10-K

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

                                    FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000       COMMISSION FILE NUMBER 333-18723

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


                DELAWARE                              76-0518669
      (State or other jurisdiction                 (I.R.S. Employer
   of incorporation or organization)            Identification Number)

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

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

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

                                      None.

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

                                      None.

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      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 / /

      All of the Registrant's voting stock is held by an affiliate of the Registrant.

      Number of shares of Common Stock outstanding at March 26, 2001: 1,000

      REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I)(1)(A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.

                      DOCUMENTS INCORPORATED BY REFERENCE:

                                 Not applicable.
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                                TABLE OF CONTENTS


                                     PART I

   Item 1.    Business
                  General
                  Forest Products Operations
                  Aluminum Operations

   Item 2.    Properties

   Item 3.    Legal Proceedings

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

                                     PART II

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

   Item 6.    Selected Financial Data

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

   Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

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

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

                                    PART III

   Items
      10-13.  Not applicable.

                                     PART IV

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



ITEM 1.         BUSINESS

GENERAL

      MAXXAM Group Holdings Inc. (the "COMPANY" or "MGHI") is a wholly owned
subsidiary of MAXXAM Inc. ("MAXXAM"). The Company's wholly owned subsidiary,
MAXXAM Group Inc. ("MGI"), and MGI's wholly owned subsidiaries, The Pacific
Lumber Company ("PACIFIC LUMBER") and Britt Lumber Co., Inc. ("BRITT"), are
engaged in forest products operations. Pacific Lumber's principal wholly owned
subsidiaries are Scotia Pacific Company LLC ("SCOTIA LLC") and Salmon Creek LLC
("SALMON CREEK"). As used herein, the terms "Company," "MGHI," "MGI," "Pacific
Lumber," "Kaiser" or "MAXXAM" refer to the respective companies and their
subsidiaries, unless otherwise noted or the context indicates otherwise.

      Pacific Lumber, which has been in continuous operation for over 130 years,
engages in several principal aspects of the lumber industry--the growing and
harvesting of redwood and Douglas-fir timber, the milling of logs into lumber
products and the manufacturing of lumber into a variety of value-added finished
products. Britt manufactures redwood fencing and decking products from small
diameter logs, a substantial portion of which Britt acquires from Pacific Lumber
(as Pacific Lumber cannot efficiently process them in its own mills). The
Company also owns 27,938,250 shares of the common stock of Kaiser Aluminum
Corporation ("KAISER"), representing a 35.1% interest in Kaiser. In addition,
MAXXAM has a direct interest in Kaiser of 27.8%. Kaiser is a publicly traded
company (New York Stock Exchange trading symbol "KLU") which operates in several
principal aspects of the aluminum industry--the mining of bauxite, the refining
of bauxite into alumina, the production of primary aluminum from alumina, and
the manufacture of fabricated (including semi-fabricated) aluminum products.

      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
(see Item 1. "Business--Forest Products Operations--Pacific Lumber
Operations--Harvesting Practices," "--Production Facilities," "--Regulatory and
Environmental Factors" and "--Aluminum Operations--General--Competition" Item 3.
"Legal Proceedings" and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Background," "--Financial
Condition and Investing and Financing Activities" and "--Trends"). Such
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "estimates," "will," "should," "plans" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may vary materially
from the forward-looking statements as a result of various factors. These
factors include the effectiveness of management's strategies and decisions,
general economic and business conditions, developments in technology, new or
modified statutory or regulatory requirements and changing prices and market
conditions. This Report identifies other factors that could cause such
differences between such forward-looking statements and actual results. No
assurance can be given that these are all of the factors that could cause actual
results to vary materially from the forward-looking statements.

FOREST PRODUCTS OPERATIONS

   PACIFIC LUMBER OPERATIONS

     Timber and Timberlands
     Pacific Lumber owns and manages approximately 219,000 acres of virtually
contiguous commercial timberlands located in Humboldt County along the northern
California coast, an area which has very favorable soil and climate conditions
for growing timber. These timberlands contain approximately 67% redwood, 26%
Douglas-fir and 7% other timber, are located in close proximity to Pacific
Lumber's four sawmills and contain an extensive network of roads. Approximately
205,000 acres of Pacific Lumber's timberlands are owned by Scotia LLC (the
"SCOTIA LLC TIMBERLANDS"), and Scotia LLC has the exclusive right to harvest
(the "SCOTIA LLC TIMBER RIGHTS") approximately 12,200 acres of Pacific Lumber's
timberlands. The timber in respect of the Scotia LLC Timberlands and the Scotia
LLC Timber Rights is collectively referred to as the "SCOTIA LLC TIMBER."
Substantially all of Scotia LLC's assets are pledged as security for its $867.2
million original aggregate principal amount of 6.55% Series B Class A-1 Timber
Collateralized Notes, 7.11% Series B Class A-2 Timber Collateralized Notes and
7.71% Series B Class A-3 Timber Collateralized Notes (collectively the "TIMBER
NOTES"). The Timber Notes are governed by an Indenture (the "TIMBER NOTES
INDENTURE"). Pacific Lumber harvests and purchases from Scotia LLC virtually all
of the logs harvested from the Scotia LLC Timber. See "--Relationships with
Scotia LLC and Britt" below for a description of this and other relationships
among Pacific Lumber, Scotia LLC and Britt.

      On March 1, 1999, Pacific Lumber, Scotia LLC and Salmon Creek
(collectively, the "PALCO COMPANIES") consummated the Headwaters Agreement (the
"HEADWATERS AGREEMENT") with the United States and California, pursuant to which
approximately 5,600 acres of timberlands owned by the Palco Companies known as
the Headwaters Forest and the Elk Head Springs Forest (the "HEADWATERS
TIMBERLANDS") were transferred to the United States. A substantial portion of
the Headwaters Timberlands consists of virgin old growth timberlands. In
consideration for the transfer of the Headwaters Timberlands, Salmon Creek was
paid $299.9 million, Scotia LLC was paid $150,000 and approximately 7,700 acres
of timberlands known as the Elk River Timberlands (the "ELK RIVER TIMBERLANDS")
were transferred to Pacific Lumber (and subsequently transferred to Scotia LLC).
In addition, upon consummation of the Headwaters Agreement (i) habitat
conservation and sustained yield plans were approved covering the Scotia LLC
Timberlands (as defined below), (ii) the Palco Companies dismissed takings
litigation pending against the United States and California and (iii) California
agreed to purchase a portion of Pacific Lumber's Grizzly Creek grove, as well as
Scotia LLC's Owl Creek grove. Salmon Creek placed $169.0 million of the proceeds
from the sale of the Headwaters Timberlands into a Scheduled Amortization
Reserve Account ("SAR ACCOUNT") in order to support principal payments on Scotia
LLC's Timber Notes (as defined below). See "--Regulatory and Environmental
Factors" and Note 2 to the Consolidated Financial Statements.

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

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

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

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

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

      The ability of Pacific Lumber to harvest timber will depend, in part, upon
its ability to obtain regulatory approval of timber harvesting plans ("THPS").
Prior to harvesting timber in California, companies are required to obtain the
CDF's approval of a detailed THP for the area to be harvested. A THP must be
submitted by a registered professional forester and must include information
regarding the method of proposed timber operations for a specified area, whether
the operations will have any adverse impact on the environment and, if so, the
mitigation measures to be used to reduce any such impact. The CDF's evaluation
of THPs incorporates review and analysis of such THPs by several California and
federal agencies and public comments received with respect to such THPs. An
approved THP is applicable to specific acreage and specifies the harvesting
method and other conditions relating to the harvesting of the timber covered by
such THP. The number of Scotia LLC's approved THPs and the amount of timber
covered by such THPs varies significantly from time to time, depending upon the
timing of agency review and other factors. Timber covered by an approved THP is
typically harvested within a one year period from the date harvesting first
begins. The Timber Notes Indenture requires Scotia LLC to use its best efforts
(consistent with prudent business practices) to maintain a number of pending
THPs which, together with THPs previously approved, would cover rights to
harvest a quantity of Scotia LLC Timber adequate to pay interest and principal
amortization based on the Minimum Principal Amortization Schedule for the Timber
Notes for the next succeeding twelve month period. Despite Scotia LLC's best
efforts, it has experienced an absence of a sufficient number of THPs available
for harvest to enable it to conduct its operations at levels it had experienced
prior to 1998 or at levels which meet its expectations. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Trends." However, Scotia LLC believes that the Environmental Plans
should in the long-term expedite the preparation and facilitate approval of its
THPs, although Scotia LLC continues to experience difficulties in the THP
approval process as it implements the Environmental Plans.

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

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

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

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

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

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

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

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

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


                                               YEAR ENDED DECEMBER 31, 2000               YEAR ENDED DECEMBER 31, 1999
                                      -------------------------------------------  ------------------------------------------
                                      % OF TOTAL                                    % OF TOTAL
                                      LUMBER         % OF TOTAL                    LUMBER        % OF TOTAL
                                      PRODUCTION     LUMBER         % OF TOTAL     PRODUCTION    LUMBER          % OF TOTAL
              PRODUCT                 VOLUME         REVENUES       REVENUES       VOLUME        REVENUES        REVENUES
                                      ------------   ------------   ------------   ------------  -------------   ------------
Upper grade redwood lumber.........             7%            16%            14%             9%            23%            20%
Common grade redwood lumber........            59%            58%            51%            52%            51%            46%
                                      ------------   ------------   ------------   ------------   ------------   ------------
   Total redwood lumber............            66%            74%            65%            61%            74%            66%
                                      ------------   ------------   ------------   ------------   ------------   ------------
Upper grade Douglas-fir lumber.....             4%             9%             8%             5%             8%             7%
Common grade Douglas-fir lumber....            28%            16%            14%            29%            16%            14%
                                      ------------   ------------   ------------   ------------   ------------   ------------
   Total Douglas-fir lumber........            32%            25%            22%            34%            24%            21%
                                      ------------   ------------   ------------   ------------   ------------   ------------
Other grades of lumber.............             2%             1%             1%             5%             2%             2%
                                      ------------   ------------   ------------   ------------   ------------   ------------
      Total lumber.................           100%           100%            88%           100%           100%            89%
                                      ============   ============   ============   ============   ============   ============

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

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

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

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

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

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

       MGI does not have any significant contractual relationships with third
parties relating to the purchase of logs. During 2000, MGI purchased
approximately 40 million board feet of logs from third parties.

      Pacific Lumber uses a whole-log chipper to produce wood chips from
hardwood trees which would otherwise be left as waste. These chips are sold to
third parties primarily for the production of facsimile and other specialty
papers. Pacific Lumber also produces softwood chips from the wood residue from
its milling operations. These chips are sold to third parties for the production
of wood pulp and paper products. The Company also derives revenues from a soil
amendment operation and a concrete block manufacturing operation.

      Backlog and Seasonality
      MGI's backlog of sales orders at December 31, 2000 and 1999 was
approximately $15.7 million and approximately $19.0 million, respectively, the
substantial portion of which was delivered in the first quarter of the next
fiscal year. The decline in the sales backlog from 1999 to 2000 was principally
due to a diminished supply of THPs which reduced the volume of logs available
for the production of lumber products. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Trends." MGI has
historically experienced lower first quarter sales due largely to the general
decline in construction-related activity during the winter months. As a
consequence, MGI's results in any one quarter are not necessarily indicative of
results to be expected for the full year. See "--Regulatory and Environmental
Factors" below and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Background."

      Marketing
      The housing, construction and remodeling markets are the primary markets
for MGI's lumber products. MGI's policy is to maintain a wide distribution of
its products both geographically and in terms of the number of customers. MGI
sells its lumber products throughout the country to a variety of accounts, the
large majority of which are wholesalers, followed by retailers, industrial
users, exporters and manufacturers. Upper grades of redwood and Douglas-fir
lumber are sold throughout the entire United States, as well as to export
markets. Common grades of redwood lumber are sold principally west of the
Mississippi River, with California accounting for approximately 71.1% of these
sales in 2000. Common grades of Douglas-fir lumber are sold primarily in
California. In 2000, MGI had three customers which accounted for approximately
11.1%, 7.1% and 5.6%, respectively, of MGI's total net lumber sales. Exports of
lumber accounted for approximately 4.8% of MGI's total revenues in 2000. MGI
markets its products through its own sales staff which focuses primarily on
domestic sales.

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

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

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

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

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

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

   REGULATORY AND ENVIRONMENTAL FACTORS

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

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

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

      Under the Environmental Plans, harvesting activities are prohibited or
restricted on certain areas of the Scotia LLC Timberlands. For a 50-year period,
harvesting activities are severely restricted in several areas (consisting of
substantial quantities of old growth redwood and Douglas-fir timber) to serve as
habitat conservation areas for the marbled murrelet, a coastal seabird, and
certain other species. Harvesting in certain other areas of the Scotia LLC
Timberlands is currently prohibited while these areas are evaluated for the
potential risk of landslide and the degree to which harvesting activities will
be prohibited or restricted in the future. Further, additional areas alongside
streamsides have been designated as buffers, in which harvesting is prohibited
or restricted, to protect aquatic and riparian habitat. These streamside buffers
may be adjusted up or down, subject to certain minimum and maximum buffers,
based upon an ongoing watershed analysis process, which the HCP requires be
completed within five years of its effective date. Pacific Lumber's analysis
of the Freshwater watershed has recently been released, and is subject to review
and approval by the applicable regulatory agencies. The analysis for two
additional watersheds is nearing completion, while the analyses for additional
watersheds are in various stages of completion.

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

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

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

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

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

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

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

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

ALUMINUM OPERATIONS

   GENERAL

      The Company owns 27,938,250 shares of the common stock of Kaiser,
representing a 35.1% interest in Kaiser. Kaiser operates in several principal
aspects of the aluminum industry through its wholly owned subsidiary, Kaiser
Aluminum & Chemical Corporation ("KACC")--the mining of bauxite, the refining of
bauxite into alumina, the production of primary aluminum from alumina, and the
manufacture of fabricated (including semi-fabricated) aluminum products. In
addition to the production utilized by Kaiser in its operations, Kaiser sells
significant amounts of alumina and primary aluminum in domestic and
international markets. References in this report to tons refers to metric tons
of 2,204.6 pounds. The following table sets forth production and third party
purchases of bauxite, alumina and primary aluminum and third party shipments and
intersegment transfers of bauxite, alumina, primary aluminum and fabricated
products for the years ended December 31, 2000, 1999 and 1998:


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

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

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

   BUSINESS OPERATIONS

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

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

      Bauxite and Alumina Business Unit
      The following table lists Kaiser's bauxite mining and alumina refining
facilities as of December 31, 2000:


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

Bauxite Mining:                               KJBC(1)            Jamaica                49.0%              4,500.0           4,500.0
                                              Alpart(2)          Jamaica                65.0%              1,032.9           3,650.0
                                                                                                     -------------     -------------
                                                                                                           6,775.0           8,000.0
                                                                                                     =============     =============

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

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

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

      Kaiser is a major producer of alumina and sells significant amounts of its
alumina production in domestic and international markets. Kaiser's strategy is
to sell a substantial portion of the alumina available to it in excess of its
internal smelting requirement under multi-year sales contracts with prices
linked to the price of primary aluminum. See "--Commodities Marketing Business
Unit" below.

      On July 5, 1999, Kaiser's Gramercy, Louisiana alumina refinery was
extensively damaged by an explosion in the digestion area of the plant. A number
of employees were injured in the incident, several of them severely. Production
at the facility was completely curtailed until the middle of December 2000 at
which time partial production commenced. The plant is expected to increase
production progressively to approximately 75% of its newly rated estimated
annual capacity of 1,250,000 tons by the end of March 2001, and construction of
the damaged part of the facility is expected to be completed during the third
quarter of 2001. At February 28, 2001, the plant was operating at 70% of
capacity. See Note 2 to the Consolidated Financial Statements of Kaiser, which
are included as Exhibit 99.3 hereto, for more detailed information regarding the
impact of the Gramercy incident.

