other species listed as threatened or endangered
under the ESA and/or the CESA and to designate critical habitat for such
species.  For example, the National Marine Fisheries Service has announced
that by April 25, 1997 it will make a final determination whether to list
the coho salmon under the ESA in northern California, including,
potentially, lands owned by Pacific Lumber.  It is uncertain what impact,
if any, such listings and/or designations of critical habitat would have on
the consolidated financial position, results of operations or liquidity of
Pacific Lumber, and in turn MGI and MGHI.

          In 1994, the BOF adopted certain regulations regarding compliance
with long-term sustained yield ("LTSY") objectives.  These regulations
require that timber companies project timber growth and harvest on their
timberlands over a 100-year planning period and establish a LTSY harvest
level that takes into account environmental and economic considerations.
The sustained yield plan ("SYP") must demonstrate that the average annual
harvest over any rolling ten-year period will not exceed the LTSY harvest
level and that Pacific Lumber's projected timber inventory is capable of
sustaining the LTSY harvest level in the last decade of the 100-year
planning period. On December 17, 1996, Pacific Lumber submitted a proposed
SYP to the CDF.  The proposed SYP sets forth an LTSY harvest level
substantially the same as Pacific Lumber's average annual timber harvest
over the last six years.  The proposed SYP also indicates that Pacific
Lumber's average annual timber harvest during the first decade of the SYP
would approximate the LTSY harvest level.  During the second decade of the
proposed SYP, Pacific Lumber's average annual timber harvest would be
approximately 8% less than that proposed for the first decade.  The SYP,
when approved, will be valid for ten years.  Thereafter, revised SYPs will
be prepared every decade that will address the LTSY harvest level based
upon reassessment of changes in the resource base and protection of public
resources.

          The proposed SYP assumes that the transactions contemplated by
the Headwaters Agreement will be consummated and that the Multi-Species HCP
(as defined below under "--Headwaters Agreement") will permit Pacific
Lumber to harvest its timberlands (including over the next two decades a
substantial portion of its old growth timberlands not transferred pursuant
to the Headwaters Agreement) to achieve maximum sustained yield.  The SYP
is subject to review and approval by the CDF, and there can be no assurance
that the SYP will be approved in its proposed form.  Until the SYP is
reviewed and approved, Pacific Lumber is unable to predict the impact that
these regulations will have on Pacific Lumber's future timber harvesting
practices. It is possible that the results of the review and approval
process could require Pacific Lumber to reduce its timber harvest in future
years from the harvest levels set forth in the proposed SYP. Pacific Lumber
believes it would be able to mitigate the effect of any required reduction
in harvest level by acquisitions of additional timberlands (and making
corresponding amendments to the SYP); however, there can be no assurance
that Pacific Lumber would be able to do so and the amount of such
acquisitions would be limited by Pacific Lumber's available financial
resources.  The Company is unable to predict the ultimate impact the
sustained yield regulations will have on Pacific Lumber's future financial
position, results of operations or liquidity.

          Various groups and individuals have filed objections with the CDF
and the BOF regarding the CDF's and the BOF's actions and rulings with
respect to certain of Pacific Lumber's THPs and other timber harvesting
operations, and Pacific Lumber expects that such groups and individuals
will continue to file such objections. In addition, lawsuits are pending or
threatened which seek to prevent Pacific Lumber from implementing certain
of its approved THPs or which challenge other operations by Pacific Lumber.
These challenges have severely restricted Pacific Lumber's ability to
harvest old growth timber on its property.  To date, challenges with
respect to Pacific Lumber's THPs relating to young growth timber and to its
other operations have been limited; however, no assurance can be given as
to the extent of such challenges in the future.  The Company believes that
environmentally focused challenges to its timber harvesting and other
operations are likely to occur in the future,  particularly with respect to
virgin and residual old growth timber.  Although such challenges have
delayed or prevented Pacific Lumber from conducting a portion of its
operations, they have not had a material adverse effect on Pacific Lumber's
consolidated financial position, results of operations or liquidity.
Nevertheless, it is impossible to predict the future nature or degree of
such challenges or their ultimate impact on the consolidated financial
position, results of operations or liquidity of Pacific Lumber, and in turn
MGI and MGHI.

          In early 1997, the Environmental Protection Agency ("EPA")
entered into a consent decree agreeing to establish limits on
sedimentation, temperature and other factors (i.e. non-point source total
maximum daily loadings, "TMDL") under the Federal Clean Water Act for
seventeen northern California rivers and certain of their tributaries,
including rivers within Pacific Lumber's timberlands.  The TMDL scheme will
be primarily aimed at protecting fish habitat.  It is impossible to predict
the ultimate impact this consent decree will have on Pacific Lumber's
consolidated financial position, results of operations or liquidity.

          In June 1990, the USFWS designated the northern spotted owl as
threatened under the ESA.  The owl's range includes all of Pacific Lumber's
timberlands.  The ESA and its implementing regulations (and related
California regulations) generally prohibit harvesting operations in which
individual owls might be killed, displaced or injured or which result in
significant habitat modification that could impair the survival of
individual owls or the species as a whole.  Since 1988, biologists have
conducted inventory and habitat utilization studies of northern spotted
owls on Pacific Lumber's timberlands.  Pacific Lumber has developed and the
USFWS has given its full concurrence to a northern spotted owl management
plan (the "Federal Owl Plan").  The Federal Owl Plan, as amended from time
to time, is currently applicable through 1999 and the USFWS expressed its
agreement that operations consistent with the Federal Owl Plan would not
result in the taking of any owls.  Pacific Lumber has also developed a
Spotted Owl Resource Plan (the "State Owl Plan"), and the California
Department of Fish and Game has expressed its agreement that operations
consistent with the State Owl Plan would not result in the taking of any
owls.  By incorporating the Federal Owl Plan or State Owl Plan into each
THP filed with the CDF, Pacific Lumber is able to expedite the approval
time with respect to its THPs.  The plaintiffs in the Marbled Murrelet
action have requested and received injunctive relief with respect to
certain THPs involving the Federal Owl Plan. See Item 3."Legal Proceedings-
-Pacific Lumber Litigation."  Both federal and state agencies continue to
review and consider possible additional regulations regarding the northern
spotted owl.  It is uncertain if such additional regulations will become
effective or their ultimate content or impact on Pacific Lumber.

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

HEADWATERS AGREEMENT

          On September 28, 1996, Pacific Lumber (on behalf of itself, its
subsidiaries and affiliates) and MAXXAM (collectively, "the Pacific Lumber
Parties") entered into the Headwaters Agreement with the United States and
California.  The Headwaters Agreement provides the framework for the
acquisition by the United States and California of certain timberlands of
Pacific Lumber.

          The Headwaters Agreement requires the parties to use their
respective best, good faith efforts to achieve certain items (the
"Specified Items").  The Specified Items include the transfer to the United
States and California of approximately 5,600 acres of Pacific Lumber's
timberlands commonly referred to as the Headwaters Forest and the Elk Head
Springs Forest and related buffer zones (respectively, the "Headwaters
Forest" and the "Elk Head Forest" and, collectively, the "Headwaters
Timberlands").  A substantial portion of the Headwaters Timberlands
consists of virgin old growth timberlands.  Approximately 4,900 of these
acres are owned by Salmon Creek.  The remaining acreage is owned by Scotia
Pacific (Pacific Lumber having harvesting rights on a portion of the
acreage).

          The Headwaters Timberlands would be transferred in exchange for
(a) property and other consideration (possibly including cash) from both
the United States and California having an aggregate fair market value of
$300 million and (b) 7,755 acres of adjacent timberlands to be acquired by
the United States and California from a third party (the "Elk River
Timberlands").  The United States and California would also acquire and
retain an additional 1,900 acres of timberlands from such third party.  An
additional Specified Item is the expedited development and submission by
Pacific Lumber and processing by the United States of an incidental take
permit ("Permit") to be based upon a habitat conservation plan for multiple
species ("Multi-Species HCP")  covering (a) the timberlands and timber
harvesting rights which Pacific Lumber will own after consummation of the
Headwaters Agreement (the "Resulting Pacific Lumber Timber Property") and
(b) the Headwaters Timberlands and the 1,900 acres of Elk River Timberlands
retained by the United States and California (both as conserved habitat).
The agreement also requires expedited processing by California of an SYP
covering the Resulting Pacific Lumber Timber Property.  The Headwaters
Agreement contains various provisions regarding the processing of the
Multi-Species HCP, the Permit and the SYP.  The Specified Items also
require, among other things, dismissal with prejudice at closing of the
Takings Litigation pending against the United States and California.  See
Item 3. "Legal Proceedings--Pacific Lumber Litigation."  Pursuant to the
Headwaters Agreement, the parties have stayed the Takings Litigation,
subject to certain rights of the parties to terminate the stay.