      Primary Aluminum Business Unit
      The following table lists Kaiser's primary aluminum smelting facilities as
of December 31, 2000:


                                                                                         ANNUAL
                                                                                          RATED             TOTAL
                                                                                        CAPACITY           ANNUAL           2000
                                                                       COMPANY        AVAILABLE TO          RATED         OPERATING
                  LOCATION                          FACILITY          OWNERSHIP        THE COMPANY        CAPACITY          RATE
- ---------------------------------------------      -----------      ------------      -------------      ----------      -----------
                                                                                         (IN THOUSANDS OF TONS)
Domestic:
      Washington                                   Mead                 100%                 200.0           200.0            85%(1)
      Washington                                   Tacoma               100%                  73.0            73.0            41%(1)
                                                                                      -------------      ----------
           Subtotal                                                                          273.0           273.0
                                                                                      -------------      ----------

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

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


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

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

      In response to the unprecedented high market prices for power in the
Pacific Northwest, Kaiser temporarily curtailed primary aluminum production at
the Tacoma and Mead, Washington smelters during the second half of 2000 and sold
a portion of the power that it has under contract through September 30, 2001. As
a result of the curtailments, Kaiser avoided the need to purchase power on a
variable market price basis and will receive cash proceeds sufficient to more
than offset the cash impact of the potline curtailments over the period for
which the power was sold. Kaiser has made additional power sales in 2001. Both
the Mead and Tacoma, Washington smelters are expected to remain curtailed
through September 30, 2001.

      Also, during October 2000, Kaiser signed a new power contract with the
Bonneville Power Administration ("BPA") under which the BPA will provide
Kaiser's operations in the State of Washington with sufficient power to operate
Kaiser's Trentwood facility as well as approximately 40% of the combined
capacity of Kaiser's Mead and Tacoma aluminum smelting operations during the
period from October 2001 through September 2006. Power costs under the new
contract are expected to exceed the cost of power under Kaiser's current BPA
contract by between 20% to 60% and, perhaps, by as much as 100% in certain
periods, and other contract terms are less favorable than Kaiser's current BPA
contract. Kaiser does not have any remarketing rights under the new BPA
contract. See Note 7 to the Consolidated Financial Statements of Kaiser, which
are included as Exhibit 99.3 hereto, for additional information on these
matters.

      Commodities Marketing Business Unit
      Kaiser's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold. Primary
aluminum prices have historically been subject to significant cyclical
fluctuations. Alumina prices, as well as fabricated aluminum product prices
(which vary considerably among products), are significantly influenced by
changes in the price of primary aluminum and generally lag behind primary
aluminum prices by up to three months. From time to time in the ordinary course
of business, Kaiser enters into hedging transactions to provide risk management
in respect of its net exposure of earnings and cash flow related to primary
aluminum price changes. Given the significance of primary aluminum hedging
activities, Kaiser has begun (starting with the year ended December 31, 2000)
reporting its primary aluminum-related hedging activities as a separate segment.
Primary aluminum-related hedging activities are managed centrally on behalf of
all of Kaiser's business segments to minimize transaction costs, monitor
consolidated net exposures and to allow for increased responsiveness to changes
in market factors. See Item 7A. "Quantitative and Qualitative Disclosures about
Market Risk" and Notes 1 and 10 to the Consolidated Financial Statements of
Kaiser, which are included as Exhibit 99.3 hereto, for further information.

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

      Flat-Rolled Products Business Unit
      Kaiser manufactures and markets fabricated aluminum products for the
transportation, packaging, construction and consumer durables markets in the
United States and abroad. The flat-rolled product business unit operates the
Trentwood, Washington, rolling mill. The business unit sells to the aerospace,
transportation and industrial ("ATI") markets (producing heat treat sheet and
plate products and automotive brazing sheet) and the beverage container market
(producing lid and tab stock) both directly and through distributors. During
2000, Kaiser shifted the product mix of its Trentwood rolling mill toward higher
value added product lines, such as heat treat sheet and plate, automotive
brazing sheet and beverage can lid and tab stock, and away from beverage can
body stock, wheel and common alloy tread products in an effort to enhance its
profitability.

      Engineered Products Business Unit
      The engineered products business unit operates soft-alloy extrusion
facilities in Los Angeles, California; Sherman, Texas; Tulsa, Oklahoma;
Richmond, Virginia; and London, Ontario, Canada; rod and bar extrusion
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. The business unit also produces drawn tube in both hard and
soft alloys at a facility in Chandler, Arizona, that it purchased in May 2000.

      The business unit also operates forging facilities at Oxnard, California
and Greenwood, South Carolina. The business unit sells forged parts to customers
in the automotive, commercial vehicle and ordnance markets.

   COMPETITION

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

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

      LABOR MATTERS

      As a result of the September 1998 strike by the United Steelworkers of
America ("USWA") and the subsequent "lock-out" by Kaiser in January 1999, and
prior to the settlement in September 2000, Kaiser was operating five of its U.S.
facilities with salaried employees and other employees. Under the terms of the
settlement, USWA members generally returned to the affected plants during
October 2000. Although the USWA dispute has been settled and the workers have
returned to the facilities, two allegations of unfair labor practices ("ULPS")
remain in connection with the USWA strike and subsequent lock-out. Kaiser
believes that these charges are without merit. See Note 12 to the Consolidated
Financial Statements of Kaiser, which are included as Exhibit 99.3 hereto, for a
discussion of the ULPs.

      ASBESTOS-RELATED LIABILITY AND EXPECTED RECOVERIES

      Kaiser is a defendant in a number of asbestos lawsuits that generally
relate to products it has not sold for more than 20 years. Kaiser believes that
it has insurance coverage available to recover a substantial portion of its
asbestos-related costs. For the year ended December 31, 2000, a total of
approximately $99.5 million of asbestos-related settlements and defense costs
were paid and partial insurance reimbursements for asbestos-related matters
totaling approximately $62.8 million were received. See Note 12 to the
Consolidated Financial Statements of Kaiser, which are included as Exhibit 99.3
hereto, for additional information.

   MISCELLANEOUS

      For further information concerning the business and financial condition of
Kaiser, see Kaiser's Consolidated Financial Statements and the notes thereto
(Exhibit 99.3 hereto), as well as Kaiser's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999. Such Exhibit and Form 10-K are available at
no charge by writing to the following address: Kaiser Aluminum Corporation,
Shareholder Services Department, 5847 San Felipe, Suite 2600, Houston, Texas
77057.

ITEM 2.         PROPERTIES

      A description of the Company's properties is included under Item 1 above.


ITEM 3.         LEGAL PROCEEDINGS

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

TIMBER HARVESTING LITIGATION

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

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

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

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

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

HUNSAKER ACTION

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

   OTHER LITIGATION MATTERS

      Kaiser is involved in significant legal proceedings, including asbestos
and environmental litigation as well as litigation involving the Gramercy
incident and the USWA strike. For further information, see Item 1.
"Business--Aluminum Operations--Business Operations," "--Labor Matters,"
"--Asbestos-Related Liquidity and Expected Recoveries" and "--Miscellaneous" as
well as Notes 2, 5 and 12 to Kaiser's Consolidated Financial Statements (Exhibit
99.3 hereto).

      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 or their effect on the Company, 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

      All of the Company's common stock is owned by MAXXAM. Accordingly, the
Company's common stock is not traded on any stock exchange and has no
established public trading market. The 12% Senior Secured Notes due 2003 of the
Company (the "MGHI NOTES") are secured by the common stock of MGI, the Pledged
Kaiser Shares and a note receivable from MAXXAM. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition and Investing and Financing Activities" and Note
7 to the Consolidated Financial Statements appearing in Item 8.


ITEM 6.         SELECTED FINANCIAL DATA

      Not applicable.

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

BACKGROUND

      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 Company's wholly owned subsidiary, MGI, and its operating
subsidiaries, Pacific Lumber and Britt, are engaged in forest products
operations. The Company's business is somewhat seasonal, and its net sales have
historically been higher in the months of April through November than in the
months of December through March. Management expects that the Company's revenues
and cash flows will continue to be seasonal. The following should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto appearing in Item 8.

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

      The Company also owns 27,938,250 shares of Kaiser common stock (the
"KAISER SHARES") representing a 35.1% interest in Kaiser on a fully diluted
basis as of December 31, 2000. The Company follows the equity method of
accounting for its investment in Kaiser. See Note 6 to the Notes to the
Consolidated Financial Statements for further information, including summarized
financial information of Kaiser.

   RESULTS OF OPERATIONS

      The following table presents selected operational and financial
information for the years ended December 31, 2000, 1999 and 1998:


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------
                                                                                        (IN MILLIONS OF DOLLARS,
                                                                                      EXCEPT SHIPMENTS AND PRICES)
Shipments:
   Lumber: (1)
      Redwood upper grades.........................................................      15.8      24.6       41.9
      Redwood common grades........................................................     143.8     137.4      230.1
      Douglas-fir upper grades.....................................................      11.5      10.4        6.9
      Douglas-fir common grades....................................................      76.1      61.5       47.5
      Other........................................................................       5.9       8.7        7.0
                                                                                     --------- ---------  ---------
        Total lumber...............................................................     253.1     242.6      333.4
                                                                                     ========= =========  =========
   Wood chips (2)..................................................................     169.5     163.7      176.7
                                                                                     ========= =========  =========

Average sales price:
   Lumber: (3)
      Redwood upper grades.........................................................  $  1,798  $  1,531   $  1,478
      Redwood common grades........................................................       712       629        540
      Douglas-fir upper grades.....................................................     1,352     1,290      1,280
      Douglas-fir common grades....................................................       376       430        346
   Wood chips (4)..................................................................        67        77         70

Net sales:
   Lumber, net of discount.........................................................  $  175.3  $  165.3   $  211.6
   Wood chips......................................................................      11.3      12.5       12.3
   Cogeneration power(8)...........................................................       6.0       3.8        3.9
   Other...........................................................................       7.5       6.2        5.8
                                                                                     --------- ---------  ---------
      Total net sales..............................................................  $  200.1  $  187.8   $  233.6
                                                                                     ========= =========  =========
Operating income (loss)............................................................  $    7.3  $   (4.4)  $   40.6
                                                                                     ========= =========  =========
Operating cash flow (5)............................................................  $   27.0  $   12.6   $   63.1
                                                                                     ========= =========  =========
Income (loss) before income taxes(6)...............................................  $   39.3  $  177.9   $  (27.3)
                                                                                     ========= =========  =========
Net income (loss)(7)...............................................................  $   30.1  $  100.0   $  (59.8)
                                                                                     ========= =========  =========
- --------------------

(1)   Lumber shipments are expressed in millions of board feet.
(2)   Wood chip shipments are expressed in thousands of bone dry units of 2,400
      pounds.
(3)   Dollars per thousand board feet.
(4)   Dollars per bone dry unit.
(5)   Operating income before depletion and depreciation, also referred to as
      "EBITDA."
(6)   2000 results include a $60.0 million gain on the sale of the Owl Creek
      grove, and 1999 results include a $239.8 million gain on the sale of the
      Headwaters Timberlands.
(7)   2000 results include an extraordinary gain of $4.2 million, net of tax,
      on the repurchases of debt and 1998 results include an extraordinary loss
      of $41.8 million, net of tax, for the early extinguishment of debt.
(8)   As of December 31, 2000, the Company had receivables from Pacific Gas &
      Electric Company ("PG&E") of $2.2 million. PG&E is currently experiencing
      financial difficulties in connection with the power shortages in
      California, and therefore the collectibility of the receivables is
      uncertain. As of March 15, 2001, $0.9 million of this balance had been
      collected. Additional sales of power to PG&E have been made during the
      first quarter of 2001. As of March 15, 2001, the uncollected receivable
      balance attributable to sales made in 2000 and 2001 was $4.2 million.

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

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

      Operating Income (Loss)
      The Company had operating income for the year ended December 31, 2000, as
compared to an operating loss for the comparable 1999 period, primarily due to
the increase in net sales discussed above.

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

      Income (Loss) Before Income Taxes
      Income before income taxes for the year ended December 31, 2000, decreased
from the comparable prior year period principally due to the 1999 gain on the
sale of the Headwaters Timberlands of $239.8 million ($142.1 million net of
deferred taxes). Included in 2000 is a gain on the sale of the Owl Creek grove
of $60.0 million ($35.6 million net of deferred taxes). Income before income
taxes for the year ended December 31, 2000, also reflects $5.9 million of equity
income from Kaiser as compared to $19.2 million of equity loss from Kaiser in
1999.

      Income before income taxes for the year ended December 31, 1999, increased
as compared to the 1998 period, primarily due to the gain on the sale of the
Headwaters Timberlands of $239.8 million offset by the operating loss discussed
above. Income before income taxes for the year ended December 31, 1999, also
reflects $19.2 million of equity loss from Kaiser, interest income earned from
investing the net proceeds from the sale of the Headwaters Timberlands and
higher earnings from marketable securities.

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

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

      Note 7 to the Consolidated Financial Statements contains additional
information concerning the Company's indebtedness and information concerning
certain restrictive debt covenants. "MGHI PARENT" is used in this section to
refer to the Company on a stand-alone basis without its subsidiaries.

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



                                                         Scotia      Pacific     MGI and       MGHI
                                                          LLC        Lumber       Other       PARENT       TOTAL
                                                       ----------  ----------   ----------  ----------  ----------
                                                                             (IN MILLIONS)
DEBT AND CREDIT FACILITIES (NOT INCLUDING
   INTERCOMPANY NOTES)
Short-term borrowings and current
   maturities of long-term debt:
   December 31, 2000.................................  $    16.4   $    37.1    $       -   $       -   $    53.5
   December 31, 1999.................................       15.9         0.1            -           -        16.0

Long-term debt, excluding current maturities:
   December 31, 2000(1)..............................  $   767.2   $     0.6    $       -   $   118.8   $   886.6
   December 31, 1999.................................      843.5         0.7            -       125.2       969.4

Revolving credit facilities:
   Facility amounts..................................  $    62.0   $    60.0    $     2.5   $       -   $   124.5
   December 31, 2000:
      Borrowings.....................................          -        37.0            -           -        37.0
      Letters of credit..............................          -        12.5            -           -        12.5
      Unused and available
        credit.......................................       62.0           -          2.5           -        64.5

CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES AND
   OTHER INVESTMENTS
December 31, 2000:
   Current amounts restricted for debt service.......  $    45.8   $       -    $       -   $       -   $    45.8
   Other current amounts.............................       68.6         0.2         61.7        54.3       184.8
                                                       ----------  ----------   ----------  ----------  ----------
                                                           114.4         0.2         61.7        54.3       230.6
                                                       ----------  ----------   ----------  ----------  ----------

   Long-term amounts restricted for debt service(1)..       92.1           -            -           -        92.1
   Other long-term restricted amounts................        2.5           -          2.0           -         4.5
                                                       ----------  ----------   ----------  ----------  ----------
                                                            94.6           -          2.0           -        96.6
                                                       ----------  ----------   ----------  ----------  ----------
                                                       $   209.0   $     0.2    $    63.7   $     54.3   $  327.2
                                                       ==========  ==========   ==========  ==========  ==========

December 31, 1999:
   Current amounts restricted for debt service.......  $    15.9   $       -    $       -   $       -   $    15.9
   Other current amounts.............................        1.3        27.5        179.9         9.0       217.7
                                                       ----------  ----------   ----------  ----------  ----------
                                                            17.2        27.5        179.9         9.0       233.6
                                                       ----------  ----------   ----------  ----------  ----------

   Long-term amounts restricted for debt service.....      153.6           -            -           -       153.6
   Other long-term restricted amounts................        3.3           -          2.0           -         5.3
                                                       ----------  ----------   ----------  ----------  ----------
                                                           156.9           -          2.0           -       158.9
                                                       ----------  ----------   ----------  ----------  ----------
                                                       $   174.1   $    27.5    $   181.9   $     9.0   $   392.5
                                                       ==========  ==========   ==========  ==========  ==========

CHANGES IN CASH AND CASH EQUIVALENTS
Capital expenditures:
   December 31, 2000(3)..............................  $     8.2   $     4.1    $     1.7   $       -   $    14.0
   December 31, 1999(3)..............................       19.2         2.6          1.3           -        23.1
   December 31, 1998.................................       16.6         4.2          0.4           -        21.2

Net proceeds from dispositions of property and
   investments:
   December 31, 2000(4)..............................  $    67.0   $     0.3    $       -   $       -   $    67.3
   December 31, 1999(4)..............................        0.3           -        298.0           -       298.3
   December 31, 1998.................................          -         6.5          0.1           -         6.6

Borrowings (repayments) of debt and credit
   facilities, net of financing costs:
   December 31, 2000(1)..............................  $   (16.0)  $    37.0    $       -   $    (5.8)  $    15.2
   December 31, 1999(1)..............................       (9.0)       (0.1)        (4.7)         -        (13.8)
   December 31, 1998(2)..............................      488.9      (244.9)      (232.3)       (2.6)        9.1

Dividends and advances received (paid):
   December 31, 2000(5)..............................  $       -   $    23.7    $  (132.1)  $    63.4   $   (45.0)
   December 31, 1999.................................          -           -        (18.7)       18.7           -
   December 31, 1998(2)..............................     (532.8)      262.8        251.3        16.2        (2.5)
- ---------------------

(1)  The decrease in MGHI's and Scotia LLC's long-term debt between December 31,
     1999, and December 31, 2000, was due primarily to repurchases of debt. With
     respect to Scotia LLC, such repurchases were made using proceeds from the
     SAR Account, resulting in a decrease in long-term cash restricted for debt
     service. In addition, Scotia LLC made principal payments on the Timber
     Notes of $15.9 million and $8.2 million during the years ended December 31,
     2000 and 1999, respectively.
(2)  Scotia LLC issued the $867.2 million aggregate principal amount of Timber
     Notes on July 20, 1998. Proceeds from the offering of the Timber Notes were
     used primarily to prepay Scotia Pacific's 7.95% Timber Collateralized Notes
     due 2015 and to redeem the 10 1/2% Senior Notes due 2003 of Pacific Lumber,
     the 11 1/4% Senior Secured Notes due 2003 and the 12 1/4% Senior Secured
     Discount Notes due 2003 of MGI. On July 28, 1998, when the Timber Notes
     were issued, Scotia LLC paid a dividend of $526.1 million to Pacific
     Lumber, Pacific Lumber paid a dividend of $263.0 million to MGI, and MGI
     paid a dividend of $14.7 million to MGHI Parent.
(3)  Included in capital expenditures for 2000 and 1999 is $1.1 million and $13.2
     million, respectively, for timberland acquisitions.
(4)  Net proceeds from dispositions of property and investments includes $67.0
     million of proceeds in 2000 for Scotia LLC's sale of the Owl Creek grove and
     $299.9 million of gross proceeds in 1999 for Pacific Lumber's sale of the
     Headwaters Timberlands.
(5)  For the year ended December 31, 2000, $90.0 million of the dividends paid
     from MGI to MGHI were made using proceeds from the sale of the Headwaters
     Timberlands.  MGHI in turn paid a $45.0 million dividend to MAXXAM Parent.