          The Headwaters Agreement also requires the United States and/or
California to provide to Pacific Lumber a list of property interests owned
or controlled by the United States and/or California meeting certain
conditions, including that they have a good faith estimated fair market
value equal to or in excess of $300 million.  On December 5, 1996, the
United States and California each furnished a list of properties for
Pacific Lumber's review and approval.  Neither list was accompanied by the
requisite background information, although both lists did indicate that
additional information would be made available.  The list of United States
properties consisted of oil and gas interests in Kern County, California,
approximately 3,000 acres of young growth timberlands in Humboldt,
Mendocino and Trinity Counties in California, and surplus acreage next to a
federal office building in Laguna Niguel, California.  In February 1997,
after full and careful consideration, Pacific Lumber notified California
that its Presented Properties were not acceptable due to, among other
things, various physical problems and encumbrances on the properties,
certain properties having been withdrawn by the state and public opposition
to the transfer of some of the properties.  Pacific Lumber also advised
California that it should proceed with the steps necessary to assure that
California can provide cash for its portion of the consideration to be paid
to Pacific Lumber.  There have been ongoing discussions between the Pacific
Lumber Parties and the United States regarding the properties or other
consideration to be furnished by the United States.

          As part of the Headwaters Agreement, the Pacific Lumber Parties
agreed to not enter the Headwaters Forest or the Elk Head Forest to conduct
logging operations, including salvage logging (the "Moratorium").  The
Moratorium was to terminate if by July 28, 1997 the parties had not
achieved the Specified Items to their respective satisfaction.  On March
11, 1997, the Pacific Lumber Parties agreed to amend the Headwaters
Agreement to extend the period of time during which these closing
conditions must be met to February 17, 1998.  The extension is, however,
subject to the achievement of certain milestones toward completion of the
Headwaters Agreement. The parties have agreed to execute an amendment to
the Headwaters Agreement evidencing these modifications.

          Closing of the Headwaters Agreement is subject to various
conditions, including (a) completion of the Specified Items, (b) approval
of a Multi-Species HCP and SYP and issuance of the Permit, each in form and
substance satisfactory to Pacific Lumber, (c) the issuance by the Internal
Revenue Service and the California Franchise Tax Board of closing
agreements in form and substance sought by and satisfactory to the Pacific
Lumber Parties, (d) the absence of a judicial decision in any litigation
brought by third parties that any party reasonably believes will
significantly delay or impair the transactions described in the Headwaters
Agreement, and (e) approval by the boards of directors of the applicable
Pacific Lumber Parties.  The Headwaters  Agreement also provides that the
parties will cooperate and act in good faith to preserve diligently the
Headwaters Agreement, the Multi-Species HCP, the Permit and the SYP against
third party challenge.  The parties to the Headwaters Agreement are working
to satisfy these conditions; however, there can be no assurance that the
Headwaters Agreement will be consummated.

LEGAL PROCEEDINGS

          See "Legal Proceedings--Pacific Lumber Litigation" for a
description of certain legal proceedings in which Pacific Lumber is
involved and "Legal Proceedings--USAT Matters" for a description of the
Martel action in which MGI is involved.

REAL ESTATE AND OTHER OPERATIONS

     REAL ESTATE AND RESORT OPERATIONS

          General
          The Company, principally through its wholly owned subsidiaries,
is also engaged in the business of residential and commercial real estate
investment and development, primarily in Arizona, California, Texas and
Puerto Rico. At December 31, 1996, the Company had approximately $18.2
million of outstanding receivables derived from the financing of real
estate sales in its land developments and may continue to finance real
estate sales in the future.  As of December 31, 1996, these receivables had
a weighted average interest rate of approximately 9.6%, a weighted average
maturity of less than three years and average borrower equity of
approximately 54%.  As of December 31, 1996, the Company also held $1.4
million of other receivables as a portion of the RTC Portfolio (as defined
below).

          Principal Properties
          Palmas del Mar.  Palmas del Mar, a resort located on the
southeastern coast of Puerto Rico near Humacao ("Palmas"), was acquired
by a subsidiary of the Company in 1984.  Palmas consists of approximately
1,900 acres of undeveloped land, 104 condominiums utilized in its
time-sharing program (comprising 5,300 time-share intervals, of which
approximately 1,258 remain to be sold), a 102-room hotel and adjacent
executive convention center known as the Candelero Hotel, a 23-room luxury
hotel known as the Palmas Inn, a casino, a Gary Player-designed 18-hole
golf course, 20 tennis courts, golf and tennis pro shops, restaurants,
beach and pool facilities, an equestrian center and a marina.  The
Candelero Hotel, approximately 1,300 private residences, a marina and
certain other facilities are owned by third parties, and certain of these
facilities are operated by third parties.  Since 1985, subsidiaries of
MAXXAM have been actively engaged in the development and sale of
condominiums, estate lots and villas.

          During 1996, Palmas del Mar Properties, Inc. ("PDMPI"), the
subsidiary through which the Company conducts its Palmas operations, sold
20 condominiums, 219 time-share intervals, one residential lot and 727
time-share conversions for an aggregate of $9.6 million.  In addition, on
December 20, 1996, PDMPI completed the sale of the Candelero Hotel and
certain other assets of Palmas for a purchase price of $7.6 million to
BlueWater Palmas Ltd. ("BlueWater"), an affiliate of the Talon Group, Inc.
The Candelero Hotel and certain other current or former assets of Palmas
are being managed for BlueWater and PDMPI by an affiliate of Wyndham hotels.
PDMPI will continue to receive royalty payments from BlueWater, for a period
of 49 years, equal to 3% of the gross revenues from the Candelero Hotel and
a percentage of gross revenues from certain other assets.  During 1995,
PDMPI sold 31 condominium units and 65 time-share intervals. Additionally,
PDMPI completed a sale and leaseback transaction on July 14, 1995 of 33
furnished condominium units for approximately $8.4 million.

          Palmas Country Club, Inc. ("PCCI"), a subsidiary of PDMPI, owns
the Palmas Country Club which consists of the golf course at Palmas, a
clubhouse, tennis courts and other facilities.  PCCI has entered into a
$12.5 million loan agreement, the proceeds of which will be used to construct
an additional golf course, a new clubhouse and related facilities.  An
additional $2.5 million can be borrowed if certain financial tests are met.
The loan is currently secured by the existing facilities and the land on
which the additional golf course is being built.  The new golf course,
clubhouse and other facilities will also serve as security for the loan,
provided that at the time the new facilities are completed, certain of the
existing facilities will be released as security for the loan.

          Fountain Hills.  In 1968, a subsidiary of MAXXAM purchased and
began developing approximately 12,100 acres of real property at Fountain
Hills, Arizona, which is located near Phoenix and adjacent to Scottsdale,
Arizona.  As of December 31, 1996, Fountain Hills had approximately 3,660
acres of undeveloped residential land, 81 developed commercial and
industrial lots, 81 acres of undeveloped commercial and industrial land and
165 developed residential lots available for sale.  The population of
Fountain Hills is approximately 15,000. The Company is planning the
development of certain of the remaining acreage at Fountain Hills.  Future
sales are expected to consist mainly of undeveloped acreage, semi-developed
parcels and fully-developed lots, although Company subsidiaries may engage
in limited construction and direct sale of residential units.  During 1996,
67 residential lots, 20 commercial parcels and 2 acres were sold for an
aggregate of $7.5 million.  During 1995, 115 residential lots, 22
commercial parcels and 103 acres were sold for an aggregate of $14.5
million.   These sales figures do not include those arising from the
SunRidge Canyon development described in the following paragraph.

          In 1994 a subsidiary of the Company entered into a joint venture
to develop 950 acres in Fountain Hills in an area known as SunRidge Canyon.
The development is a residential golf-oriented, upscale master-planned
community.  The project includes 950 acres, of which 185 have been
developed into a championship-quality, public golf course which opened for
play in November 1995.  The remaining 765 acres are being developed into
approximately 860 single family lots.  Sales of the individual lots began
in November 1995.  The project consists of both custom lots, marketed on an
individual basis, and production lots, marketed to home builders.  There
are currently five homebuilders actively involved in the construction and
sale of new homes within SunRidge Canyon.  During 1996, 39 custom lots and
70 production lots were sold for an aggregate of $8.9 million.  Nine custom
lots and three production lots were sold during 1995 for an aggregate of
$1.4 million.  The development is being done 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.