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

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

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

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

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

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

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

      MGI and its subsidiaries anticipate that existing cash, cash equivalents,
marketable securities, funds available from the SAR Account and available
sources of financing will be sufficient to fund their working capital, debt
service and capital expenditure requirements for the next year. With respect to
their long-term liquidity, although MGI and its subsidiaries believe that their
existing cash and cash equivalents should provide sufficient funds to meet their
debt service and working capital requirements until such time as Pacific Lumber
has adequate cash flows from operations and/or dividends from Scotia LLC, there
can be no assurance that this will be the case. Furthermore, due to its highly
leveraged condition, MGI is more sensitive than less leveraged companies to
factors affecting its operations, including governmental regulation and
litigation affecting its timber harvesting practices (see "--Trends" below and
Note 11 to the Consolidated Financial Statements), increased competition from
other lumber producers or alternative building products and general economic
conditions.

TRENDS

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

      Regulatory and environmental matters play a significant role in the
Company's operations. See Item 1. "Business--Forest Products
Operations--Regulatory and Environmental Factors" and Note 11 to the
Consolidated Financial Statements for a discussion of these matters. Regulatory
compliance and related litigation have increased the cost of logging operations,
and Pacific Lumber has also been adversely affected by a lack of available logs
as a result of a severely diminished supply of available THPs, resulting in
delayed or reduced harvest and in lower shipments of lumber and lower net sales.

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

      There can be no assurance that Pacific Lumber will not continue to
experience difficulties in receiving approvals of its THPs similar to those it
has been experiencing. Furthermore, there can be no assurance that certain
pending legal, regulatory and environmental matters or future governmental
regulations, legislation or judicial or administrative decisions, or adverse
weather conditions, would not have a material adverse effect on the Company's
financial position, results of operations or liquidity. See Item 3. "Legal
Proceedings" and Note 11 to the Consolidated Financial Statements for further
information regarding regulatory and legal proceedings affecting the Company's
operations.

ACCOUNTING PRONOUNCEMENTS

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

ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      This item is not applicable for the Company and its subsidiaries; however,
Kaiser, the Company's equity investee, utilizes hedging transactions to lock-in
a specified price or range of prices for certain products which it sells or
consumes and to mitigate its exposure to changes in foreign currency exchange
rates. See Item 7A. "Quantitative and Qualitative Disclosures About Market Risk"
from Kaiser's Annual Report on Form 10-K (included as Exhibit 99.4 hereto) for
information regarding Kaiser's hedging activities.

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To MAXXAM Group Holdings Inc.:

      We have audited the accompanying consolidated balance sheets of MAXXAM
Group Holdings Inc. (a Delaware corporation and a wholly owned subsidiary of
MAXXAM Inc.) and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholder's deficit and cash flows for
each of the three years in the period ended December 31, 2000. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MAXXAM Group
Holdings Inc. and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

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



                                                          ARTHUR ANDERSEN LLP


San Francisco, California
March 15, 2001


                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------
ASSETS:

Current assets:
   Cash and cash equivalents..............................................................  $   201.7   $    189.8
   Marketable securities..................................................................       28.9         43.8
   Receivables:
      Trade...............................................................................       10.4         10.9
      Receivables from MAXXAM Inc.........................................................        6.6          6.3
      Other...............................................................................        4.0          2.8
   Inventories............................................................................       55.1         44.6
   Prepaid expenses and other current assets..............................................       14.2         17.7
                                                                                            ----------  -----------
        Total current assets..............................................................      320.9        315.9
Property, plant and equipment, net of accumulated depreciation of $102.9 and
   $93.7, respectively....................................................................      100.0        100.4
Timber and timberlands, net of accumulated depletion of $183.8 and $180.6,
   respectively...........................................................................      244.3        254.1
Note receivable from MAXXAM Inc...........................................................      164.5        147.8
Investment in Kaiser Aluminum Corporation.................................................       27.6         21.9
Deferred financing costs, net.............................................................       19.8         23.6
Deferred income taxes.....................................................................       27.3        100.3
Restricted cash, marketable securities and other investments..............................       96.6        158.9
Other assets..............................................................................        7.9          8.8
                                                                                            ----------  -----------
                                                                                            $ 1,008.9   $  1,131.7
                                                                                            ==========  ===========

LIABILITIES AND STOCKHOLDER'S DEFICIT:

Current liabilities:
   Accounts payable.......................................................................  $     6.2   $      6.1
   Accrued interest.......................................................................       32.4         34.5
   Accrued compensation and related benefits..............................................        8.2          3.7
   Deferred income taxes..................................................................       10.0          7.0
   Other accrued liabilities..............................................................        3.6          5.3
   Short-term borrowings and current maturities of long-term debt.........................       53.5         16.0
                                                                                            ----------  -----------
        Total current liabilities.........................................................      113.9         72.6
Long-term debt, less current maturities...................................................      886.6        969.4
Deferred income taxes.....................................................................       31.2         78.8
Other noncurrent liabilities..............................................................       26.6         45.8
                                                                                            ----------  -----------
        Total liabilities.................................................................    1,058.3      1,166.6
                                                                                            ----------  -----------

Contingencies

Stockholder's deficit:
   Common stock, $1.00 par value; 3,000 shares authorized; 1,000 shares issued............          -            -
   Additional capital.....................................................................      123.2        123.2
   Accumulated deficit....................................................................     (172.6)      (157.7)
   Accumulated other comprehensive loss...................................................          -         (0.4)
                                                                                            ----------  -----------
        Total stockholder's deficit.......................................................      (49.4)       (34.9)
                                                                                            ----------  -----------
                                                                                            $ 1,008.9   $  1,131.7
                                                                                            ==========  ===========


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

                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
                            (IN MILLIONS OF DOLLARS)


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2000        1999        1998
                                                                                ----------  ----------  -----------
Net sales:
   Lumber and logs............................................................  $   178.8   $   165.5   $    213.1
   Other......................................................................       21.3        22.3         20.5
                                                                                ----------  ----------  -----------
                                                                                    200.1       187.8        233.6
                                                                                ----------  ----------  -----------

Operating expenses:
   Cost of goods sold.........................................................      157.4       159.5        155.3
   Selling, general and administrative expenses...............................       15.7        15.7         15.2
   Depletion and depreciation.................................................       19.7        17.0         22.5
                                                                                ----------  ----------  -----------
                                                                                    192.8       192.2        193.0
                                                                                ----------  ----------  -----------

Operating income (loss).......................................................        7.3        (4.4)        40.6

Other income (expense):
   Gains on sales of timberlands..............................................       60.0       239.8            -
   Equity in earnings (loss) of Kaiser Aluminum Corporation...................        5.9       (19.2)         0.1
   Investment, interest and other income (expense), net.......................       45.6        44.5         23.6
   Interest expense...........................................................      (79.5)      (82.8)       (91.6)
                                                                                ----------  ----------  -----------
Income (loss) before income taxes.............................................       39.3       177.9        (27.3)
Credit (provision) in lieu of income taxes....................................      (13.4)      (77.9)         9.3
                                                                                ----------  ----------  -----------
Income (loss) before extraordinary items......................................       25.9       100.0        (18.0)
Extraordinary items:
   Loss on early extinguishment of debt, net of
      credit in lieu of income taxes of $23.6.................................          -           -        (41.8)
   Gains on repurchases of debt, net of provision in lieu of income
      taxes of $2.4...........................................................        4.2           -            -
                                                                                ----------  ----------  -----------
Net income (loss).............................................................  $    30.1   $   100.0   $    (59.8)
                                                                                ==========  ==========  ===========


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

                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
              (IN MILLION OF DOLLARS, EXCEPT PER SHARE INFORMATION)



                                                                                    ACCUMU-
                                                                                     LATED
                                                                                     OTHER
                                                                                    COMPRE-                 COMPRE-
                                                  COMMON      ADDI-     ACCUM-      HENSIVE                 HENSIVE
                                                   STOCK     TIONAL     ULATED       INCOME                 INCOME
                                                ($1.00 PAR)  CAPITAL    DEFICIT      (LOSS)      TOTAL      (LOSS)
                                                ---------- ----------  ----------  ----------  ----------  ----------
Balance, December 31, 1997....................  $       -  $   123.2   $  (195.4)  $     1.0   $   (71.2)
   Net loss...................................          -          -       (59.8)          -       (59.8)  $   (59.8)
   Equity in Kaiser Aluminum Corporation's
      reduction of pension liability reversal.          -          -           -        (1.0)       (1.0)       (1.0)
                                                                                                           ----------
   Comprehensive loss.........................                                                             $   (60.8)
                                                                                                           ==========
   Dividend...................................          -          -        (2.5)          -        (2.5)
                                                ---------- ----------  ----------  ----------  ----------
Balance, December 31, 1998....................          -      123.2      (257.7)          -      (134.5)
   Net income.................................          -          -       100.0           -       100.0   $   100.0
   Equity in Kaiser Aluminum
      Corporation's additional minimum
      pension liability.......................          -          -           -        (0.4)       (0.4)       (0.4)
                                                                                                           ----------
   Comprehensive income.......................                                                             $    99.6
                                                ---------- ----------  ----------  ----------  ----------  ==========
Balance, December 31, 1999....................          -      123.2      (157.7)       (0.4)      (34.9)
   Net income.................................          -          -        30.1           -        30.1   $    30.1
   Equity in Kaiser Aluminum
      Corporation's additional minimum
      pension liability.......................          -          -           -        (0.2)       (0.2)       (0.2)
   Change in value of available-for-sale
   investments................................          -          -           -         0.6         0.6         0.6
                                                                                                           ----------
   Comprehensive income.......................                                                             $    30.5
                                                                                                           ==========
   Dividend...................................          -          -       (45.0)          -      (45.0)
                                                ---------- ----------  ----------  ----------  ---------
Balance, December 31, 2000....................  $       -  $   123.2   $  (172.6)  $       -   $  (49.4)
                                                ========== ==========  ==========  ==========  =========


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

                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

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


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)................................................................ $   30.1  $  100.0   $  (59.8)
   Adjustments to reconcile net income (loss) to net cash provided by (used for)
      operating activities:
      Depletion and depreciation....................................................     19.7      17.0       22.5
      Gains on sales of timberlands.................................................    (60.0)   (239.8)         -
      Extraordinary loss (gains) on early extinguishments (repurchases) of debt, net     (4.2)        -       41.8
      Equity in undistributed loss (earnings) of Kaiser Aluminum Corporation........     (5.9)     19.2       (0.1)
      Amortization of deferred financing costs and discounts on long-term debt......      2.3       2.4       11.5
      Net gains on marketable securities............................................    (15.1)    (11.5)      (2.9)
      Deferral of interest payment on note receivable from MAXXAM Inc...............    (16.7)    (15.0)      (7.8)
   Increase (decrease) in cash resulting from changes in:
      Receivables...................................................................     (1.5)     (2.8)       1.0
      Inventories, net of depletion.................................................    (12.2)     (2.1)      14.0
      Prepaid expenses and other assets.............................................     (3.3)     (2.8)      (2.7)
      Accounts payable..............................................................      0.1       2.7       (0.3)
      Accrued interest..............................................................     (2.1)     (0.3)       4.0
      Other accrued liabilities.....................................................      0.1      (0.7)       1.3
      Accrued and deferred income taxes.............................................     13.9      76.3      (10.5)
      Long-term assets and long-term liabilities....................................      2.1      (2.1)       0.7
                                                                                     --------- ---------  ---------
        Net cash provided by (used for) operating activities........................    (52.7)    (59.5)      12.7
                                                                                     --------- ---------  ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net proceeds from dispositions of property and investments.......................     67.3     298.3        6.6
   Net sales (purchases) of marketable securities...................................     30.5      (4.7)      42.6
   Capital expenditures.............................................................    (14.0)    (23.1)     (21.2)
   Restricted cash withdrawals used to acquire timberlands..........................      0.8      12.9        8.9
                                                                                     --------- ---------  ---------
        Net cash provided by investing activities...................................     84.6     283.4       36.9
                                                                                     --------- ---------  ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of long-term debt.........................................        -         -      867.2
   Premiums for early retirement of debt............................................        -         -      (45.5)
   Net borrowings under revolving credit agreements.................................     37.0         -          -
   Incurrence of deferred financing costs...........................................        -      (0.7)     (22.4)
   Redemptions, repurchases of and principal payments on long-term debt.............    (21.8)    (13.1)    (796.8)
   Dividends paid to stockholder....................................................    (45.0)        -       (2.5)
   Other restricted cash withdrawals (deposits), net................................      9.8    (171.1)       9.4
                                                                                     --------- ---------  ---------
        Net cash provided by (used for) financing activities........................    (20.0)   (184.9)       9.4
                                                                                     --------- ---------  ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS...........................................     11.9      39.0       59.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................................    189.8     150.8       91.8
                                                                                     --------- ---------  ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................................ $  201.7  $  189.8   $  150.8
                                                                                     ========= =========  =========



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

                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PRESENTATION

      The consolidated financial statements include the accounts of MAXXAM Group
Holdings Inc. and its wholly owned subsidiaries. All references to the "COMPANY"
or "MGHI" include MAXXAM Group Holdings Inc. and its wholly owned subsidiaries,
unless otherwise indicated or the context indicates otherwise. MGHI is a wholly
owned subsidiary of MAXXAM Inc. ("MAXXAM"). Intercompany balances and
transactions have been eliminated. Certain reclassifications have been made to
prior years' financial statements to be consistent with the current year's
presentation.

      The Company's wholly owned subsidiary, MAXXAM Group Inc. ("MGI"), and its
wholly owned subsidiaries, The Pacific Lumber Company ("PACIFIC LUMBER") and
Britt Lumber Co., Inc. ("BRITT") are engaged in forest products operations.
Pacific Lumber's principal wholly owned subsidiaries are Scotia Pacific Company
LLC ("SCOTIA LLC") and Salmon Creek LLC ("SALMON CREEK"). MGI operates in
several principal aspects of the lumber industry - the growing and harvesting of
redwood and Douglas-fir timber, the milling of logs into lumber and the
manufacture of lumber into a variety of finished products. Housing, construction
and remodeling are the principal markets for the Company's lumber products.

      In addition, the Company has 27,938,250 shares of the common stock of
Kaiser Aluminum Corporation ("KAISER") which represented a 35.1% equity interest
in Kaiser at December 31, 2000.

   USE OF ESTIMATES AND ASSUMPTIONS

      The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) the
disclosure of contingent assets and liabilities known to exist as of the date
the financial statements are published and (iii) the reported amount of revenues
and expenses recognized during each period presented. The Company reviews all
significant estimates affecting its consolidated financial statements on a
recurring basis and records the effect of any necessary adjustments prior to
filing the consolidated financial statements with the Securities and Exchange
Commission. Adjustments made using estimates often relate to improved
information not previously available. Uncertainties regarding such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, actual results could differ from estimates,
and it is possible that the subsequent resolution of any one of the contingent
matters described in Note 11 could differ materially from current estimates. The
results of an adverse resolution of such uncertainties could have a material
effect on the Company's consolidated financial position, results of operations
or liquidity.

   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

      The Company had three customers which accounted for 11.1%, 7.1% and 5.6%
of total net lumber sales for the year ended December 31, 2000. Trade
receivables from these customers totaled $1.3 million as of December 31, 2000.
As of December 31, 2000, the Company had receivables from Pacific Gas & Electric
Company ("PG&E") of $2.2 million. PG&E is currently experiencing financial
difficulties in connection with the power shortages in California, and therefore
the collectibility of the receivables is uncertain. As of March 15, 2001, $0.9
million of this balance had been collected. Additional sales of power to PG&E
have been made during the first quarter of 2001. As of March 15, 2001, the
uncollected receivable balance attributable to sales made in 2000 and 2001 was
$4.2 million.

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

      Deferred Financing Costs
      Costs incurred to obtain debt financing are deferred and amortized over
the estimated term of the related borrowing. The amortization of deferred
financing costs expense is included in interest expense on the income statement.

      Accounting Pronouncements for Derivative Financial Instruments - Kaiser
      Beginning with the quarterly period ending March 31, 2001, Kaiser will
begin reporting derivative activities consistent with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Financial Instruments
and Hedging Activities" ("SFAS NO. 133"). Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivatives and Certain Hedging
Activities-An Amendment of FASB Statement No. 133" ("SFAS NO. 138"), which
amends certain requirements of SFAS No. 133, was issued in June 2000. SFAS No.
133 requires companies to recognize all derivative instruments as assets or
liabilities in the balance sheet and to measure those instruments at fair value.
Kaiser, the Company's equity investee, has hedging programs which use various
derivative products to "lock- in" a price (or range of prices) for products sold
or used so that earnings and cash flows are subject to a reduced risk of
volatility. Changes in the market value of Kaiser's derivative instruments
represent unrealized gains or losses. Such unrealized gains or losses will
change based on prevailing market prices at each subsequent balance sheet date,
until the transaction occurs. Under SFAS No. 133, these changes are reflected as
an increase or reduction in stockholders' equity through either other
comprehensive income or net income, depending on the nature of the hedging
instrument used and its effectiveness at offsetting changes in market prices for
the hedged item. To the extent that changes in the market value of Kaiser's
hedging positions are initially recorded in other comprehensive income, such
changes are reversed from other comprehensive income (net of any fluctuations in
other "open hedging" positions) and are reflected in traditional net income upon
the occurrence of the transactions to which the hedges relate. Under the equity
method of accounting which the Company follows in accounting for its investment
in Kaiser, the Company will reflect its equity share of Kaiser's adjustments
through either other comprehensive income or traditional net income, as
appropriate.

      SFAS No. 133 requires that as of the date of the initial adoption, the
difference between the market value of derivative instruments and the previous
carrying amount of those derivatives recorded on Kaiser's consolidated balance
sheet be reported in net income or other comprehensive income, as appropriate,
as the cumulative effect of a change in accounting principle. As previously
discussed, this impact will be reflected in Kaiser's first quarter 2001
financial statements, and in turn the Company's equity share of the impact will
be reflected in its first quarter 2001 financial statements. The adoption of
SFAS No. 133 resulted in a pre-tax benefit of $7.4 million to other
comprehensive income and a pre-tax charge of $6.6 million to earnings.

2.    SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

      Headwaters Transactions
      On March 1, 1999, the United States and California acquired the Headwaters
Timberlands, approximately 5,600 acres of timberlands containing a significant
amount of virgin old growth timber, from Pacific Lumber and its wholly owned
subsidiary, Salmon Creek. Salmon Creek received $299.9 million for its 4,900
acres, and for its 700 acres Pacific Lumber received the 7,700 acre Elk River
Timberlands, which Pacific Lumber contributed to Scotia LLC in June 1999. See
Note 11 below for a discussion of additional agreements entered into on March 1,
1999.

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

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

3.    CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS

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

      Marketable securities consist primarily of investments in debt securities
and long and short positions in corporate common stocks and option contracts.
The Company determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Debt securities are classified as "held-to-maturity" when
the Company has the positive intent and ability to hold the securities to
maturity. Debt securities which the Company does not have the intent or ability
to hold to maturity are classified as "available-for- sale." "Held-to-maturity"
securities are stated at amortized cost. Debt securities classified as
"held-to-maturity" as of December 31, 2000 and 1999, totaled $18.9 million and
$169.1 million, respectively, and had a fair market value of $18.9 million and
$168.5 million, respectively. "Available-for-sale" securities are carried at
fair market value, with the unrealized gains and losses included in other
comprehensive income and reported in stockholder's deficit. The fair value of
substantially all securities is determined by quoted market prices. Marketable
securities which are considered "trading" securities consist of long and short
positions in corporate common stocks and option contracts and are carried at
fair value. The cost of the securities sold is determined using the first-in,
first-out method. Included in investment, interest and other income (expense),
net for each of the three years in the period ended December 31, 2000 were: 2000
- - net realized gains of $13.7 million and net unrealized gains of $0.4 million;
1999 - net realized gains of $12.5 million and net unrealized losses of $0.9
million; 1998 - net realized gains of $5.1 million and net unrealized losses of
$2.2 million.

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

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


                                                                                                December 31,
                                                                                       ----------------------------
                                                                                           2000           1999
                                                                                       -------------  -------------
Current assets:
   Cash and cash equivalents:
      Amounts held as security for short positions in marketable securities..........  $        9.2   $       27.1
      Other restricted cash and cash equivalents.....................................          29.2              -
                                                                                       -------------  -------------
                                                                                               38.4           27.1
                                                                                       -------------  -------------
   Marketable securities, restricted:
      Amounts held in SAR Account....................................................          16.3           15.9
                                                                                       -------------  -------------

Long-term restricted cash, marketable securities and other investments:
   Amounts held in SAR Account.......................................................         144.4          153.2
   Amounts held in Prefunding Account................................................           2.5            3.3
   Other amounts restricted under the Timber Notes Indenture.........................           0.4            0.4
   Other long-term restricted cash...................................................           2.0            2.0
   Less:  Amounts attributable to Timber Notes held in SAR Account...................         (52.7)             -
                                                                                       -------------  -------------
                                                                                               96.6          158.9
                                                                                       -------------  -------------

Total restricted cash, marketable securities and other investments...................  $      151.3   $      201.9
                                                                                       =============  =============

      Amounts in the Scheduled Amortization Reserve Account (the "SAR ACCOUNT")
are being held by the trustee under the indenture (the "TIMBER NOTES INDENTURE")
to support principal payments on Scotia LLC's Class A-1, Class A-2 and Class A-3
Timber Collateralized Notes due 2028 (the "TIMBER NOTES"). See Note 7 for
further discussion on the SAR Account. Amounts held in the "PREFUNDING ACCOUNT"
by the trustee are to be used by Scotia LLC to acquire additional timberlands.
The current portion of the SAR Account is determined based on the liquidity
needs of Scotia LLC which corresponds directly with the current portion of
Scheduled Amortization.

4.    INVENTORIES

      Inventories are stated at the lower of cost or market. Cost is primarily
determined using the last-in, first-out ("LIFO") method not in excess of market
value. Replacement cost is not in excess of LIFO cost. Inventory costs consist
of material, labor and manufacturing overhead, including depreciation and
depletion. Inventories consist of the following (in millions):


                                                                                                   DECEMBER 31,
                                                                                               --------------------
                                                                                                 2000       1999
                                                                                               ---------  ---------
Lumber........................................................................................ $   34.0   $   23.2
Logs..........................................................................................     21.1       21.4
                                                                                               ---------  ---------
                                                                                               $   55.1   $   44.6
                                                                                               =========  =========

5.    PROPERTY, PLANT AND EQUIPMENT

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


                                                                               ESTIMATED         DECEMBER 31,
                                                                                            -----------------------
                                                                             USEFUL LIVES      2000        1999
                                                                             -------------  ----------  -----------
Logging roads, land and improvements.......................................       15 years  $    41.6   $     35.2
Buildings..................................................................       33 years       50.2         49.4
Machinery and equipment....................................................   3 - 15 years      108.3        108.8
Construction in progress...................................................                       2.8          0.7
                                                                                            ----------  -----------
                                                                                                202.9        194.1
Less:  accumulated depreciation............................................                    (102.9)       (93.7)
                                                                                            ----------  -----------
                                                                                            $   100.0   $    100.4
                                                                                            ==========  ===========

      Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was $10.4 million, $10.1 million and $9.8 million, respectively.

6.    INVESTMENT IN KAISER

      As of March 15, 2001, the Company has 27,938,250 shares of the common
stock of Kaiser, of which 25,055,775 shares are pledged as collateral for the
12% MGHI Senior Secured Notes due 2003 (the "MGHI NOTES"). Kaiser operates in
several principal aspects of the aluminum industry--the mining of bauxite into
alumina, (the major aluminum-bearing ore), the refining of bauxite into alumina
(the intermediate material), the production of primary aluminum and the
manufacture of fabricated and semi-fabricated aluminum products. Kaiser's common
stock is publicly traded on the New York Stock Exchange under the trading symbol
"KLU."

      The Company follows the equity method of accounting for its investment in
Kaiser. Net sales and cost and expenses of Kaiser for 1999 and 1998 have been
restated to conform to a new accounting principle that requires freight charges
to be included in cost of products sold. The amount of such restatement was
$39.3 million and $46.0 million for 1999 and 1998, respectively.

      The market value for the Kaiser Shares based on the price per share quoted
at the close of business on March 15, 2001 was $111.8 million. There can be no
assurance that such value would be realized should the Company dispose of its
investment in the Kaiser shares. The following tables contain summarized
financial information of Kaiser (in millions).


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2000         1999
                                                                                            ----------   ----------
Current assets............................................................................  $ 1,012.1    $    973.9
Property, plant and equipment, net........................................................    1,176.1       1,053.7
Other assets..............................................................................    1,154.9       1,171.2
                                                                                            ----------   ----------
           Total assets...................................................................  $ 3,343.1    $  3,198.8
                                                                                            ==========   ==========

Current liabilities.......................................................................  $   841.4    $    637.9
Long-term debt, less current maturities...................................................      957.8         972.5
Other liabilities.........................................................................    1,360.6       1,405.4
Minority interests........................................................................      101.1         117.7
Stockholders' equity:
   Common.................................................................................       82.2          65.3
                                                                                            ----------   ----------
                                                                                                 82.2          65.3
                                                                                            ----------   ----------
            Total liabilities and stockholders' equity....................................  $ 3,343.1    $  3,198.8
                                                                                            ==========   ==========


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------
                                                                                   2000        1999         1998
                                                                                ----------  ----------  -----------
Net sales.....................................................................  $ 2,169.8   $ 2,083.6   $  2,302.4
Costs and expenses............................................................   (2,030.5)   (2,112.5)    (2,211.8)
Other expenses-net............................................................     (113.9)      (61.0)      (106.5)
                                                                                ----------  ----------  -----------
Income (loss) before income taxes and minority interests......................       25.4       (89.9)       (15.9)
Credit (provision) for income taxes...........................................      (11.6)       32.7         16.4
Minority interests............................................................        3.0         3.1          0.1
                                                                                ----------  ----------  -----------
Net income (loss).............................................................       16.8       (54.1)         0.6
Dividends on preferred stock..................................................          -           -            -
                                                                                ----------  ----------  -----------
Net income (loss) available to common stockholders............................  $    16.8   $   (54.1)  $      0.6
                                                                                ==========  ==========  ===========
Equity in earnings (loss) of Kaiser...........................................  $     5.9   $   (19.2)  $      0.1
                                                                                ==========  ==========  ===========


7.    LONG-TERM AND SHORT-TERM DEBT

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------
Pacific Lumber Credit Agreement...........................................................  $    37.0   $        -
6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028..................      136.7        152.6
7.11% Scotia LLC Class A-2 Timber Collateralized Notes due July 20, 2028..................      243.2        243.2
7.71% Scotia LLC Class A-3 Timber Collateralized Notes due July 20, 2028..................      463.3        463.3
12% MGHI Senior Secured Notes due August 1, 2003..........................................      118.8        125.2
Other.....................................................................................        1.0          1.1
                                                                                            ----------  -----------
                                                                                              1,000.0        985.4
Less: current maturities..................................................................      (53.5)       (16.0)
   Timber Notes held in SAR Account.......................................................      (59.9)           -
                                                                                            ----------  -----------
                                                                                            $   886.6   $    969.4
                                                                                            ==========  ===========


      Scotia LLC Timber Notes
      Scotia LLC issued $867.2 million aggregate principal amount of Timber
Notes on July 20, 1998. Net proceeds from the offering of the Timber Notes were
used primarily to prepay certain debt, and accordingly, in 1998 the Company
recognized an extraordinary loss of $41.8 million, net of the related income tax
benefit of $23.6 million, for the early extinguishment.

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

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

      Pursuant to certain liquidity requirements under the Timber Notes
Indenture, Scotia LLC has entered into an agreement (the "SCOTIA LLC LINE OF
CREDIT") with a group of banks pursuant to which Scotia LLC may borrow to pay
interest on the Timber Notes. The maximum amount Scotia LLC may borrow is equal
to one year's interest on the aggregate outstanding principal balance of the
Timber Notes (the "REQUIRED LIQUIDITY AMOUNT"). At December 31, 2000, the
Required Liquidity Amount was $62.0 million. The Scotia LLC Line of Credit
expires on July 15, 2001. Annually, Scotia LLC will request that the banks
extend the Scotia LLC Line of Credit for a period of not less than 364 days. If
not extended, Scotia LLC may draw upon the full amount available. Borrowings
under the Scotia LLC Line of Credit generally bear interest at the Base Rate (as
defined in the agreement) plus 0.25% or at a one month or six month LIBOR rate
plus 1% at any time the borrowings have not been continually outstanding for
more than six months. As of December 31, 2000, Scotia LLC had no borrowings
outstanding under the Scotia LLC Line of Credit.

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

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

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

      12% MGHI Senior Secured Notes due 2003 (the "MGHI NOTES")
      The MGHI Notes due August 1, 2003 are guaranteed on a senior, unsecured
basis by MAXXAM. As of March 15, 2001, the MGHI Notes are also secured by a
pledge of 25,055,775 shares of the Kaiser common stock owned by MGHI, the common
stock of MGI and the MAXXAM Note (defined below). Interest on the MGHI Notes is
payable semi-annually.

      The net proceeds from the offering of the MGHI Notes after expenses were
approximately $125.0 million, all of which was loaned to MAXXAM pursuant to an
intercompany note (the "MAXXAM NOTE"). The MAXXAM Note bears interest at the
rate of 11% per annum (payable semi-annually on the interest payment dates
applicable to the MGHI Notes) and matures on August 1, 2003. MAXXAM is entitled
to defer the payment of interest on the MAXXAM Note on any interest payment date
to the extent that the Company has sufficient available funds to satisfy its
obligations on the MGHI Notes on such date. Any such deferred interest will be
added to the principal amount of the MAXXAM Note and will be payable at
maturity. As of December 31, 2000, $47.0 million of interest had been deferred
and added to principal. An additional $9.0 million of interest was deferred and
added to principal on February 1, 2001.

      Maturities
      Scheduled maturities of long-term and short-term debt outstanding at
December 31, 2000 are as follows: $53.5 million in 2001, $17.3 million in 2002,
$138.3 million in 2003, $22.4 million in 2004, $25.2 million in 2005 and $683.4
million thereafter.