          The Company intends to continue development of its remaining
acreage at Fountain Hills in a manner that will allow it to maintain recent
sales levels, although there can be no assurance that it will be able to do
so.

          Texas.  In June 1991, a wholly owned subsidiary of MAXXAM
purchased from the Resolution Trust Corporation at an auction, for
approximately $122.3 million, a portfolio of 27 parcels of income producing
real property and 28 loans secured by real property (the "RTC Portfolio").
Substantially all of the real property was located in Texas, with the
largest concentration in the vicinities of San Antonio, Houston, Austin and
Dallas.  From 1992 to December 31, 1996, an aggregate of approximately
$41.7 million in loans (which represented thirteen loans) were sold or paid
off and thirty-six properties (including fourteen acquired via foreclosure)
were sold for aggregate consideration of approximately $182.4 million.
These transactions resulted in aggregate gains of  $97.3 million.  As of
December 31, 1996, two loans resulting from property sales and six
properties (including one acquired via foreclosure) were held, which had an
aggregate net book value of $15.7 million. One property within this
portfolio has subsequently been sold for $4.5 million, resulting in a gain
of $2.5 million and net cash proceeds of $4.3 million.  All of the
remaining assets are being marketed for sale.

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

          Rancho Mirage.  In 1991, a subsidiary of the Company acquired
Mirada, a 195-acre luxury resort-residential project located in Rancho
Mirage, California.  Mirada is a master planned community built into the
Santa Rosa Mountains, 650 feet above the Coachella Valley floor.  Two of
the five parcels have been developed, one of which is a custom lot
subdivision of 46 estate lots with home prices ranging from $1.5 million to
$3.0 million.  The Ritz-Carlton Rancho Mirage Hotel is located in the
development.  The three remaining parcels encompass approximately 130 acres
with entitlements allowing a variety of residential options.  The Company is
currently marketing the project's 23 fully-developed lots.

          Other.   The Company through its subsidiaries, owns a number of
other properties in Arizona, New Mexico, Texas and Colorado. Efforts are
underway to sell most of these properties.  Most notably, in April 1996,
the Company sold the 1,600-acre Vail Valley Ranch project and Del Lago
Water Company near Tucson, Arizona, for an aggregate of $6.0 million.

          Marketing
          The Company is engaged in marketing and sales programs of varying
magnitudes at its real estate developments. In recent years, the Company
has constructed residential units and sold time-share intervals at certain
of its real estate developments.  The Company intends to continue selling
land to builders and developers and lots to individuals and expects to
continue to construct and sell completed residential units at certain of
its developments.  It also expects to sell certain of its commercial real
estate assets.  All sales are made directly to purchasers through the
Company's marketing personnel, independent contractors or through
independent real estate brokers who are compensated through the payment of
customary real estate brokerage commissions.

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

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

          Employees
          As of March 1, 1997, the Company's real estate operations had
approximately 160 employees.

     SAM HOUSTON RACE PARK

          General
          In July 1993, MAXXAM, through subsidiaries, acquired various
interests in SHRP, Ltd., a Texas limited partnership which owns and
operates Sam Houston Race Park (the "Race Park"), a Texas Class 1 horse
racing facility located within the greater Houston metropolitan area. On
January 15, 1995, SHRP, Ltd. defaulted on the $4.4 million semi-annual
interest payment due on its 11-3/4% Senior Secured Notes.  On April 17,
1995, the Debtors, consisting of SHRP, Ltd. and two affiliated entities,
filed voluntary petitions, each seeking to reorganize under the provisions
of Chapter 11 of the United States Bankruptcy Code.  On September 22, 1995,
the Bankruptcy Court confirmed the Debtors' plan of reorganization (the
"Plan") and on October 6, 1995, the transactions called for by the Plan
were completed.

          The Plan provided for, among other things, a significant
modification of SHRP, Ltd.'s 11-3/4% Senior Secured Notes (the "Original
Notes" and, as modified, the "Extendible Notes"), an additional capital
infusion and a reorganization of SHRP, Ltd.  The Extendible Notes have an
aggregate initial principal amount of $37.5 million, mature on September 1,
2001 and bear interest at the rate 11% per annum.  The maturity date of the
Extendible Notes may be extended to September 1, 2003 (with an increase in
the rate of interest to 13% per annum) if the Texas legislature passes
significant gaming legislation (as defined) between January 1, 2001 and
August 15, 2001.  Interest on the Extendible Notes will accrue in-kind and
will not be payable in cash until a certain level of cash flow from
operations has been achieved.  Once cash interest payments commence,
interest payments may not thereafter be paid in-kind.

          The New SHRP Investor Group made a capital contribution of cash
in the aggregate amount of $5.9 million (wholly owned subsidiaries of
MAXXAM contributed $5.8 million).  Additionally, a wholly owned subsidiary
of MAXXAM contributed to SHRP, Ltd. an adjoining approximately 87 acre
tract of land (having a fair market value of $2.3 million).  A wholly owned
subsidiary of MAXXAM is the new managing general partner of SHRP, Ltd.
Each member of the New SHRP Investor Group provided its pro rata share of a
$1.7 million line of credit, should the initial cash contributed to SHRP,
Ltd. prove insufficient to fund the future operating and working capital
requirements of SHRP, Ltd.  MAXXAM has guaranteed its subsidiaries' share
of the line of credit, which totaled $1.6 million.  The Company has
subsequently purchased certain of the Extendible Notes and the
corresponding shares of common stock of SHRP Equity, Inc. (a Delaware
corporation and an additional general partner of the reorganized SHRP,
Ltd.).  After giving effect to these transactions, wholly owned
subsidiaries of MAXXAM hold, directly or indirectly, approximately 88.5% of
the equity in the reorganized SHRP, Ltd.

          See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities--Real Estate and Other Operations--Investing" for
information concerning the projected losses of SHRP, Ltd. for the next two
years.

          Racing Operations and Race Park Facilities
          The Race Park offers pari-mutuel wagering on live thoroughbred or
quarter horse racing or simulcast racing generally seven days a week
throughout the year.  Simulcasting is the process by which live races held
at one facility are broadcast simultaneously to other locations at which
additional wagers are placed on the race being broadcast.  The Race Park's
principal sources of revenue are its statutory and contractual share of
total wagering on live and simulcast racing.  The Race Park also derives
revenues from admission fees, food services, club memberships, luxury
suites, advertising sales and other sources.  The Race Park is located on
approximately 300 acres of land in northwest Harris County approximately 18
miles from the Houston central business district and approximately 15 miles
from Houston Intercontinental Airport.

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

          Marketing and Competition
          The Race Park believes that the majority of the patrons for the
Race Park reside within a 50-mile radius of the Race Park, which includes
the greater Houston metropolitan area, and that a secondary market of
occasional patrons can be developed outside the 50-mile radius but within a
100-mile radius of the Race Park.  The Race Park uses a number of marketing
strategies in an attempt to reach these people and make them more frequent
visitors to the Race Park.  The Race Park competes with other forms of
entertainment, including casinos located approximately 125 to 150 miles
from Houston, a greyhound racetrack located 60 miles from the Race Park and
a wide range of sporting events and other entertainment activities in the
Houston area.  The Race Park could in the future also compete with other
forms of gambling in Texas, including casino gambling on Indian
reservations or otherwise.  While the Race Park believes that the location
of the Race Park is a competitive advantage over the other more distant
gaming ventures mentioned above, the most significant challenge for the
Race Park is to develop and educate new racing fans in a market where
pari-mutuel wagering has been absent since the 1930's.  Other competitive
factors faced by the Race Park include the allocation of sufficient live
race days by the Racing  Commission and attraction of sufficient race
horses to run at the Race Park.  The Race Park had 146 days of live racing
during 1996.  The Race Park currently has 134 days of live racing scheduled
for 1997.

EMPLOYEES

          At March 1, 1997, MAXXAM and its subsidiaries employed
approximately 2,040 persons, exclusive of those involved in Aluminum
Operations.