      Restricted Net Assets of Subsidiaries
      As of December 31, 2000, all of the assets of MGI and its subsidiaries are
subject to certain debt instruments which restrict the ability to transfer
assets, make loans and advances and pay dividends to the Company.

8.    CREDIT (PROVISION) IN LIEU OF INCOME TAXES

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

      The Company and its corporate subsidiaries are members of MAXXAM's
consolidated return group for federal income tax purposes.

      Pursuant to a tax allocation agreement between MAXXAM, Pacific Lumber, and
Salmon Creek (the "PL TAX ALLOCATION AGREEMENT"), Pacific Lumber is liable to
MAXXAM for the federal consolidated income tax liability of Pacific Lumber,
Scotia LLC and certain other subsidiaries of Pacific Lumber (but excluding
Salmon Creek) (collectively, the "PL SUBGROUP") computed as if the PL Subgroup
was a separate affiliated group of corporations which was never connected with
MAXXAM. The PL Tax Allocation Agreement further provides that Salmon Creek is
liable to MAXXAM for its federal income tax liability computed on a separate
company basis as if it was never connected with MAXXAM. For taxable periods
beginning after December 7, 1999 (the day on which Salmon Creek was converted
from a corporation to a limited liability company), the PL Subgroup includes
Salmon Creek and there is no separate calculation for Salmon Creek. The
remaining subsidiaries of MGI are each liable to MAXXAM for their respective
income tax liabilities computed on a separate company basis as if they were
never connected with MAXXAM, pursuant to their respective tax allocation
agreements.

      MGI's tax allocation agreement with MAXXAM (the "MGI TAX ALLOCATION
AGREEMENT") provides that MGI's federal income tax liability is computed as if
MGI files a consolidated tax return with all of its subsidiaries except Salmon
Creek, and that such corporations were never connected with MAXXAM (the "MGI
CONSOLIDATED TAX LIABILITY"). For taxable periods beginning after December 7,
1999, the MGI Consolidated Tax Liability includes Salmon Creek. The federal
income tax liability of MGI is the difference between (i) the MGI Consolidated
Tax Liability and (ii) the sum of the separate tax liabilities for MGI's
subsidiaries (computed as discussed above), but excluding Salmon Creek for
taxable periods through December 7, 1999. To the extent that the MGI
Consolidated Tax Liability is less than the aggregate amounts in (ii), MAXXAM is
obligated to pay the amount of such difference to MGI.

      MGHI's tax allocation agreement with MAXXAM (the "MGHI TAX ALLOCATION
AGREEMENT") provides that the Company's federal consolidated income tax
liability is computed as if MGHI and its subsidiaries, except Salmon Creek, file
a consolidated tax return and that such corporations were never connected with
MAXXAM (the "MGHI CONSOLIDATED TAX LIABILITY"). For taxable periods beginning
after December 7, 1999, the MGHI Consolidated Tax Liability includes Salmon
Creek. The federal income tax liability of MGHI is the difference between the
MGHI Consolidated Tax Liability and the MGI Consolidated Tax Liability. To the
extent that the MGHI Consolidated Tax Liability is less than the MGI
Consolidated Tax Liability, MAXXAM is obligated to pay the amount of such
difference to MGHI.

      The credit (provision) in lieu of income taxes on income (loss) before
income taxes consists of the following (in millions):


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------
Current:
   Federal in lieu of income taxes.................................................  $    0.1  $   (3.0)  $    0.1
   State and local.................................................................         -       0.1       (0.1)
                                                                                     --------- ---------  ---------
                                                                                          0.1      (2.9)         -
                                                                                     --------- ---------  ---------
Deferred:
   Federal in lieu of income taxes.................................................      (9.3)    (53.4)       7.1
   State and local.................................................................      (4.2)    (21.6)       2.2
                                                                                     --------- ---------  ---------
                                                                                        (13.5)    (75.0)       9.3
                                                                                     --------- ---------  ---------
                                                                                     $  (13.4) $  (77.9)  $    9.3
                                                                                     ========= =========  =========

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


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------

Income (loss) before income taxes..................................................  $   39.3  $  177.9   $  (27.3)
                                                                                     ========= =========  =========

Amount of federal income tax credit (provision) based upon the statutory rate......  $  (13.8) $  (62.3)  $    9.6
Revision of prior years' tax estimates and other changes in valuation allowances...       1.2       4.5       (1.4)
Equity in earnings (loss) of Kaiser not tax effected...............................       2.1      (6.6)       0.1
State and local taxes, net of federal tax effect...................................      (2.9)    (13.2)       1.3
Expenses for which no federal tax benefit is available.............................         -      (0.3)      (0.3)
                                                                                     --------- ---------  ---------
                                                                                     $  (13.4) $  (77.9)  $    9.3
                                                                                     ========= =========  =========

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

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------
Deferred income tax assets:
   Loss and credit carryforwards..........................................................  $   144.1   $    136.5
   Timber and timberlands.................................................................       28.1         32.2
   Other..................................................................................       20.2         17.9
   Valuation allowances...................................................................      (47.6)       (47.6)
                                                                                            ----------  -----------
      Total deferred income tax assets, net...............................................      144.8        139.0
                                                                                            ----------  -----------
Deferred income tax liabilities:
   Deferred gains on sales of timber and timberlands......................................     (130.4)      (104.3)
   Property, plant and equipment..........................................................      (14.9)       (16.9)
   Inventories............................................................................       (8.9)       (10.4)
   Other..................................................................................       (6.2)        (5.9)
                                                                                            ----------  -----------
      Total deferred income tax liabilities...............................................     (160.4)      (137.5)
                                                                                            ----------  -----------
Net deferred income tax assets (liabilities)..............................................  $   (15.6)  $      1.5
                                                                                            ==========  ===========

      Included in net deferred income tax assets as of December 31, 2000 is
$96.5 million attributable to the tax benefit of loss and credit carryforwards,
net of valuation allowances. The Company evaluated all appropriate factors in
determining the realizability of the deferred tax assets attributable to loss
and credit carryforwards, including any limitations on their use, the year the
carryforwards expire and the levels of taxable income necessary for utilization.
Based on this evaluation of the appropriate factors to determine the proper
valuation allowances for these carryforwards, the Company believes that it is
more likely than not that it will realize the benefit for the carryforwards for
which valuation allowances were not provided. The deferred income tax
liabilities related to deferred gains on the sales of timber and timberlands are
a result of the sales of the Headwaters Timberlands (1999) and the Owl Creek
grove (2000).

      Included in the net deferred income tax assets listed above are $2.8
million and $15.6 million at December 31, 2000 and 1999, respectively, which are
recorded pursuant to the tax allocation agreements with MAXXAM.

      The following table presents the estimated tax attributes for federal
income tax purposes for the Company and its subsidiaries as of December 31,
2000, under the terms of the respective tax allocation agreements (in millions).
The utilization of certain of these tax attributes is subject to limitations.


                                                                                                         EXPIRING
                                                                                                          THROUGH
                                                                                                        -----------
Regular Tax Attribute Carryforwards:
   Net operating losses...................................................................  $   392.8         2020
Alternative Minimum Tax Attribute Carryforwards:
   Net operating losses...................................................................  $   344.6         2020

      The income tax credit (provision) related to other comprehensive income
for the years ended December 31, 2000, 1999 and 1998 was $(0.3) million, $0.2
million and $(0.3) million, respectively.

9.    EMPLOYEE BENEFIT PLANS

      Pension and Other Postretirement Benefit Plans
      Pacific Lumber has a defined benefit plan which covers all employees of
Pacific Lumber. Under the plan, employees are eligible for benefits at age 65 or
earlier, if certain provisions are met. The benefits are determined under a
career average formula based on each year of service with Pacific Lumber and the
employee's compensation for that year. Pacific Lumber's funding policy is to
contribute annually an amount at least equal to the minimum cash contribution
required by the Employee Retirement Income Security Act of 1974, as amended.

      Pacific Lumber has an unfunded benefit plan for certain postretirement
medical benefits which covers substantially all employees of Pacific Lumber.
Participants of the plan are eligible for certain health care benefits upon
retirement. Participants make contributions for a portion of the cost of their
health care benefits. The expected costs of postretirement medical benefits are
accrued over the period the employees provide services to the date of their full
eligibility for such benefits.

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


                                                                            PENSION BENEFITS   MEDICAL/LIFE BENEFITS
                                                                          -------------------- ---------------------
                                                                                    YEARS ENDED DECEMBER 31,
                                                                          -----------------------------------------
                                                                            2000       1999      2000       1999
                                                                          ---------  --------- ---------  ---------
Change in benefit obligation:
   Benefit obligation at beginning of year..............................  $   33.7   $   34.3  $    4.9   $    5.0
   Service cost.........................................................       1.9        2.4       0.2        0.3
   Interest cost........................................................       2.7        2.5       0.3        0.4
   Plan participants' contributions.....................................         -          -       1.1        0.3
   Actuarial (gain) loss................................................       0.8       (4.8)      1.2       (0.7)
   Benefits paid........................................................      (0.9)      (0.7)     (1.7)      (0.4)
                                                                          ---------  --------- ---------  ---------
      Benefit obligation at end of year ................................      38.2       33.7       6.0        4.9
                                                                          ---------  --------- ---------  ---------

Change in plan assets:
   Fair value of plan assets at beginning of year.......................      37.1       29.9         -          -
   Actual return on assets..............................................      (1.5)       5.7         -          -
   Employer contributions...............................................         -        2.2       0.6        0.1
   Plan participants' contributions.....................................         -          -       1.1        0.3
   Benefits paid........................................................      (0.9)      (0.7)     (1.7)      (0.4)
                                                                          ---------  --------- ---------  ---------
   Fair value of plan assets at end of year.............................      34.7       37.1         -          -
                                                                          ---------  --------- ---------  ---------

   Benefit obligation in excess of (less than) plan assets..............       3.5       (3.4)      6.0        4.9
   Unrecognized actuarial gain..........................................       7.5       12.8       0.8        2.1
   Unrecognized prior service costs.....................................      (0.7)      (0.8)        -          -
                                                                          ---------  --------- ---------  ---------
      Accrued benefit liability.........................................  $   10.3   $    8.6  $    6.8   $    7.0
                                                                          =========  ========= =========  =========





                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2000        1999      1998       2000      1999       1998
                                                     ---------  ---------  ---------  --------- ---------  ---------
Components of net periodic benefit costs:
   Service cost....................................  $    1.9   $    2.4   $    2.2   $    0.2  $   0.3    $    0.3
   Interest cost...................................       2.7        2.5        2.2        0.3      0.4         0.3
   Expected return on assets.......................      (2.6)      (2.1)      (1.8)         -        -           -
   Amortization of prior service costs.............       0.1        0.1        0.1          -        -           -
   Recognized net actuarial gain...................      (0.4)         -          -       (0.1)    (0.1)       (0.1)
                                                     ---------  ---------  ---------  --------- ---------  ---------
      Adjusted net periodic benefit costs..........  $    1.7   $    2.9   $    2.7   $    0.4  $   0.6    $    0.5
                                                     =========  =========  =========  ========= =========  =========


                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2000        1999      1998       2000      1999       1998
                                                     ---------  ---------  ---------  --------- ---------  ---------
Weighted-average assumptions:
   Discount rate...................................    7.5%        7.8%      7.0%       7.5%      7.8%        7.0%
   Expected return on plan assets..................    8.0%        8.0%      8.0%         -         -           -
   Rate of compensation increase...................    5.0%        5.0%      5.0%       5.0%      5.0%        5.0%

      Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates as of December 31, 2000 would have the
following effects (in millions):


                                                                       1-PERCENTAGE-POINT              1-PERCENTAGE-POINT
                                                                            INCREASE                        DECREASE
                                                                   ---------------------------     ---------------------------
Effect on total of service and interest cost components.......              $    0.1                        $    (0.1)
Effect on the postretirement benefit obligations..............                   0.8                             (0.7)


      Employee Savings Plan
      Pacific Lumber's employees are eligible to participate in a defined
contribution savings plan sponsored by MAXXAM. This plan is designed to enhance
the existing retirement programs of participating employees. The cost to the
Company of this plan was $1.5 million, $1.4 million and $1.4 million for the
years ended December 31, 2000, 1999 and 1998, respectively.

      Workers' Compensation Benefits
      Pacific Lumber is self-insured for workers' compensation benefits, whereas
Britt is insured for workers' compensation benefits by an outside party.
Included in accrued compensation and related benefits and other noncurrent
liabilities are accruals for workers' compensation claims amounting to $9.2
million and $9.8 million at December 31, 2000 and 1999, respectively. Workers'
compensation expenses amounted to $3.4 million, $3.9 million and $3.5 million
for the years ended December 31, 2000, 1999 and 1998, respectively.

10.   RELATED PARTY TRANSACTIONS

      MAXXAM provides the Company and certain of the Company's subsidiaries with
accounting, data processing services, office space and various office personnel,
insurance, legal, operating, financial and certain other services. MAXXAM's
expenses incurred on behalf of the Company are reimbursed by the Company through
payments consisting of (i) an allocation of the lease expense for the office
space utilized by or on behalf of the Company and (ii) a reimbursement of actual
out-of-pocket expenses incurred by MAXXAM, including, but not limited to, labor
costs of MAXXAM personnel rendering services to the Company. Charges by MAXXAM
for such services were $2.2 million, $3.1 million and $3.5 million for the years
ended December 31, 2000, 1999 and 1998, respectively. The Company believes that
the services being rendered are on terms not less favorable to the Company than
those which would be obtainable from unaffiliated third parties.

11.   COMMITMENTS AND CONTINGENCIES

      Commitments
      Minimum rental commitments under operating leases at December 31, 2000 are
as follows: years ending December 31, 2001--$4.2 million; 2002--$3.5 million;
2003--$2.8 million; 2004--$1.7 million; 2005--$1.2 million; thereafter--$2.5
million. Rental expense for operating leases was $4.7 million, $4.2 million and
$3.0 million for the years ended December 31, 2000, 1999 and 1998, respectively.

      Contingencies
      Regulatory and environmental matters play a significant role in the
Company's forest products business, which is subject to a variety of California
and federal laws and regulations, as well as the HCP and SYP and Pacific
Lumber's timber operator's license, dealing with timber harvesting practices,
threatened and endangered species and habitat for such species, and air and
water quality. As further described in Note 2, on March 1, 1999, Pacific Lumber
and MAXXAM consummated the Headwaters Agreement with the United States and
California. In addition to the transfer of the Headwaters Timberlands described
in Note 2, the SYP and the HCP were approved and incidental take permits related
to the HCP (the "PERMITS") were issued.

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

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

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

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

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

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

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

12.   SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------
                                                                                              (IN MILLIONS)
Supplemental information on non-cash investing and financing activities:
   Acquisition of assets subject to other liabilities..............................  $      -  $      -    $   0.8
   Deferral of interest on MAXXAM note receivable..................................      16.7      15.0        7.8
   Repurchases of debt using restricted cash.......................................      52.5         -          -
   Purchases of marketable securities and other investments using restricted cash..       0.4      15.9          -

Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized interest......................................  $   79.3  $   80.8   $   78.2
   Income taxes paid...............................................................         -         -        0.2
   Tax allocation payments to (from) MAXXAM........................................      (0.5)      1.8        0.2


13.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

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


                                                                            THREE MONTHS ENDED
                                                        -----------------------------------------------------------
                                                          MARCH 31        JUNE 30     SEPTEMBER 30     DECEMBER 31
                                                        -------------  -------------  -------------- --------------
2000:
   Net sales..........................................  $       47.4   $       55.9   $        49.4  $        47.4
   Operating income (loss)............................           5.7            8.5             0.1           (7.0)
   Income (loss) before extraordinary items...........           2.0            4.9           (12.8)          31.8
   Extraordinary items, net...........................           1.4              -             0.6            2.2
   Net income (loss)..................................           3.4            4.9           (12.2)          34.0

1999:
   Net sales..........................................  $       46.7   $       41.4   $        49.0  $        50.7
   Operating income (loss)............................          (1.5)          (3.4)           (3.9)           4.4
   Net income (loss)..................................         120.3          (10.8)          (19.3)           9.8



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

      None.

                                    PART III

      Not applicable.