ITEM 2.        PROPERTIES

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

ITEM 3.        LEGAL PROCEEDINGS

GENERAL

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

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

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

MAXXAM INC. LITIGATION

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

     USAT MATTERS

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

          On December 26, 1995, the OTS initiated a formal administrative
proceeding (the "OTS action") against the Company and others by filing a
Notice of Charges (No. AP 95-40; the "Notice").  The Notice alleges, among
other things, misconduct by the Company, Federated Development Company
("Federated"), Mr. Charles Hurwitz and others (the "respondents") with
respect to the failure of USAT.  Mr. Hurwitz is the Chairman of the Board,
Chief Executive Officer and President of the Company.  Mr. Hurwitz is also
the Chairman of the Board and Chief Executive Officer of Federated, a New
York business trust wholly owned by Mr. Hurwitz, members of his immediate
family and trusts for the benefit thereof. Mr. Hurwitz and a wholly owned
subsidiary of Federated collectively own approximately 61.1% of the
aggregate voting power of the Company. The Notice claims that the Company
was a savings and loan holding company, that with others it controlled
USAT, and that, as a result of such status and agreements with the FHLBB,
it was obligated to maintain the net worth of USAT. The Notice makes
numerous other allegations against the Company and the other respondents,
including that through USAT it was involved in prohibited transactions with
Drexel, Burnham, Lambert Inc. ("Drexel"). The OTS, among other things,
seeks unspecified damages in excess of $138.0 million from the Company and
Federated, civil money penalties from certain respondents and restitution
and reimbursement of certain losses as well as a removal from, and
prohibition against the Company and the other respondents engaging in, the
banking industry.  The date for the hearing on the merits is scheduled for
September 22, 1997.  It is impossible to predict the ultimate outcome of
the foregoing matter or its potential impact on the Company's consolidated
financial position, results of operations or liquidity.  See also the
description of the FDIC action and the Martel action below.

          In a separate but related matter, on December 7, 1995, the
Company filed a petition for review in the U.S. Fifth Circuit Court of
Appeals alleging various statutory violations by certain predecessor
agencies to the OTS and seeking to modify, terminate or set aside the
December 30, 1988 order awarding the bid to acquire USAT to a bidder whose
bid was more costly to the government and taxpayers.  The action was
entitled MAXXAM Inc. v. Office of Thrift Supervision, Department of the
Treasury (No. 95-60753).  By order dated December 10, 1996, the  U.S. Fifth
Circuit Court of Appeals denied the Company's petition for review and
denied any relief to the Company.

          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
sought 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.  This action did not name the
Company as a defendant.  The Court has joined the OTS as a party to the
FDIC action and granted the motions to intervene filed by the Company and
three other respondents in the OTS action.  The OTS is seeking to be
dismissed from the FDIC action.  On January 15, 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 alleged
obligations to maintain USAT's net worth.  It is impossible to predict the
ultimate outcome of the foregoing matter or its potential impact on the
Company's consolidated financial position, results of operations or
liquidity.

          In January 1995, an action entitled U.S., ex rel., Martel v.
Hurwitz, et al. (the "Martel action") was filed in the U.S. District Court
for the Northern District of California (No. C950322) and names as
defendants the Company, Mr. Hurwitz, MGI, Federated, UFG and a former
director of the Company. This action is purportedly brought by plaintiff on
behalf of the U.S. government; however, the U.S. government has declined to
participate in the suit. The suit alleges that defendants made false
statements and claims in violation of the Federal False Claims Act in
connection with USAT. Plaintiff alleges, among other things, that
defendants used the federally insured assets of USAT to acquire junk bonds
from Michael Milken and Drexel and that, in exchange, Mr. Milken and Drexel
arranged financing for defendants' various business ventures, including the
acquisition of Pacific Lumber.  Plaintiff alleges that USAT became
insolvent in 1988 and that the defendants should be required to pay $1.6
billion (subject to trebling) to cover USAT's losses.  The Company's
alleged portion of such damages has not been specified.  Plaintiff seeks,
among other things, that the Court impose a constructive trust upon the
fruits of the alleged improper use of USAT funds.  In August 1996, the
Court transferred this matter (No. 96-CV-1164) to the court handling the
FDIC action.  The parties are awaiting a ruling or hearing on defendants'
motion to dismiss.

     ZERO COUPON NOTE LITIGATION

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

     RANCHO MIRAGE LITIGATION

          In May 1991, a derivative action entitled Progressive United
Corporation v. MAXXAM Inc., et al. (No. 12111) (the "Progressive United
action") was filed in the Court of Chancery, State of Delaware against the
Company, Federated, certain of the Company's directors and MCO Properties
Inc., a subsidiary of the Company ("MCOP").  The action alleges abuse of
control and breaches of fiduciary obligations based on, and unfair
consideration for, the Company's Agreement in Principle with Federated to
(a) forgive payments of principal and interest of approximately $32.2
million due from Federated under two loan agreements entered into between
MCOP and Federated in 1987 (and later assigned by MCOP to the Company), and
(b) grant an additional $11.0 million of consideration to Federated, in
exchange for certain real estate assets valued at approximately $42.9
million in Rancho Mirage, California, held by Federated (the "Mirada
transactions"). Plaintiff seeks, among other things, an accounting under
the loan agreements, repayment of any losses or damages suffered by the
Company or MCOP, costs and attorneys fees.

          The following six additional lawsuits, similar to the Progressive
United action, were filed in 1991 and 1992 in Delaware Chancery Court
challenging the Mirada transactions: NL Industries, et al. v. MAXXAM Inc.,
et al. (No. 12353) (the "NL Industries action"); Kahn, et al. v. Federated
Development Company, et al. (No. 12373); Thistlethwaite, et al. v. MAXXAM
Inc., et al. (No. 12377) (the "Thistlethwaite action"); Glinert, et al. v.
Hurwitz, et al. (No. 12383); Friscia, et al. v. MAXXAM Inc., et al. (No.
12390); and Kassoway, et al. v. MAXXAM Inc., et al. (No. 12404). The Kahn,
Glinert, Friscia and Kassoway actions have been consolidated with the
Progressive United action into In re MAXXAM Inc./Federated Development
Shareholders Litigation (No. 12111); the NL Industries action has been
"coordinated" with the consolidated actions; and the Thistlethwaite action
has been stayed pending the outcome of the consolidated actions. In January
1994, a derivative action entitled NL Industries, Inc., et al. v. Federated
Development Company, et al. (No. 94-00630) was filed in the District Court
of Dallas County, Texas, against the Company (as nominal defendant) and
Federated. This action contains allegations and seeks relief similar to
that contained in the In re MAXXAM Inc./Federated Development Shareholders
Litigation. The parties have agreed to stay this action in light of the In
re MAXXAM Inc./Federated Development Shareholders Litigation. With respect
to the In re MAXXAM Inc./Federated Development Shareholders Litigation, on
February 10, 1995, the Court issued its decision disapproving a previously
announced proposed settlement and on June 23, 1995, the Court denied
defendants' motion to dismiss certain of plaintiffs' claims. This matter
was tried before the Court commencing January 29, 1996. The Court held a
hearing on April 2, 1996 on various trial-related matters, including
defendants' motion to dismiss the claims relating to the 1987 loan
transactions. On August 14, 1996, the Court heard final oral argument on
the merits of the case, but has not issued its decision. By order dated
September 6, 1996, the Court denied defendants' motion to dismiss the 1987
loan claims and granted plaintiffs' motion to intervene and substitute a
new plaintiff to cure standing problems concerning plaintiffs' 1987 loan
claims. Based on post-trial briefs, plaintiffs have indicated they are
seeking $49 million in damages from the director defendants.

KAISER LITIGATION

     ENVIRONMENTAL LITIGATION

          Aberdeen Pesticide Dumps Site Matter

          The Aberdeen Pesticide Dumps Site, listed on the Superfund
National Priorities List, is composed of five separate sites around the
town of Aberdeen, North Carolina (collectively, the "Sites"). The Sites are
of concern to the United States Environmental Protection Agency (the "EPA")
because of their past use as either pesticide formulation facilities or
pesticide disposal areas from approximately the mid-1930's through the late
1980's. The United States originally filed a cost recovery complaint (as
amended, the "Complaint") in the United States District Court for the
Middle District of North Carolina, Rockingham Division,  No. C-89-231-R,
which, as amended, includes KACC and a number of other defendants. The
Complaint seeks reimbursement for past and future response costs and a
determination of liability of the defendants under Section 107 of CERCLA.

          In 1993 and 1994, the EPA issued unilateral Administrative Orders
under Section 106(a) of CERCLA ordering the respondents, including KACC, to
perform soil remedial design and remedial action and groundwater
remediation for three of the Sites.  In addition to KACC, a number of other
companies are also named as respondents. KACC has entered into interim PRP
Participation Agreements with certain of the respondents (the "Aberdeen
Site PRP Group" or the "Group") to participate jointly in responding to the
Administrative Orders, to share costs incurred on an interim basis, and to
seek to reach a final allocation of costs through agreement or to allow
such final allocation and determination of liability to be made by the
United States District Court.