                                     PART IV

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

(A)   INDEX TO FINANCIAL STATEMENTS

      1.   FINANCIAL STATEMENTS (INCLUDED UNDER ITEM 8):

           Report of Independent Public Accountants
           Consolidated Balance Sheet at December 31, 2000 and 1999
           Consolidated Statement of Operations for the Years Ended December 31, 2000,
              1999 and 1998
           Consolidated Statement of Stockholder's Deficit for the Years Ended
              December 31, 2000, 1999 and 1998
           Consolidated Statement of Cash Flows for the Years Ended December 31, 2000,
              1999 and 1998
           Notes to Consolidated Financial Statements

      2.   FINANCIAL STATEMENT SCHEDULES:

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

           The Consolidated Financial Statements and Notes thereto of MAXXAM Inc., MAXXAM Group
           Inc.  and Kaiser Aluminum Corporation are incorporated herein by reference and included as
           Exhibits 99.1, 99.2 and 99.3 hereto, respectively.

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

(B)   REPORTS ON FORM 8-K

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

(C)   EXHIBITS

      Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 47), which index is incorporated herein by
reference.


           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                           MAXXAM GROUP HOLDINGS INC.

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



                                                                                                   DECEMBER 31,
                                                                                               --------------------
                                                                                                 2000       1999
                                                                                               ---------  ---------
                                            ASSETS

Current assets:
   Cash and cash equivalents.................................................................. $   46.9   $    9.0
   Marketable securities......................................................................      7.4          -
   Receivable from MAXXAM Inc.................................................................      7.6        6.8
                                                                                               ---------  ---------
      Total current assets....................................................................     61.9       15.8
Note receivable from MAXXAM Inc...............................................................    164.5      147.8
Deferred income taxes.........................................................................      6.4        9.9
Deferred financing costs......................................................................      2.0        2.7
                                                                                               ---------  ---------
                                                                                               $  234.8   $  176.2
                                                                                               =========  =========

                             LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
   Accounts payable and other accrued liabilities............................................. $    1.3   $    1.2
   Accrued interest...........................................................................      5.9        6.3
                                                                                               ---------  ---------
      Total current liabilities...............................................................      7.2        7.5
Note payable to MGI...........................................................................        -        4.6
Losses recognized in excess of investments in subsidiaries....................................    158.2       73.8
Long-term debt................................................................................    118.8      125.2
                                                                                               ---------  ---------
      Total liabilities.......................................................................    284.2      211.1
                                                                                               ---------  ---------

Stockholder's deficit:
   Common stock, $1.00 par value, 3,000 shares authorized, 1,000 shares issued................        -          -
   Additional capital.........................................................................    123.2      123.2
   Accumulated deficit........................................................................   (172.6)    (157.7)
   Accumulated other comprehensive loss.......................................................        -       (0.4)
                                                                                               ---------  ---------
      Total stockholder's deficit.............................................................    (49.4)     (34.9)
                                                                                               ---------  ---------
                                                                                               $  234.8   $  176.2
                                                                                               =========  =========


     See notes to consolidated financial statements and accompanying notes.

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                           MAXXAM GROUP HOLDINGS INC.

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



                                                                                      YEARS ENDED DECEMBER 31,
                                                                               -------------------------------------
                                                                                  2000         1999         1998
                                                                               -----------  -----------  -----------

Investment, interest and other income (expense), net.......................... $    24.9    $     17.7   $     14.4
Interest expense..............................................................     (15.2)        (16.4)       (16.4)
General and administrative expenses...........................................      (0.3)         (0.3)        (0.3)
Equity in earnings (loss) of subsidiaries.....................................      23.6          99.3        (56.1)
                                                                               -----------  -----------  -----------
Income (loss) before income taxes.............................................      33.0         100.3        (58.4)
Credit (provision) in lieu of income taxes....................................      (3.3)         (0.3)         0.2
                                                                               -----------  -----------  -----------
Income (loss) before extraordinary items......................................      29.7         100.0        (58.2)
Extraordinary items:
   Gain on repurchase of debt, net of provision in lieu of income taxes.......       0.4             -            -
   Loss on early extinguishment of debt, net of credit in lieu
      of income taxes.........................................................         -             -         (1.6)
                                                                               -----------  -----------  -----------
Net income (loss)............................................................. $     30.1   $    100.0   $    (59.8)
                                                                               ===========  ===========  ===========


     See notes to consolidated financial statements and accompanying notes.

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                           MAXXAM GROUP HOLDINGS INC.

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


                                                                                       YEARS ENDED DECEMBER 31,
                                                                                    -------------------------------
                                                                                       2000      1999       1998
                                                                                    ---------- ---------  ---------
Cash flows from operating activities:
   Net income (loss)..............................................................  $    30.1  $  100.0   $  (59.8)
   Adjustments to reconcile net income (loss) to net cash
      provided by (used for) operating activities:
      Extraordinary loss (gain) on early extinguishment of debt, net..............       (0.4)        -        1.6
      Net gains on marketable securities..........................................       (6.9)        -          -
      Amortization of deferred financing costs and
        discounts on long-term debt...............................................        0.8       0.8        0.8
      Equity in loss (earnings) of subsidiaries...................................      (23.6)    (99.3)      56.1
      Dividends from subsidiaries.................................................      108.4      18.7       18.7
      Increase (decrease) in cash resulting from changes in:
        Receivable from MAXXAM Inc................................................      (22.1)    (11.0)      (8.4)
        Accrued and deferred income taxes.........................................        2.8       0.3       (0.1)
        Accrued interest, other liabilities and other.............................        0.1      (6.1)      (0.1)
                                                                                    ---------- ---------  ---------
        Net cash provided by operating activities.................................       89.2       3.4        8.8
                                                                                    ---------- ---------  ---------

Cash flows from investing activities:
   Net purchases of marketable securities.........................................       (0.5)        -          -
                                                                                    ---------- ---------  ---------
      Net cash used for investing activities......................................       (0.5)        -          -
                                                                                    ---------- ---------  ---------

Cash flows from financing activities:
   Repurchases of long-term debt..................................................       (5.8)        -          -
   Consent fees for early retirement of subsidiaries' debt........................          -         -       (2.6)
   Dividends paid.................................................................      (45.0)        -       (2.5)
                                                                                    ---------- ---------  ---------
      Net cash used for financing activities......................................      (50.8)        -       (5.1)
                                                                                    ---------- ---------  ---------

Net increase in cash and cash equivalents.........................................       37.9       3.4        3.7
Cash and cash equivalents at beginning of year....................................        9.0       5.6        1.9
                                                                                    ---------- ---------  ---------
Cash and cash equivalents at end of year..........................................  $    46.9  $    9.0   $    5.6
                                                                                    ========== =========  =========



     See notes to consolidated financial statements and accompanying notes.

     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)

                          NOTES TO FINANCIAL STATEMENTS


1. DEFERRED INCOME TAXES

      The deferred income tax assets and liabilities reported in the
accompanying unconsolidated balance sheet are determined by computing such
amounts on a consolidated basis, as if MGHI files a consolidated tax return with
all of its subsidiaries except Salmon Creek, and as if such corporations were
never connected with MAXXAM, and then reducing such consolidated amounts by the
amounts recorded by MGHI's subsidiaries, but excluding Salmon Creek, pursuant to
their respective tax allocation agreements with MAXXAM. For taxable periods
beginning after December 7, 1999, the computation includes Salmon Creek. A
significant portion of MGHI's net deferred income tax assets relates to loss and
credit carryforwards, net of valuation allowances. MGHI evaluated all
appropriate factors to determine the proper valuation allowances for these
carryforwards, including any limitations concerning their use, the year the
carryforwards expire and the levels of taxable income necessary for utilization.
Based on this evaluation, MGHI has concluded that it is more likely than not
that it will realize the benefit of these carryforwards for which valuation
allowances were not provided.

2.    SUPPLEMENTAL CASH FLOW INFORMATION

                                                                                       YEARS ENDED DECEMBER 31,
                                                                        ---------------------------------------------------
                                                                             2000              1999               1998
                                                                        --------------    --------------     --------------
                                                                                           (IN MILLIONS)

Supplemental information on non-cash investing and financing activities:
   Deferral of interest on MAXXAM note receivable......................     $     16.7       $     15.0      $         7.8

Supplemental disclosure of cash flow information:
   Interest paid.......................................................     $     14.9       $     15.6      $        15.6




                                   SIGNATURES

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



                                                                       MAXXAM GROUP HOLDINGS INC.


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

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



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


Date:   March 28, 2001                           By:                     /S/ J. KENT FRIEDMAN
                                                     --------------------------------------------------------------
                                                                            J. Kent Friedman
                                                                                Director


Date:   March 28, 2001                           By:                      /S/ JOHN T. LA DUC
                                                     --------------------------------------------------------------
                                                                             John T. La Duc
                                                                                Director


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


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



                                INDEX OF EXHIBITS


EXHIBIT
NUMBER                                  DESCRIPTION
- -------       ------------------------------------------------------------------
 3.1          Certificate of Incorporation of MAXXAM Group Holdings Inc. (the
              "Company" or "MGHI") (incorporated herein by reference to Exhibit
              3.1 to the Company's Registration Statement on Form S-4 dated
              November 4, 1996; Registration No. 333-18723; the "Company's Form
              S-4")
 3.2          Amended and Restated By-laws of the Company, adopted July 7, 1998
              (incorporated herein by reference to Exhibit 3.2 to the Company's
              Form S-4)
 4.1          Indenture, dated as of December 23, 1996 among the Company, as
              Issuer, MAXXAM Inc. ("MAXXAM"), as Guarantor, and First Bank
              National Association, as Trustee ("MGHI Indenture"), regarding the
              Company's 12% Senior Secured Notes due 2003 (incorporated herein
              by reference to Exhibit 4.1 to the Company's Form S-4)
 4.2          First Supplemental Indenture, dated as of July 8, 1998, to
              the MGHI Indenture (incorporated herein by reference to
              Exhibit 4.4 to the Quarterly Report on Form 10-Q/A of the
              Company for the quarter ended June 30, 1998; the "Company
              June 1998 Form 10-Q/A")
 4.3          Second Supplemental Indenture, dated as of July 29, 1998, to the
              MGHI Indenture (incorporated herein by reference to Exhibit 4.5 to
              the Company June 1998 Form 10-Q/A)
 4.4          Indenture, dated as of July 20, 1998, between Scotia Pacific
              Company LLC ("Scotia LLC") and State Street Bank and Trust
              Company ("State Street") regarding Scotia LLC's Class A-1,
              Class A-2 and Class A-3 Timber Collateralized Notes (the
              "Timber Note Indenture") (incorporated herein by reference
              to Exhibit 4.2 to the Quarterly Report on Form 10-Q/A of
              MAXXAM for the quarter ended June 30, 1998; File No. 1-3924
 4.5          First Supplemental Indenture, dated as of July 16, 1999, to the
              Timber Note Indenture (incorporated herein by reference to Exhibit
              4.1 to Scotia LLC's Quarterly Report on Form 10-Q for the quarter
              ended June 30, 1999; File No. 333-63825;  the "Scotia LLC June
              1999 Form 10-Q")
 4.6          Second Supplemental Indenture, dated as of November 18, 1999, to
              the Timber Note Indenture (incorporated herein by reference to
              Exhibit 99.3 to Scotia LLC's Report on Form 8-K dated November 19,
              1999; File No. 333-63825)
 4.7          Deed of Trust, Security Agreement, Financing Statement
              Fixture Filing and Assignment of Proceeds, dated as of July
              20, 1998, among Scotia LLC, Fidelity National Title
              Insurance Company, as trustee, and State Street, as
              collateral agent (incorporated herein by reference to
              Exhibit 4.6 to Scotia LLC's Registration Statement on Form
              S-4; Registration No. 333-63825; the "Scotia LLC
              Registration Statement")
 4.8          Credit Agreement, dated as of July 20, 1998, among Scotia
              LLC, the financial institutions party thereto and Bank of
              America National Trust and Savings Association, as agent
              (incorporated herein by reference to Exhibit 4.3 to the
              Quarterly Report on Form 10-Q/A of MAXXAM for the quarter
              ended June 30, 1998; File No. 1-3924; the "MAXXAM June 1998
              Form 10-Q")
 4.9          First Amendment, dated as of July 16, 1999, to the Line of Credit
              Agreement among Scotia LLC, the financial institutions party
              thereto and Bank of America National Trust and Savings Association,
              as agent (incorporated herein by reference to Exhibit 4.2 to the
              Scotia LLC June 1999 Form 10-Q)
 4.10         Amended and Restated Credit Agreement ("Pacific Lumber Credit
              Agreement") dated as of December 18, 1998 between The Pacific
              Lumber Company ("Pacific Lumber") and Bank of America National
              Trust and Savings Association (incorporated herein by reference to
              Exhibit 4.7 to the Company's Annual Report on Form 10-K dated
              December 31, 1998)
 4.11         Amendment, dated as of January 31, 2000, to the Pacific Lumber
              Credit Agreement

              Note: Pursuant to Regulation ss. 229.601, Item 601
              (b)(4)(iii) of Regulation S-K, upon request of the
              Securities and Exchange Commission, the Company hereby
              agrees to furnish a copy of any unfiled instrument which
              defines the rights of holders of long-term debt of the
              Company and its consolidated subsidiaries (and for any of
              its unconsolidated subsidiaries for which financial
              statements are required to be filed) wherein the total
              amount of securities authorized thereunder does not exceed
              10 percent of the total consolidated assets of the Company
10.1          Tax Allocation Agreement dated as of December 23, 1996
              between MGHI and MAXXAM (incorporated herein by reference to
              Exhibit 10.1 to the Company's Form S-4)
10.2          Tax Allocation Agreement between MAXXAM Group Inc. ("MGI") and
              MAXXAM dated as of August 4, 1993 (incorporated herein by
              reference to Exhibit 10.6 to Amendment No. 3 to the Registration
              Statement on Form S-2 of MGI; Registration No. 33-64042; the "MGI
              Registration Statement")
10.3          Tax Allocation Agreement dated as of May 21, 1988 among MAXXAM,
              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 fiscal year ended
              December 31, 1988; File No. 1-9204)
10.4          Tax Allocation Agreement among Pacific Lumber, Scotia LLC, Salmon
              Creek Corporation ("Salmon Creek") and MAXXAM dated as of March
              23, 1993 (incorporated herein by reference to Exhibit 10.1 to
              Amendment No. 3 to the Form S-1 Registration Statement of Scotia
              Pacific Holding Company, Registration No. 33-55538)
10.5          Tax Allocation Agreement between MAXXAM and Britt Lumber Co., Inc.
              ("Britt"), dated as of July 3, 1990 (incorporated herein by
              reference to Exhibit 10.4 to Pacific Lumber's Annual Report
              on Form 10-K for the fiscal year ended December 31, 1993)
10.6          Non-Negotiable Intercompany Note dated as of December 23, 1996
              executed by MAXXAM in favor of the Company (incorporated herein by
              reference to Exhibit 10.8 to the Company's Form S-4)
10.7          Power Purchase Agreement dated as of January 17, 1986
              between Pacific Lumber and Pacific Gas and Electric Company
              (incorporated herein by reference to Exhibit 10(n) to
              Pacific Lumber's Registration Statement on Form S-1,
              Registration No. 33-5549)
10.8          New Master Purchase Agreement, dated as of July 20, 1998, between
              Scotia LLC and Pacific Lumber (incorporated herein by reference to
              Exhibit 10.1 to the Quarterly Report on Form 10-Q of the Company
              for the quarter ended June 30, 1998; the "Company June 1998
              Form 10-Q")
10.9          New Services Agreement, dated as of July 20, 1998, between
              Pacific Lumber and Scotia LLC (incorporated herein by
              reference to Exhibit 10.2 to the Company June 1998 Form
              10-Q)
10.10         New Additional Services Agreement, dated as of July 20,
              1998, between Scotia LLC and Pacific Lumber (incorporated
              herein by reference to Exhibit 10.3 to the Company June 1998
              Form 10-Q)
10.11         New Reciprocal Rights Agreement, dated as of July 20, 1998, among
              Pacific Lumber, Scotia LLC and Salmon Creek Corporation
              (incorporated herein by reference to Exhibit 10.4 to the Company
              June 1998 Form 10-Q)
10.12         New Environmental Indemnification Agreement, dated as of July 20,
              1998, between Pacific Lumber and Scotia LLC (incorporated herein
              by reference to Exhibit 10.5 to the Company June 1998 Form 10-Q)
10.13         Purchase and Services Agreement between Pacific Lumber and Britt
              dated as of March 23, 1993 (incorporated herein by reference to
              Exhibit 10.17 to Amendment No. 2 to the Form S-2 Registration
              Statement of Pacific Lumber; Registration Statement No. 33-56332)
10.14         Implementation Agreement with Regard to Habitat Conservation
              Plan for the Properties of Pacific Lumber, Scotia LLC and
              Salmon Creek dated as of February 1999 by and among The
              United States Fish and Wildlife Service, the National Marine
              Fisheries Service, the California Department of Fish and
              Game ("CDF&G"), the California Department of Forestry and
              Fire Protection (the "CDF") and Pacific Lumber, Salmon Creek
              and Scotia LLC (incorporated herein by reference to Exhibit
              99.3 to Scotia LLC's Form 8-K dated March 19, 1999; File No.
              333-63825; the "Scotia LLC March 19, 1999 Form 8-K")
10.15         Agreement Relating to Enforcement of AB 1986 dated as of February
              25, 1999 by and among The California Resources Agency, CDF&G, CDF,
              The California Wildlife Conservation Board, Pacific Lumber, Salmon
              Creek and Scotia LLC (incorporated herein by reference to
              Exhibit 99.4 to the Scotia LLC March 19, 1999 Form 8-K)
10.16         Habitat Conservation Plan dated as of February 1999 for the
              Properties of Pacific Lumber, Scotia Pacific Holding Company
              and Salmon Creek (incorporated herein by reference to
              Exhibit 99.5 to the Scotia LLC March 19, 1999 Form 8-K)
10.17         Agreement for Transfer of Grizzly Creek and Escrow
              Instructions and Option Agreement dated as of February 26,
              1999 by and between Pacific Lumber and the State of
              California (incorporated herein by reference to Exhibit 99.6
              to Scotia LLC's March 19, 1999 Form 8-K)
10.18         Letter dated February 25, 1999 from the CDF to Pacific Lumber
              (incorporated herein by reference to Exhibit 99.8 to Scotia LLC's
              March 19, 1999 Form 8-K)
10.19         Letter dated March 1, 1999 from the CDF to Pacific Lumber
              (incorporated herein by reference to Exhibit 99.9 to Scotia LLC's
              March 19, 1999 Form 8-K)
10.20         Letter dated March 1, 1999 from the U.S. Department of the
              Interior Fish and Wildlife Service and the U.S. Department
              of Commerce National Oceanic and Atmospheric Administration
              to Pacific Lumber, Salmon Creek and the Company
              (incorporated herein by reference to Exhibit 99.10 to Scotia
              LLC's March 19, 1999 Form 8-K)
*99.1         The consolidated financial statements and notes thereto of MAXXAM
              Inc. for the fiscal year ended December 31, 2000
*99.2         The financial statements and notes thereto of MAXXAM Group Inc.
              for the fiscal year ended December 31, 2000
*99.3         The consolidated financial statements and notes thereto of Kaiser
              Aluminum Corporation for the fiscal year ended December 31, 2000
*99.4         Item 7A. of Kaiser Aluminum Corporation's Annual Report on Form
              10-K for the fiscal year ended December 31, 2000

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

* Included with this filing.

EX-99.1

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To MAXXAM Inc.:

We have audited the accompanying consolidated balance sheets of MAXXAM Inc. (a
Delaware corporation) and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
2000. These consolidated financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MAXXAM Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

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



                                                          ARTHUR ANDERSEN LLP


Houston, Texas
March 27, 2001


                          MAXXAM INC. AND SUBSIDIARIES

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


                                                                                                 December 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------- -----------
Assets
Current assets:
   Cash and cash equivalents............................................................... $    353.2  $    275.7
   Marketable securities...................................................................       44.6        58.3
   Receivables:
      Trade, net of allowance for doubtful accounts of $6.4 and $6.0, respectively.........      202.3       169.4
      Other................................................................................      251.6       116.0
   Inventories.............................................................................      451.3       590.7
   Prepaid expenses and other current assets...............................................      203.1       192.7
                                                                                            ----------- -----------
        Total current assets...............................................................    1,506.1     1,402.8
Property, plant and equipment, net of accumulated depreciation of $1,033.0 and
      $977.9, respectively.................................................................    1,331.3     1,222.2
Timber and timberlands, net of accumulated depletion of $183.8 and $180.6,
   respectively............................................................................      244.3       254.1
Investments in and advances to unconsolidated affiliates...................................       85.5       112.6
Deferred income taxes......................................................................      553.1       549.1
Restricted cash, marketable securities and other investments...............................      106.3       159.0
Long-term receivables and other assets.....................................................      677.4       693.3
                                                                                            ----------- -----------
                                                                                            $  4,504.0  $  4,393.1
                                                                                            =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable........................................................................ $    248.7  $    243.1
   Accrued interest........................................................................       70.1        72.4
   Accrued compensation and related benefits...............................................      180.8       124.8
   Other accrued liabilities...............................................................      313.5       194.7
   Payable to affiliates...................................................................       78.3        85.8
   Short-term borrowings and current maturities of long-term debt..........................      100.6        46.0
                                                                                            ----------- -----------
        Total current liabilities..........................................................      992.0       766.8
Long-term debt, less current maturities....................................................    1,882.8     1,956.8
Accrued postretirement medical benefits....................................................      667.4       688.9
Other noncurrent liabilities...............................................................      779.9       810.1
                                                                                            ----------- -----------
        Total liabilities..................................................................    4,322.1     4,222.6
                                                                                            ----------- -----------
Commitments and contingencies
Minority interests.........................................................................      132.8       142.7
Stockholders' equity:
   Preferred stock, $0.50 par value; 12,500,000 shares authorized; Class A $0.05
      Non-Cumulative Participating Convertible Preferred Stock; 669,355 shares issued......        0.3         0.3
   Common stock, $0.50 par value; 28,000,000 shares authorized;
      10,063,359 shares issued.............................................................        5.0         5.0
   Additional capital......................................................................      225.3       225.3
   Accumulated deficit.....................................................................      (68.2)     (102.1)
   Accumulated other comprehensive loss....................................................       (0.5)       (0.7)
    Treasury stock, at cost (shares held:  preferred - 845; common - 3,315,008
      and 2,805,608, respectively).........................................................     (112.8)     (100.0)
                                                                                            ----------- -----------
        Total stockholders' equity.........................................................       49.1        27.8
                                                                                            ----------- -----------
                                                                                            $  4,504.0  $  4,393.1
                                                                                            =========== ===========


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


                          MAXXAM INC. AND SUBSIDIARIES

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


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

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

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

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

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



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


                          MAXXAM INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                   (In millions, except per share information)



                                                                                   Accumu-
                                                                                   lated
                                                Common Stock                       Other
                                              -----------------                    Compre-                      Compre-
                                   Preferred                     Addi-    Accumu-  hensive                      hensive
                                     Stock                       tional    lated   Income   Treasury            Income
                                  ($.50 Par)  Shares ($.50 Par) Capital   Deficit  (Loss)     Stock    Total    (Loss)
                                  ---------- ------- ---------- -------- --------- -------- --------- --------  -------

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

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

Balance, December 31, 1999.......       0.3     7.0        5.0    225.3    (102.1)    (0.7)   (100.0)    27.8
   Net income....................         -       -          -        -      33.9        -         -     33.9   $ 33.9
   Increase in pension liability.         -       -          -        -         -     (0.4)        -     (0.4)    (0.4)
   Change in value of available-
      for-sale investments.......         -       -          -        -         -      0.6         -      0.6      0.6
                                                                                                                -------
   Comprehensive income..........                                                                               $ 34.1
                                                                                                                =======
   Treasury stock purchases......         -       -          -        -         -        -     (12.8)   (12.8)
                                  ---------- ------- ---------  -------- --------- -------- --------- --------
Balance, December 31, 2000....... $     0.3     7.0    $   5.0   $225.3  $  (68.2) $  (0.5) $ (112.8) $  49.1
                                  ========== ======= =========  ======== ========= ======== ========= ========




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



                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (In millions of dollars)


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

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


                          MAXXAM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation and Summary of Significant Accounting Policies

   Basis of Presentation

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

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

- -     Aluminum, through its majority owned subsidiary, Kaiser Aluminum
      Corporation ("KAISER", 63% owned as of December 31, 2000), an aluminum
      producer.  Kaiser, through its wholly owned principal operating
      subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), operates in
      several principal aspects of the aluminum industry - the mining of
      bauxite (the major aluminum-bearing ore), the refining of bauxite into
      alumina (the intermediate material), the production of aluminum and the
      manufacture of fabricated and semi-fabricated aluminum products.  Kaiser's
      production levels of alumina, before consideration of the Gramercy
      incident described in Note 3, and primary aluminum exceed its internal
      processing needs, which allows it to be a major seller of alumina and
      primary aluminum to domestic and international third parties.  A
      substantial portion of the Company's consolidated assets, liabilities,
      revenues, results of operations and cash flows are attributable to Kaiser
      (see Note 2).

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

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

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

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

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

      Use of Estimates and Assumptions
      The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) the
disclosure of contingent assets and liabilities known to exist as of the date
the financial statements are published and (iii) the reported amount of
revenues and expenses recognized during each period presented. The Company
reviews all significant estimates affecting its consolidated financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to filing the consolidated financial statements with the
Securities and Exchange Commission. Adjustments made using estimates often
relate to improved information not previously available. Uncertainties regarding
such estimates and assumptions are inherent in the preparation of the Company's
consolidated financial statements; accordingly, actual results could differ from
estimates, and it is possible that the subsequent resolution of any one of the
contingent matters described in Note 17 could differ materially from current
estimates. The results of an adverse resolution of such uncertainties could have
a material effect on the Company's consolidated financial position, results of
operations or liquidity.

      Reclassifications and Other Matters
      Certain reclassifications have been made to prior years' consolidated
financial statements to be consistent with the current year's presentation. In
addition, net sales and cost of sales and operations for 1999 and 1998 which are
attributable to the Company's aluminum operations have been restated to conform
to a new accounting principle that requires freight charges to be included in
cost of sales and operations. The amount of such restatement was $39.3 million
and $46.0 million for 1999 and 1998, respectively.

   Summary of Significant Accounting Policies

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

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

      Revenue Recognition
      The Company recognizes revenues for alumina, primary aluminum and
fabricated aluminum products when title, ownership and risk of loss pass to the
buyer.

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

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

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

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

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

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

      Most of Kaiser's hedging activities involve the use of option contracts
(which establish a maximum and/or minimum amount to be paid or received) and
forward sales contracts (which effectively fix or lock-in the amount Kaiser will
pay or receive). Option contracts typically require the payment of an up-front
premium in return for the right to lock-in a minimum or maximum price. Forward
sales contracts do not require an up-front payment and are settled by the
receipt or payment of the amount by which the price at the settlement date
varies from the contract price. Consistent with guidelines in place through
December 31, 2000, any interim fluctuations in option prices prior to the
settlement date were deferred until the settlement date of the underlying hedged
transaction, at which time they were reflected in net sales or cost of sales and
operations (as applicable) together with the related premium cost. No accounting
recognition was accorded to interim fluctuations in prices of forward sales
contracts. Hedge (deferral) accounting would be terminated (resulting in the
applicable derivative positions being marked-to-market) if the level of
underlying physical transactions ever fell below the net exposure hedged. This
did not occur in 1998, 1999 or 2000.

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

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

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

      Per Share Information
      Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period including the weighted average impact of the shares of common stock
issued and treasury stock acquired during the year from the date of issuance or
repurchase. Diluted earnings (loss) per share calculations also include the
dilutive effect of the Class A Preferred Stock (which is convertible into Common
Stock) as well as common and preferred stock options.


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

- ------------------
(1)  The impact of outstanding convertible stock and stock options of 811,714
     shares was excluded from the weighted average share calculation for the
     year ended December 31, 1998, as its effect would have been antidilutive.
(2)  Options to purchase 940,183, 496,083 and 81,475 shares of Common Stock
     outstanding during the years ended December 31, 2000, 1999 and 1998,
     respectively, were not included in the computation of diluted earnings per
     share because the options' exercise prices were greater than the average
     market price of the Common Stock.

2.    Segment Information

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

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

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



                                                      Forest       Real       Racing                  Consolidated
                          December 31,   Aluminum    Products     Estate    Operations    Corporate       Total
                          -----------  ------------ -----------  --------  ------------ ------------ --------------
Net sales to unaffiliated
   customers                 2000      $   2,169.8  $    200.1   $  47.2   $      30.9  $         -  $     2,448.0
                             1999          2,083.6       187.8      52.0          27.3            -        2,350.7
                             1998          2,302.4       233.6      58.6          24.1            -        2,618.7

Operating income (loss)      2000            145.2         7.6      (7.8)          2.1        (16.5)         130.6
                             1999            (23.0)       (4.1)     (5.2)          3.8        (23.0)         (51.5)
                             1998             96.5        40.9         -           1.8        (13.6)         125.6

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

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

Depreciation, depletion
   and amortization          2000             71.0        19.7       5.5           1.4          0.6           98.2
                             1999             83.6        17.0       6.2           1.1          0.5          108.4
                             1998             93.2        22.5       3.2           1.0          0.5          120.4

Income (loss) before
   income taxes and
   minority interests        2000             31.3        23.9      14.5           2.1        (11.5)          60.3
                             1999            (84.0)      196.1      13.7           3.1        (34.4)          94.5
                             1998            (10.0)      (24.7)     14.4          (1.0)       (25.3)         (46.6)

Capital expenditures         2000            296.5        14.0       6.9           4.5          1.0          322.9
                             1999             68.4        23.1       3.1           0.6          0.6           95.8
                             1998             77.6        22.0      22.2           1.0          0.1          122.9

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

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


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

      Non-recurring Items

      Aluminum
      The aluminum segment's operating income (loss) for the years ended
December 31, 2000, 1999 and 1998 includes the impact of certain non-recurring
items as shown in the following table. These items are included in cost of sales
and operations and in impairment of assets in the Consolidated Statement of
Operations.

                                                                                     Years Ended December 31,
                                                                               ------------------------------------
                                                                                  2000         1999         1998
                                                                               -----------  ----------  -----------
Net gains on power sales (Note 5)............................................  $    159.5   $       -   $        -
Gramercy related items  (Note 3):
   Incremental maintenance...................................................       (11.5)          -            -
   Insurance deductibles, etc................................................           -        (5.0)           -
   LIFO inventory charge.....................................................        (7.0)          -            -
Impairment charges:
   Washington smelters (Note 5)..............................................       (33.0)          -            -

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

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

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

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

      The aluminum segment's income (loss) before income taxes and minority
interests for the years ended December 31, 2000, 1999 and 1998 include the net
impact of certain non-recurring amounts included in investment, interest and
other income (expense), net, as shown in the following table:


                                                                                      Years Ended December 31,
                                                                                ------------------------------------
                                                                                   2000         1999         1998
                                                                                ----------   ----------   ----------
Asbestos-related charges (Note 17)..............................................$   (43.0)   $   (53.2)   $   (12.7)
Gain on sale of Pleasanton complex (Note 6).....................................     22.0            -            -
Lease obligation adjustment (Note 17)...........................................     17.0            -            -
Mark-to-market gains (losses) (Note 18).........................................     11.0        (32.8)           -
Gain on involuntary conversion at Gramercy facility.............................        -         85.0            -
Gain on sale of interests in AKW (Note 6).......................................        -         50.5            -
Environmental cost insurance recoveries.........................................        -            -         12.0
All other, net..................................................................    (11.3)        (0.4)         4.2
                                                                                ----------   ----------   ----------
                                                                                $    (4.3)   $    49.1    $     3.5
                                                                                ==========   ==========   ==========

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

      Real Estate
      Investment, interest and other income (expense) for real estate includes
net gains from sales of operating assets and equity in earnings from real estate
joint ventures of $19.2 million, $8.9 million and $8.9 million the years ended
December 31, 2000, 1999 and 1998, respectively. Investment, interest and other
income (expense) for real estate also includes $11.3 million related to the gain
on the sale of a water company in Arizona in 2000.