          In March 1997, certain members of the Group, including KACC,
entered into a Settlement Agreement and Participation Agreement which
allocates one hundred percent of all costs incurred or to be incurred for
work at each of the five Sites.  Negotiations with the United States
Department of Justice ("DOJ") and the EPA concerning an acceptable consent
decree to resolve the outstanding litigation in whole or in part commenced
during the first quarter of 1997.  Based on current estimates of future
costs, Kaiser believes that its aggregate financial exposure at these Sites
is less than $2.0 million.

          United States of America v. Kaiser Aluminum & Chemical
          Corporation

          In February 1989, a civil action was filed by the DOJ at the
request of the EPA against KACC in the United States District Court for the
Eastern District of Washington, Case Number C-89-106-CLQ. The complaint
alleged that emissions from certain stacks at KACC's Trentwood facility in
Spokane, Washington, intermittently violated the opacity standard contained
in the Washington State Implementation Plan ("SIP"), approved by the EPA
under the federal Clean Air Act.  KACC and the EPA, without adjudication of
any issue of fact or law, and without any admission of the violations
alleged in the underlying complaint, have entered into a Consent Decree,
which was approved by a Consent Order entered by the United States District
Court for the Eastern District of Washington in January 1996. As approved,
the Consent Decree settles the underlying disputes and requires KACC to (i)
pay a $.5 million civil penalty (which has been paid), (ii) complete a
program of plant improvements and operational changes that began in 1990 at
its Trentwood facility, including the installation of an emission control
system to capture particulate emissions from certain furnaces, and (iii)
achieve and maintain furnace compliance with the opacity standard in the
SIP.  KACC anticipates that capital expenditures for the environmental
upgrade of the furnace operation at its Trentwood facility, including the
improvements and changes required by the Consent Decree, will be
approximately $20.0 million.

          Catellus Development Corporation v. Kaiser Aluminum & Chemical
          Corporation and James L. Ferry & Son, Inc.

          In January 1991, the City of Richmond, et al. (the "Plaintiffs")
filed a Second Amended Complaint for Damages and Declaratory Relief against
the United States, Catellus Development Corporation ("Catellus") and other
defendants (collectively, the "Defendants") alleging, among other things,
that the Defendants caused or allowed hazardous substances to be discharged
or released on certain property located in Richmond, California (the
"Property") formerly owned by Catellus and leased to KACC for the purpose
of shipbuilding activities conducted by KACC on behalf of the United States
during World War II. The Plaintiffs sought recovery of response costs and
natural resource damages under CERCLA. Certain of the Plaintiffs alleged
that they had incurred or expect to incur costs and damages of
approximately $49.0 million. Catellus subsequently filed a third party
complaint (the "Third Party Complaint") against KACC in the United States
District Court for the Northern District of California, Case No. C-89-2935
DLJ. Thereafter, the Plaintiffs filed a separate complaint against KACC,
Case No. C-92-4176. The Plaintiffs settled their CERCLA and tort claims
against the United States for $3.5 million plus thirty-five percent (35%)
of future response costs.

          The trial involving this case commenced in March 1995. During the
trial, Plaintiffs settled their claims against Catellus in exchange for
payment of approximately $3.3 million.  On December 7, 1995, the United
States District Court issued a final judgment on those claims concluding
that KACC is liable for various costs and interest, aggregating
approximately $2.2 million, fifty percent (50%) of future costs of cleaning
up certain parts of the Property, and certain fees and costs associated
specifically with the claim by Catellus against KACC.  KACC paid the City
of Richmond $1.8 million in partial satisfaction of this judgment. In
January 1996, Catellus filed a notice of appeal with respect to its
indemnity judgment against KACC.  KACC has since filed a notice of cross
appeal as to the Court's decision adjudicating that KACC is obligated to
indemnify Catellus.  On July 8, 1996, the Court issued an order awarding
Plaintiffs nominal costs, which amount has been paid.  The order also
awarded Catellus de minimis costs.  Catellus has filed a notice of appeal.
On August 12, 1996, the Court issued an order granting the Catellus motion
for attorneys' fees in the amount of approximately $.9 million.  KACC and
Catellus have filed notices of appeal with respect to the attorneys' fees
award.

          Asbestos-related Litigation

          KACC is a defendant in a number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with
KACC or exposure to products containing asbestos produced or sold by KACC.
The lawsuits generally relate to products KACC has not manufactured for at
least 15 years. For a discussion of asbestos-related litigation, see Item
7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Condition and Investing and Financing Activities--
Aluminum Operations--Asbestos Contingencies."

          DOJ Proceedings

          On August 24, 1994, the DOJ issued Civil Investigative Demand No.
11356 ("CID No. 11356") requesting information from Kaiser regarding (i)
its production, capacity to produce, and sales of primary aluminum from
January 1, 1991, to the date of the response; (ii) any actual or
contemplated reduction in its production of primary aluminum during that
period; and (iii) any communications with others regarding any actual,
contemplated, possible or desired reductions in primary aluminum production
by Kaiser or any of its competitors during that period.  Kaiser believes
that its actions have at all times been appropriate, and KACC has submitted
documents and interrogatory answers to the DOJ responding to CID No. 11356.

          On March 27, 1995, the DOJ issued Civil Investigative Demand No.
12503 ("CID No. 12503"), as part of an industry-wide investigation,
requesting information from KACC regarding (i) any actual or contemplated
changes in its method of pricing can sheet from January 1, 1994, through
March 31, 1995, (ii) the percentage of aluminum scrap and primary aluminum
ingot used by KACC to produce can sheet and the manner in which KACC's cost
of acquiring aluminum scrap is factored into its can sheet prices, and
(iii) any communications with others regarding any actual or contemplated
changes in its method of pricing can sheet from January 1, 1994, through
March 31, 1995.  Kaiser believes that its actions have at all times been
appropriate, and KACC has submitted documents and interrogatory answers to
the DOJ responding to CID No. 12503. KACC was informed in November 1996
that the DOJ has officially closed its investigation of CID No. 12503, and
has returned the documents submitted by KACC.

     OTHER PROCEEDINGS

          Matheson, et al. v. Kaiser Aluminum Corporation, et al.

          On March 19, 1996, a lawsuit was filed against the Company,
Kaiser and Kaiser's directors challenging and seeking to enjoin a proposed
recapitalization of Kaiser (the "Proposed Recapitalization").  See Note 7
to the Consolidated Financial Statements.  The suit, which is entitled
Matheson, et al. v. Kaiser Aluminum Corporation, et al. (No. 14900) and was
filed in the Delaware Court of Chancery, alleges, among other things,
breaches of fiduciary duties by certain defendants and that the Proposed
Recapitalization violates Delaware law and the certificate of designations
for the outstanding preferred stock of Kaiser.  On April 8, 1996, the
Delaware Court of Chancery issued a ruling which preliminarily enjoined
Kaiser from implementing the Proposed Recapitalization. On May 1, 1996,
Kaiser's stockholders approved the Proposed Recapitalization which was not
implemented at that time due to a pending appeal of the trial court's
ruling. On August 29, 1996, the Delaware Supreme Court upheld the
preliminary injunction and remanded the case to the Court of Chancery. On
September 24, 1996, the plaintiffs filed a motion to make permanent the
temporary injunction issued on April 8, 1996. On September 27, 1996,
Kaiser's Board of Directors adopted a resolution abandoning the Proposed
Recapitalization.  On March 18, 1997, plaintiffs withdrew their motion for
a permanent injunction, leaving their fee application as the only issue for
the Court of Chancery to consider.  On March 25, 1997, the Court of
Chancery awarded plaintiffs' attorneys' fees and expenses in the total
amount of $800,000.  It is anticipated that the Court of Chancery will sign
an order approved as to form by all parties, awarding such fees,
dissolving the preliminary injunction, and dismissing plaintiffs' case with
prejudice.  The decision to abandon the Proposed Recapitalization does not
preclude a recapitalization being proposed to the stockholders of Kaiser in
the future.

          Hammons v. Alcan Aluminum Corp., et al.

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

          Other Matters

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

PACIFIC LUMBER LITIGATION

          Various actions, similar to each other, have been filed against
the Company, MGI, Pacific Lumber and its subsidiaries, various state
officials and others, alleging, among other things, violations of the
Forest Practice Act, CEQA, ESA, CESA and/or related regulations.  These
actions seek to prevent Pacific Lumber and its subsidiaries from harvesting
certain of their THPs and conducting certain other timber operations.

          On September 15, 1995, an action entitled Marbled Murrelet, et
al. v. Bruce Babbitt, et al.  (No. C-95-3261) (the "Marbled Murrelet
action") was filed in the U.S. District Court for the Northern District of
California. This action relates to, among other things, exemptions for
forest health which Pacific Lumber and its subsidiaries had previously
filed covering their entire timberlands. These exemptions allow Pacific
Lumber to harvest dead, dying or diseased trees ("exempt harvesting
operations"). As amended, the complaint alleges, among other things,
violations of the ESA, the National Environmental Protection Act ("NEPA")
and the Administrative Procedures Act ("APA"). Plaintiffs claim, among
other things, that the exempt harvesting operations will contribute to the
destruction of habitat for the marbled murrelet and the northern spotted
owl. After the U.S. Ninth Circuit Court of Appeals reversed a preliminary
injunction granted by the trial court enjoining the exempt harvesting
operations, the plaintiffs asked for leave to amend their pleadings.  On
April 3, 1996, the trial court granted a preliminary injunction preventing
harvesting on eight already-approved THPs to the extent that they rely on
the Federal Owl Plan. In addition to appealing the preliminary injunction,
Pacific Lumber has obtained regulatory reapproval of seven of the eight
enjoined THPs without reliance on the Federal Owl Plan and has, to date,
confirmed with the trial court that six of those THPs are not subject to
the preliminary injunction.  On November 4, 1996, the U.S. Ninth Circuit
Court of Appeals heard oral arguments concerning Pacific Lumber's appeal
but has not yet rendered a decision on this matter.  In January 1997, the
trial court dismissed plaintiffs' claims that Pacific Lumber had and was
causing "takes" of the marbled murrelet and northern spotted owl.

          See Item 1. "Business--Forest Products Operations--Pacific Lumber
Operations--Regulatory and Environmental Factors" above for a description
of regulatory and similar matters which could affect Pacific Lumber's
timber harvesting practices and future operating results.

          The EPIC, et al. v. California State Board of Forestry, et al.
(No. 91CP244) action in the Superior Court of Humboldt County, filed by the
Sierra Club and the Environmental Protection Information Center ("EPIC") in
1991, relates to a THP for approximately 237 acres of virgin old growth
timber. After the Superior Court reversed the BOF's approval of this THP,
certain modifications were made to the THP, which was then unanimously
approved by the BOF. The Superior Court later issued judgment in favor of
Pacific Lumber. On appeal, the Court of Appeal in October 1993 affirmed the
trial court's judgment approving harvesting under this THP. In April 1993,
EPIC filed another action with respect to this THP entitled EPIC, Marbled
Murrelet, et al. v. Bruce Babbitt, Secretary, Department of Interior, et
al. (No. C93-1400) (the "EPIC action") in the U.S. District Court for the
Northern District of California, alleging an unlawful "taking" of the
marbled murrelet under the ESA.  In February 1995, the Court ruled that the
area covered by the THP is occupied by the marbled murrelet and permanently
enjoined implementation of the THP in order to protect the marbled
murrelet.  Upon appeal, the U.S. Ninth Circuit Court of Appeals affirmed
the District Court's decision.  Pacific Lumber subsequently appealed the
matter to the U.S. Supreme Court, but on February 19, 1997, the U.S.
Supreme Court ruled that it would not consider Pacific Lumber's appeal.  In
March 1997, Pacific Lumber paid approximately $1.4 million in legal fees
which the trial court had awarded to the plaintiffs.

          On April 22, 1996, Salmon Creek filed a lawsuit entitled Salmon
Creek Corporation v. California State Board of Forestry, et al. (No.
96CS01057) in the Superior Court of Sacramento County. This action seeks to
overturn the BOF's decision denying approval of a THP for approximately 8
acres of virgin old growth timber in the Headwaters Forest. Salmon Creek
seeks a court order requiring approval of the THP so that it may harvest in
accordance with the THP. Salmon Creek also seeks constitutional "just
compensation" damages to the extent that its old growth timber within and
surrounding the THP has been "taken" by reason of this regulatory denial
and previous actions of governmental authorities.  In addition, on May 7,
1996, Pacific Lumber, Scotia Pacific and Salmon Creek filed a lawsuit
entitled The Pacific Lumber Company, et al. v. The United States of America
in the United States Court of Federal Claims. The suit alleges that the
federal government has "taken" over 3,800 acres of Pacific Lumber's old
growth timberlands (including the Headwaters Forest) through its
application of the ESA.   Pacific Lumber, Scotia Pacific and Salmon Creek
seek constitutional "just compensation" damages for the taking of these
timberlands by the federal government's actions. The Court in each of these
actions has granted the parties' agreed motions to stay the actions
pursuant to the Headwaters Agreement. These actions would be dismissed if
the Headwaters Agreement is consummated. See Item 1. "Business--Forest
Products Operations--Pacific Lumber Operations--Headwaters Agreement" for a
description of the Headwaters Agreement.

OTHER MATTERS

          Groundwater contamination has been found on property sold to a
subsidiary of the Company by a subsidiary of Rockwell International
Corporation ("Rockwell"). In March 1992, an enforcement action was filed
against Rockwell and the current property owners by the Nevada Division of
Environmental Protection seeking an order that would require defendants to
investigate and report on the nature and extent of the pollution and
contamination on the property. This action has been stayed, pending
continued environmental investigation and remediation by Rockwell. The
Company was named as a defendant in three related damage actions filed by
certain persons. Two of these cases have settled to date and in each case
the Company's share of the settlement was 21%. In September 1996, Rockwell
submitted a global settlement package to the Company. An Environmental
Cleanup Liability report, which accompanied Rockwell's settlement package
and which was prepared by Rockwell's experts, estimates total costs to be
$26.1 million (which the Company is disputing). No further settlement
discussions have taken place between Rockwell and the Company concerning
the indemnification issue since the settlement package was presented.

          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

          Reference is made to this section in the portions of the
Company's 1996 Annual Report to Stockholders (the "Annual Report") which
are included as part of Exhibit 13.1 hereto and incorporated herein by
reference.

          On December 23, 1996, the Company's wholly owned subsidiary,
MAXXAM Group Holdings Inc. consummated an offering of $130.0 million
aggregate principal amount of 12% Senior Secured Notes due 2003 (the "MGHI
Notes").  The Company guaranteed the MGHI Notes on a senior, unsecured
basis.  The principal underwriters for this offering were Bear, Stearns &
Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation (the
"Initial Purchasers").  The MGHI Notes were sold for cash (at 100% of
principal amount) and the aggregate discount of the Initial Purchasers was
$3,575,000.  Sales were made to Qualified Institutional Buyers ("QIBs") in
reliance on Rule 144A under the Securities Act of 1933 (the "Securities
Act") and to a limited number of  Institutional Accredited Investors (as
defined under Rule 501(a)(1), (2), (3), or (7) under the Securities Act),
that prior to their purchase of MGHI Notes, delivered to the Initial
Purchasers a letter containing, among other things, certain representations
from prospective Institutional Accredited Investors).  This reliance was
based on the Initial Purchasers' knowledge of the QIBs  and the
representation letters received from the Institutional Accredited
Investors.  On December 24, 1996, MGHI and the Company filed a Form S-4
Registration Statement relating to an exchange offer pursuant to which the
MGHI Notes could be exchanged for registered notes containing substantially
identical terms.  The Form S-4 Registration Statement was declared
effective on January 8, 1997 and the exchange offer was consummated on
February 11, 1997.

ITEM 6.        SELECTED FINANCIAL DATA

          Reference is made to this section in the portions of the Annual
Report which are included as part of Exhibit 13.1 hereto and incorporated
herein by reference.

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

          Reference is made to this section in the portions of the Annual
Report which are included as part of Exhibit 13.1 hereto and incorporated
herein by reference.

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          Reference is made to the Consolidated Financial Statements and
Notes thereto and the quarterly financial information in the portions of
the Annual Report which are included as part of Exhibit 13.1 hereto and
incorporated herein by reference.

ITEM 9.        CHANGE 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):

                    The Consolidated Financial Statements and the Report of
Independent Public Accountants are included on pages 31 to 62 of the Annual
Report which are included as part of Exhibit 13.1 hereto and incorporated
herein by reference.

          2.        FINANCIAL STATEMENT SCHEDULES:                     PAGE
                                                                       ----
                    Report of Independent Public Accountants on
                         Financial Statement Schedule                 42
                    Schedule I - Condensed Financial Information of
                         Registrant at December 31, 1996
                         and 1995 and for the years ended December
                         31, 1996, 1995 and 1994                      43-46

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

(B)  REPORTS ON FORM 8-K

          There were no reports on Form 8-K during the fourth quarter of
1996; however, on March 12, 1997, the Company filed a Current Report on Form
8-K (under Item 5), dated March 11, 1997, concerning an agreement to amend
the Headwaters Agreement to extend to February 17, 1998 the period of time
during which the closing conditions must be met.

(C)  EXHIBITS

          Reference is made to the Index of Exhibits immediately preceding
the exhibits hereto (beginning on page 48), which index is incorporated
herein by reference.

                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To the Stockholders and Board of Directors of MAXXAM Inc.:

          We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in MAXXAM Inc.'s
1996 Annual Report to Stockholders incorporated by reference in this Form
10-K, and have issued our report thereon dated February 14, 1997.  Our
audits were made for the purpose of forming an opinion on those statements
taken as a whole.  The schedule listed in the index on page 41 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not
part of the basic consolidated financial statements.  This schedule has
been subjected to the auditing procedures applied in the audits of the
basic consolidated financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth
therein in relation to the basic consolidated financial statements taken as
a whole.


                                         ARTHUR ANDERSEN LLP


Houston, Texas
February 14, 1997

                                MAXXAM INC.

         SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

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

<TABLE>
<CAPTION>

                                                            December 31,
                                                    ---------------------------
                                                         1996          1995
                                                    ------------- -------------
                       ASSETS
<S>                                                 <C>           <C>
Current assets:
     Cash and cash equivalents                      $      169.6  $       20.4
     Marketable securities                                  18.9           9.3
     Other current assets                                   14.6          13.9
                                                    ------------- -------------
          Total current assets                             203.1          43.6
Deferred income taxes                                       66.1          52.1
Investment in subsidiaries                                  16.5            --
Other assets                                                 3.9           3.7
                                                    ------------- -------------
                                                    $      289.6  $       99.4
                                                    ============= =============

       LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
     Accounts payable and accrued liabilities       $        8.3  $        7.4
     Long-term debt, current maturities                     42.6            .2
                                                    ------------- -------------
          Total current liabilities                         50.9           7.6
Long-term debt, less current maturities                       --          41.6
Losses recognized in excess of investment in
     subsidiaries                                             --          12.4
Notes payable to subsidiaries, net of notes
     receivable and advances                               192.2          18.8
Other noncurrent liabilities                                97.3         102.8
                                                    ------------- -------------
          Total liabilities                                340.4         183.2
                                                    ------------- -------------

Stockholders' deficit:
     Preferred stock, $.50 par value; 12,500,000
          shares authorized; Class A $.05
          Non-Cumulative Participating Convertible
          Preferred Stock; shares issued: 669,701             .3            .3
     Common stock, $.50 par value; 28,000,000
          shares authorized; shares issued:
          10,063,885 and 10,063,359, respectively            5.0           5.0
     Additional capital                                    155.9         155.0
     Accumulated deficit                                  (185.6)       (208.5)
     Pension liability adjustment                           (5.1)        (16.1)
     Treasury stock, at cost (shares held:
          preferred - 845; common:  1,400,112 and
          1,355,512, respectively)                         (21.3)        (19.5)
                                                    ------------- -------------
          Total stockholders' deficit                      (50.8)        (83.8)
                                                    ------------- -------------
                                                    $      289.6  $       99.4
                                                    ============= =============

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

                                MAXXAM INC.

          SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

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


<TABLE>
<CAPTION>

                                                       Years Ended December 31,
                                              -----------------------------------------
                                                   1996          1995          1994
                                              ------------- ------------- -------------
<S>                                           <C>           <C>           <C>
Investment, interest and other income
     (expense)                                $       (1.5) $        5.6  $       12.6
Interest expense                                      (7.0)         (6.2)        (11.7)
General and administrative expenses                  (32.8)        (18.9)        (11.0)
Equity in earnings (losses) of subsidiaries           15.1          43.6        (132.0)
                                              ------------- ------------- -------------
Income (loss) before income taxes                    (26.2)         24.1        (142.1)
Credit for income taxes                               49.1          33.4          20.0
                                              ------------- ------------- -------------
Net income (loss)                             $       22.9  $       57.5  $     (122.1)
                                              ============= ============= =============

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

                                MAXXAM INC.

          SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

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

<TABLE>
<CAPTION>


                                                       Years Ended December 31,
                                              -----------------------------------------
                                                   1996          1995          1994
                                              ------------- ------------- -------------
<S>                                           <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income (loss)                        $       22.9  $       57.5  $     (122.1)
     Adjustments to reconcile net income
          (loss) to net cash provided by
          (used for) operating activities:
          Equity in losses (earnings) of
               subsidiaries                          (15.1)        (43.6)        132.0
          Net sales (purchases) of
               marketable securities                  (7.1)         14.5           6.8
          Amortization of deferred financing
               costs and discounts on
               long-term debt                           .3            .3            .3
          Decrease in receivables                       .3            .6           1.1
          Increase in accrued and deferred
               income taxes                          (30.2)        (18.9)         (7.9)
          Decrease in accounts payable and
               other liabilities                       (.1)        (14.5)         (5.3)
          Other                                        2.1           2.3           (.2)
                                              ------------- ------------- -------------
               Net cash provided by (used
                    for) operating
                    activities                       (26.9)         (1.8)          4.7
                                              ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Proceeds from sale of Kaiser Depositary
          Shares                                        --           7.6          10.3
     Dividends received from subsidiaries              3.9           4.8           7.5
     Investments in and net advances from
          (to) subsidiaries                           49.7            .4         (27.5)
     Capital expenditures                              (.4)          (.2)          (.4)
                                              ------------- ------------- -------------
               Net cash provided by (used
                    for) investing
                    activities                        53.2          12.6         (10.1)
                                              ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from issuance of intercompany
          note                                       125.0            --            --
     Redemption, repurchase of and principal
          payments on long-term debt                   (.3)         (5.9)         (5.8)
     Other                                            (1.8)           --            --
                                              ------------- ------------- -------------
               Net cash provided by (used
                    for) financing
                    activities                       122.9          (5.9)         (5.8)
                                              ------------- ------------- -------------

NET INCREASE (DECREASE) IN CASH AND CASH
     EQUIVALENTS                                     149.2           4.9         (11.2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
     YEAR                                             20.4          15.5          26.7
                                              ------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR      $      169.6  $       20.4  $       15.5
                                              ============= ============= =============
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING
     AND FINANCING ACTIVITIES:
     Reduction of stockholders' deficit due
          to redemption of Kaiser preferred
          stock                               $         --  $      136.2  $         --
     Distribution of intercompany payable
          received from a subsidiary                  20.0           8.0         132.0
     Assumption by the Company of
          subsidiary's payables to the
          Company and affiliates                        --            --         (63.1)
     Net assets transferred to subsidiary               --         (14.5)           --

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
     INFORMATION:
     Interest paid                            $        6.7  $        6.0  $        7.0
     Income taxes paid (refunded)                      1.5           (.3)          1.1

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

                                 MAXXAM INC.

         SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                       NOTES TO FINANCIAL STATEMENTS
                          (IN MILLIONS OF DOLLARS)

A.   DEFERRED INCOME TAXES

          The deferred income tax assets and liabilities reported in the
accompanying unconsolidated balance sheet are determined by computing such
amounts on a consolidated basis, for the Company and members of its
consolidated federal income tax return group, and then reducing such
consolidated amounts by the amounts recorded by the Company's subsidiaries
pursuant to their respective tax allocation agreements with the Company.
The Company's net deferred income tax assets relate primarily to the excess
of the tax basis over financial statement basis with respect to timber and
timberlands and real estate held for sale by various subsidiaries.  The
Company has concluded that it is more likely than not that these net
deferred income tax assets will be realized based in part upon the
estimated values of the underlying assets which are in excess of their tax
basis.

B.   LONG-TERM DEBT

          Long-term debt consists of the following:


<TABLE>
<CAPTION>

                                                         December 31,
                                                 ---------------------------
                                                      1996          1995
                                                 ------------- -------------
<S>                                              <C>           <C>
14% Senior Subordinated Reset Notes due May 20,
     2000                                        $       25.0  $       25.0
12-1/2% Subordinated Debentures due December 15,
     1999, net of discount                               17.6          16.5
Other                                                      --            .3
                                                 ------------- -------------
                                                         42.6          41.8
Less: current maturities                                (42.6)          (.2)
                                                 ------------- -------------
                                                 $         --  $       41.6
                                                 ============= =============

</TABLE>

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

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

          At December 31, 1996, the Company's indebtedness to its
subsidiaries, which includes accrued interest, consists of the following:


<TABLE>
<CAPTION>

                                                         December 31,
                                                 ---------------------------
                                                      1996          1995
                                                 ------------- -------------
<S>                                              <C>           <C>
Note payable, interest at 11%                    $      125.0  $         --
Unsecured note payable, interest at 6%                   19.3          18.3
Unsecured notes payable, interest at 7%                  14.6          13.7
Net advances                                             33.3         (13.2)
                                                 ------------- -------------
                                                 $      192.2  $       18.8
                                                 ============= =============

</TABLE>

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

                                 SIGNATURES


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

                                          MAXXAM INC.


Date: March 28, 1997          By:    /S/ PAUL N. SCHWARTZ
                                       Paul N. Schwartz
                              Executive Vice President and Chief
                                       Financial Officer


          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, 1997          By:   /S/ CHARLES E. HURWITZ
                                      Charles E. Hurwitz
                               Chairman of the Board, President,
                                  Chief Executive Officer and
                                           Director


Date: March 28, 1997          By:  /S/ ROBERT J. CRUIKSHANK
                                     Robert J. Cruikshank
                                           Director


Date: March 28, 1997          By:      /S/ EZRA G. LEVIN
                                         Ezra G. Levin
                                           Director


Date: March 28, 1997          By:  /S/ STANLEY D. ROSENBERG
                                     Stanley D. Rosenberg
                                           Director

Date: March 28, 1997          By:    /S/ PAUL N. SCHWARTZ
                                       Paul N. Schwartz
                              Executive Vice President and Chief
                                       Financial Officer
                                 (Principal Financial Officer)

Date: March 28, 1997          By:    /S/ TERRY L. FREEMAN
                                       Terry L. Freeman
                                          Controller
                                (Principal Accounting Officer)

                                MAXXAM INC.
                             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 July 6, 1994 (incorporated herein by
           reference to Exhibit 4(c) to the Registration Statement
           of the Company on Form S-8, Registration No. 33-54479)

   *3.4    Amended and Restated By-laws of the Company dated
           February 3, 1997

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

    4.2    Loan and Pledge Agreement, dated as of June 28, 1996,
           between Custodial Trust Company and the Company (the
           "CTC Loan Agreement"; incorporated herein by reference
           to Exhibit 4 to the Company's Quarterly Report on Form
           10-Q for the quarter ended June 30, 1996)

    4.3    Amendment Agreement, dated December 23, 1996, relating
           to the CTC Loan Agreement, (incorporated herein by
           reference to Exhibit 4.33 to Amendment No. 1 to MGHI's
           Registration Statement on Form S-4, Registration No.
           333-18723)

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

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

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

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

    4.8    Indenture, dated December 23, 1996, among Kaiser
           Aluminum & Chemical Corporation ("KACC"), Kaiser
           Aluminum Australia Corporation, Alpart Jamaica Inc.,
           Kaiser Jamaica Corporation, Kaiser Finance Corporation,
           Kaiser Micromill Holdings, LLC, Kaiser Sierra
           Micromills, LLC, Kaiser Texas Micromill Holdings, LLC
           and Kaiser Texas Sierra Micromills, LLC, as subsidiary
           guarantors ("the Subsidiary Guarantors") and First
           Trust National Association, as Trustee, regarding
           KACC's 10-7/8% Series C Senior Notes due 2006
           (incorporated herein by reference to KACC's
           Registration Statement on Form S-4, Registration No.
           333-19143)

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

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

    4.11   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)

    4.12   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)

    4.13   Indenture, dated as of February 17, 1994, among KACC,
           as Issuer, Kaiser Alumina Australia Corporation, Alpart
           Jamaica Inc., Kaiser Jamaica Corporation, and Kaiser
           Finance Corporation, as subsidiary guarantors, and
           First Trust National Association, Trustee, regarding
           Kaiser's 9-7/8% Senior Notes due 2002 (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")

    4.14   First Supplemental Indenture, dated as of February 1,
           1996, among KACC, as Issuer, Kaiser Alumina Australia
           Corporation, Alpart Jamaica Inc., Kaiser Jamaica
           Corporation, and Kaiser Finance Corporation, as
           subsidiary guarantors, and First Trust National
           Association, Trustee, regarding KACC's 9-7/8% Senior
           Notes (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)

    4.15   Credit Agreement, dated as of February 17, 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)

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

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

    4.18   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)

    4.19   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)

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

    4.21   Sixth Amendment, dated as of October 1, 1996, to the
           Kaiser Credit Agreement (incorporated herein by
           reference to Exhibit 4.1 to KACC's Quarterly Report on
           Form 10-Q for the quarter ended September 30, 1996,
           File No. 1-3605)

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

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

    4.25   Certificate of Designation of 8.255% Preferred
           Redeemable Increased Dividend Equity Securities of
           Kaiser, dated February 17, 1994 (incorporated herein by
           reference to Exhibit 4.21 to Kaiser 1993 Form 10-K)

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

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

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

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

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

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

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

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

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

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

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

   10.5    Tax Allocation Agreement, dated as of May 21, 1988,
           among the Company, MGI, Pacific Lumber and the
           corporations signatory thereto (incorporated herein by
           reference to Exhibit 10.8 to Pacific Lumber's Annual
           Report on Form 10-K for the year ended December 31,
           1988, File No. 1-9204)

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

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

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

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

  *10.10   Intercompany Note, dated December 21, 1989, executed by
           Kaiser in favor of KACC

  *10.11   Confirmation of Amendment of Non-Negotiable
           Intercompany Note, dated as of October 6, 1993, between
           Kaiser and KACC

   10.12   Agreement, dated as of June 30, 1993, between Kaiser
           and the Company (incorporated herein by reference to
           Exhibit 10.2 to KACC's Quarterly Report on Form 10-Q
           for the quarter ended June 30, 1993, File No. 1-3605)

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

   10.14   Exchange Agreement, dated as of May 20, 1991, by and
           among the Company, MCO Properties Inc. ("MCOP") and
           Federated Development Company (incorporated by
           reference to Exhibit 10(ff) to Amendment No. 4 to MGI's
           Registration Statement on Form S-4 on Form S-2,
           Registration No. 33-42300)

   10.15   Revolving Credit and Term Loan Agreement, dated as of
           August 27, 1987, as amended, between MCOP and Federated
           Development Company (incorporated herein by reference
           to Exhibit 10.82 to the Company's Registration
           Statement on Form S-4, Registration No. 33-20096)

   10.16   Term Loan Agreement, dated as of November 17, 1987,
           between MCOP and Federated Development Company
           (incorporated herein by reference to Exhibit 10.83 to
           the Company's Registration Statement on Form S-4,
           Registration No. 33-20096)

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

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

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

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

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

                Executive Compensation Plans and Arrangements
                ---------------------------------------------

   10.22   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")

   10.23   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)

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

   10.25   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)

  *10.26   Form of Deferred Fee Agreement under the MAXXAM 1994
           Non-Employee Director Plan

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

   10.28   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)

   10.29   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")

   10.30   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)

   10.31   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)

   10.32   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)

   10.33   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)

   10.34   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)

   10.35   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)

   10.36   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)

   10.37   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)

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

   10.39   Promissory Note, dated February 1, 1989, by Anthony R.
           Pierno and Beverly J. Pierno in favor of the Company
           (the "1989 Pierno Note") (incorporated herein by
           reference to Exhibit 10.30 to the Company 1990 Form 10-
           K)

   10.40   Letter amendment, dated February 28, 1995, to the 1989
           Pierno Note (incorporated herein by reference to
           Exhibit 10.44 to the Company's Annual Report on Form
           10-K for the year ended December 31, 1994)

   10.41   Promissory Note dated July 19, 1990 by Anthony R.
           Pierno in favor of the Company (the "1990 Pierno Note")
           (incorporated herein by reference to Exhibit 10.31 to
           the Company 1990 Form 10-K)

   10.42   Letter amendment, dated February 28, 1995, to the 1990
           Pierno Note (incorporated herein by reference to
           Exhibit 10.46 to the Company's Annual Report on Form
           10-K for the year ended December 31, 1994)

   10.43   Employment Agreement, dated August 20, 1993 between
           KACC and Robert E. Cole (incorporated herein by
           reference to Exhibit 10.63 to the Company's Annual
           Report on Form 10-K for the year ended December 31,
           1993)

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

  *13.1    The portions of the Company's Annual Report to
           Stockholders for the year ended December 31, 1996 which
           are incorporated herein by reference

  *21      List of the Company's Subsidiaries

  *23      Consent of Independent Public Accountants by Arthur
           Andersen LLP

  *27      Financial Data Schedule

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