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


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

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

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

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

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


                                                       United                                  Other
                                     December 31,      States       Jamaica       Ghana       Foreign      Total
                                    ---------------  ----------- ------------- -----------  ----------  -----------
Net sales to unaffiliated customers      2000        $  1,628.3  $      298.5  $    237.5   $   283.7   $  2,448.0
                                         1999           1,706.7         233.1       153.2       257.7      2,350.7
                                         1998           2,060.3         237.0        89.8       231.6      2,618.7

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


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

3.    Incident at Gramercy Facility

      In July 1999, Kaiser's Gramercy, Louisiana alumina refinery was
extensively damaged by an explosion in the digestion area of the plant. A number
of employees were injured in the incident, several of them severely. In
connection with the settlement of the U.S. Mine Safety and Health
Administration's ("MSHA") investigation of the incident, Kaiser is paying a fine
of $0.5 million, but Kaiser has denied the alleged violations. As a result of
the incident, alumina production at the facility was completely curtailed.
Construction on the damaged part of the facility began during the first quarter
of 2000. Initial production at the plant commenced during the middle of December
2000.

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

      Property Damage
      Kaiser's insurance policies provide that Kaiser will be reimbursed for the
costs of repairing or rebuilding the damaged portion of the facility using new
materials of like kind and quality with no deduction for depreciation. In 1999,
based on discussions with the insurance carriers and their representatives and
third party engineering reports, Kaiser recorded a pre-tax gain of $85.0
million, representing the difference between the minimum expected property
damage reimbursement amount of $100.0 million and the net carrying value of the
damaged property of $15.0 million. The reimbursement amount was classified as
long-term receivables and other assets at December 31, 1999. The full amount of
the receivable was collected in 2000. Additional recoveries are possible. See
"Timing and Amount of Additional Insurance Recoveries" below.

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

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

      Depreciation expense for the first six months of 1999 was approximately
$6.0 million. Kaiser suspended depreciation at the facility starting in July
1999 since production had been completely curtailed. However, in accordance with
an agreement with Kaiser's insurers, during the second half of 2000, Kaiser
recorded a depreciation charge of $14.3 million, of which $1.5 million was
recorded in the fourth quarter, representing the previously unrecorded
depreciation related to the undamaged portion of the facility for the period
from July 1999 through November 2000. However, this charge did not have any
impact on Kaiser's operating results as Kaiser has reflected (as a reduction of
depreciation expense) an equal and offsetting insurance receivable (incremental
to the amounts discussed in the preceding paragraph) since the insurers have
agreed to reimburse Kaiser this amount. Since production at the facility was
partially restored during December 2000, normal depreciation has commenced. Such
depreciation will exceed prior historical rates primarily due to the capital
costs on the newly constructed assets.

      Liability
      The incident has also resulted in more than ninety individual and class
action lawsuits being filed against Kaiser and others alleging, among other
things, property damage, business interruption losses by other businesses and
personal injury. The aggregate amount of damages sought in the lawsuits and
other claims cannot be determined at this time; however, Kaiser does not believe
the damages will exceed the amount of coverage under its liability policies.

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

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

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

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

4.    Labor Dispute, Settlement and Related Costs

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

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

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

5.    Pacific Northwest Power Sales and Operating Level

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

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

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

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


6.    Significant Acquisitions and Dispositions

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

      In May 2000, Kaiser acquired the assets of a drawn tube aluminum
fabricating operation in Chandler, Arizona. Total consideration for the
acquisition was $16.1 million, consisting of cash payments of $15.1 million and
assumed current liabilities of $1.0 million. The purchase price was allocated to
the assets acquired based on their estimated fair values, of which approximately
$1.1 million was allocated to property, plant and equipment and $2.8 million was
allocated to receivables, inventory and prepaid expenses. The excess of the
purchase price over the fair value of the assets acquired (goodwill) was
approximately $12.2 million and is being amortized on a straight-line basis over
20 years. Total revenues for the Chandler facility were approximately $13.8
million for the year ended December 31, 1999 (unaudited).

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

      In February 2000, Kaiser completed the sale of the Micromill assets and
technology for a nominal payment at closing and possible future payments based
on subsequent performance and profitability of the Micromill technology. The
sale did not have a material impact on Kaiser's 2000 operating results (see Note
2).

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

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

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

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

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

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

7.    Cash, Marketable Securities and Other Investments

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

      Marketable securities consist primarily of investments in debt securities
and long and short positions in corporate common stocks and option contracts.
The Company determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Debt securities are classified as "held-to-maturity" when
the Company has the positive intent and ability to hold the securities to
maturity. Debt securities which the Company does not have the intent or ability
to hold to maturity are classified as "available-for-sale." "Held-to-maturity"
securities are stated at amortized cost. Debt securities classified as
"held-to-maturity" as of December 31, 2000 and 1999, totaled $18.9 million and
$169.1 million, respectively, and had a fair market value of $18.9 million and
$168.5 million, respectively. "Available-for-sale" securities are carried at
fair market value, with the unrealized gains and losses included in other
comprehensive income and reported in stockholders' equity. The fair value of
substantially all securities is determined by quoted market prices. Marketable
securities which are considered "trading" securities consist of long and short
positions in corporate common stocks and option contracts and are carried at
fair value. The cost of the securities sold is determined using the first-in,
first-out method. Included in investment, interest and other income (expense),
net for each of the three years in the period ended December 31, 2000 were: 2000
- - net unrealized gains of $1.0 million and net realized gains of $24.5 million;
1999 - net unrealized losses of $1.4 million and net realized gains of $18.8
million; and 1998 - net unrealized losses of $3.8 million and net realized gains
of $11.9 million.

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

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


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

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

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

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

8.    Inventories

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

      Inventories consist of the following (in millions):


                                                                                                   December 31,
                                                                                               --------------------
                                                                                                 2000       1999
                                                                                               ---------  ---------
Aluminum operations:
   Finished fabricated products............................................................... $   54.6   $  118.5
   Primary aluminum and work in process.......................................................    126.9      189.4
   Bauxite and alumina........................................................................     88.6      124.1
   Operating supplies and repair and maintenance parts........................................    126.1      114.1
                                                                                               ---------  ---------
                                                                                                  396.2      546.1
                                                                                               ---------  ---------
Forest products operations:
   Lumber.....................................................................................     34.0       23.2
   Logs.......................................................................................     21.1       21.4
                                                                                               ---------  ---------
                                                                                                   55.1       44.6
                                                                                               ---------  ---------
                                                                                               $  451.3   $  590.7
                                                                                               =========  =========

      Inventories at December 31, 2000 have been reduced by LIFO inventory
charges totaling $24.1 million. The non- recurring LIFO charges result primarily
from the Washington smelters' curtailment ($4.5 million), Kaiser's exit from the
can body stock product line ($11.1 million) and the delayed restart of the
Gramercy facility ($7.0 million).

9.    Property, Plant and Equipment

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

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


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


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

      Kaiser evaluated the recoverability of the approximate $200.0 million
carrying value of its Washington smelters as a result of the change in the
economic environment of the Pacific Northwest associated with the reduced power
availability and higher power costs for Kaiser's Washington smelters under the
terms of the new contract with the BPA starting in October 2001 (see Note 5).
Kaiser determined that the expected future undiscounted cash flows of the
Washington smelters were below their carrying value. Accordingly, during 2000,
Kaiser adjusted the carrying value of its Washington smelting assets to their
estimated fair value, which resulted in a non-cash impairment charge of
approximately $33.0 million. The estimated fair value was based on anticipated
future cash flows discounted at a rate commensurate with the risk involved.

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

10.     Investments in and Advances to Unconsolidated Affiliates

      Summary combined financial information is provided below for
unconsolidated aluminum investments, most of which supply and process raw
materials. These investees include Queensland Alumina Limited ("QAL") (28.3%
owned), Anglesey Aluminium Limited ("ANGLESEY") (49.0% owned) and Kaiser Jamaica
Bauxite Company (49.0% owned). Kaiser's equity in earnings (loss) before income
taxes of such operations is treated as a reduction (increase) in cost of sales
and operations. At December 31, 2000 and 1999, Kaiser's net receivables from
these affiliates were not material. In addition, the1999 and 1998 summary income
statement information includes results for AKW which was sold on April 1, 1999
(see Note 6). The Company's equity in earnings of AKW was $2.5 million and $7.8
million for the years ended December 31, 1999 and 1998, respectively.

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


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

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


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

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

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


      Kaiser's equity in earnings differs from the summary net income (loss) due
to varying percentage ownerships in the entities and equity method accounting
adjustments. Prior to December 31, 2000, Kaiser's investment in its
unconsolidated affiliates exceeded its equity in their net assets and such
excess was being amortized to depreciation, depletion and amortization. At
December 31, 2000, the excess investment had been fully amortized. Such
amortization was approximately $10.0 million for each of the years ended
December 31, 2000, 1999 and 1998.

      Kaiser and its affiliates have interrelated operations. Kaiser provides
some of its affiliates with services such as management and engineering.
Significant activities with affiliates include the acquisition and processing of
bauxite, alumina, and primary aluminum. Purchases from these affiliates were
$235.7 million, $223.7 million, and $235.1 million, in the years ended December
31, 2000, 1999, and 1998, respectively.

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

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

11.   Short-term Borrowings

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

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

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

      Scotia LLC Line of Credit Agreement
      Pursuant to certain liquidity requirements under the Timber Notes
Indenture, Scotia LLC has entered into an agreement (the "SCOTIA LLC LINE OF
CREDIT") with a group of banks pursuant to which Scotia LLC may borrow to pay
interest on the Timber Notes. The maximum amount Scotia LLC may borrow is equal
to one year's interest on the aggregate outstanding principal balance of the
Timber Notes (the "REQUIRED LIQUIDITY AMOUNT"). At December 31, 2000, the
Required Liquidity Amount was $62.0 million. The Scotia LLC Line of Credit
expires on July 15, 2001. Annually, Scotia LLC will request that the banks
extend the Scotia LLC Line of Credit for a period of not less than 364 days. If
not extended, Scotia LLC may draw upon the full amount available. Borrowings
under the Scotia LLC Line of Credit generally bear interest at the Base Rate (as
defined in the agreement) plus 0.25% or at a one month or six month LIBOR rate
plus 1% at any time the borrowings have not been continually outstanding for
more than six months. As of December 31, 2000, Scotia LLC had no borrowings
outstanding under the Scotia LLC Line of Credit.

12.     Long-term Debt

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

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

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

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

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

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

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

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

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

      During March 2000, Alpart redeemed $4.0 million principal amount of the
CARIFA loans. During March 2001, Alpart redeemed an additional $34.0 million
principal amount of the CARIFA loans, and accordingly, Kaiser's letter of credit
securing the loans was reduced to $15.3 million. The March 2001 redemption had a
modest beneficial effect on the unused availability remaining under the KACC
Credit Agreement as the additional KACC Credit Agreement borrowings of $22.1
million required for Kaiser's share of the redemption were more than offset by a
reduction in the amount of letters of credit outstanding.

      12% MGHI Senior Secured Notes due 2003 (the "MGHI NOTES")
      The MGHI Notes due August 1, 2003 are guaranteed on a senior, unsecured
basis by the Company. As of March 15, 2001, the MGHI Notes are also secured by a
pledge of 25,055,775 shares of the Kaiser common stock owned by MGHI, the common
stock of MGI and the Intercompany Note (defined below). Interest on the MGHI
Notes is payable semi-annually.

      The net proceeds from the offering of the MGHI Notes after expenses were
approximately $125.0 million, all of which was loaned to the Company pursuant to
an intercompany note (the "INTERCOMPANY NOTE"). The Intercompany Note bears
interest at the rate of 11% per annum (payable semi-annually on the interest
payment dates applicable to the MGHI Notes) and matures on August 1, 2003. The
Company is entitled to defer the payment of interest on the Intercompany Note on
any interest payment date to the extent that MGHI has sufficient available funds
to satisfy its obligations on the MGHI Notes on such date. Any such deferred
interest will be added to the principal amount of the Intercompany Note and will
be payable at maturity. As of December 31, 2000, $47.0 million of interest had
been deferred and added to principal. An additional $9.0 million of interest was
deferred and added to principal on February 1, 2001.

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

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

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

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

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

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


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


      Capitalized Interest
      Interest capitalized during the years ended December 31, 2000, 1999 and
1998 was $7.0 million, $3.5 million and $3.5 million, respectively.

      Restricted Net Assets of Subsidiaries and Pledges of Subsidiary Stock
      Certain debt instruments restrict the ability of the Company's
subsidiaries to transfer assets, make loans and advances and pay dividends to
the Company. As of December 31, 2000, all of the assets relating to the
Company's aluminum, forest products and racing operations are subject to such
restrictions and certain assets of the Company's real estate operations are
pledged or serve as collateral. As of March 15, 2001, the Company and MGHI have
pledged a total of 32,970,775 shares of Kaiser common stock (representing a
41.4% interest in Kaiser) under various indentures and loan agreements.

13.     Income Taxes

      Income taxes are determined using an asset and liability approach which
requires the recognition of deferred income tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Under this method, deferred
income tax assets and liabilities are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates. The Company files consolidated federal
income tax returns together with its domestic subsidiaries, other than Kaiser
and its subsidiaries. Kaiser and its domestic subsidiaries are members of a
separate consolidated return group which files its own consolidated federal
income tax returns.

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


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

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

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

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

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


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

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

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

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


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

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

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

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

      The following table presents the estimated tax attributes for federal
income tax purposes at December 31, 2000 attributable to the Company and Kaiser
(in millions). The utilization of certain of these tax attributes is subject to
limitations.

                                                                         The Company                 Kaiser
                                                                   -----------------------  -----------------------
                                                                                 Expiring                Expiring
                                                                                 Through                  Through
                                                                                ----------              -----------
Regular Tax Attribute Carryforwards:
   Current year net operating loss...............................  $     24.2        2020   $       -            -
   Prior year net operating losses...............................       338.1        2019        84.9         2019
   General business tax credits..................................         0.2        2002         1.0         2011
   Foreign tax credits...........................................           -           -        67.1         2005
   Alternative minimum tax credits...............................         1.8  Indefinite        25.8   Indefinite

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


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

14.     Employee Benefit and Incentive Plans

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

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

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


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

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

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


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

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


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


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

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

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


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


      In 2000, the average annual assumed rate of increase in the per capita
cost of covered benefits (i.e. health care cost trend rate) is 8.0% for all
participants. The assumed rate of increase is assumed to decline gradually to
5.0% in 2009 for all participants and remain at that level thereafter. Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plan. A one-percentage-point change in assumed health care
cost trend rates as of December 31, 2000 would have the following effects (in
millions):


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

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

15.   Minority Interests

      Minority interests represent the following (in millions):


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

      KACC Redeemable Preference Stock
      In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and
its Cumulative (1985 Series B) Preference Stock (together, the "REDEEMABLE
PREFERENCE STOCK") each of which has a par value of $1 per share and a
liquidation and redemption value of $50 per share plus accrued dividends, if
any. No additional Redeemable Preference Stock is expected to be issued. In
connection with the USWA settlement agreement (see Note 4), during March 2001,
Kaiser redeemed all of the Cumulative Preference Stock (350,872 shares
outstanding at December 31, 2000). The amount applicable to the unredeemed
shares at December 31, 2000, of $17.5 million is included in other accrued
liabilities. The net cash impact of the redemption on Kaiser was only
approximately $5.5 million because approximately $12.0 million of the redemption
amount had previously been funded into redemption funds (included in prepaid
expenses and other current assets).

      Preference Stock
      KACC has four series of $100 par value Cumulative Convertible Preference
Stock ("$100 PREFERENCE STOCK") outstanding with annual dividend requirements of
between 4 1/8% and 4 3/4%. KACC has the option to redeem the $100 Preference
Stock at par value plus accrued dividends. KACC does not intend to issue any
additional shares of the $100 Preference Stock. The $100 Preference Stock can be
exchanged for per share cash amounts between $69 to $80. KACC records the $100
Preference Stock at their exchange amounts for financial statement presentation
and the Company includes such amounts in minority interests. At December 31,
2000 and 1999, outstanding shares of $100 Preference Stock were 9,250 and
19,538, respectively.

      Kaiser Common Stock Incentive Plans
      Kaiser has a total of 8,000,000 shares of Kaiser common stock reserved for
issuance under its incentive compensation programs. At December 31, 2000,
1,861,752 shares were available for issuance under these plans. Pursuant to
Kaiser's nonqualified stock option program, stock options are granted at or
above the prevailing market price, generally vest at the rate of 20% to 33% per
year and have a five or ten year term. Information relating to nonqualified
stock options is shown below. The prices shown in the table below are the
weighted average price per share for the respective number of underlying shares.


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

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

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

16.   Stockholders' Equity

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

      Stock Option and Restricted Stock Plans
      In 1994, the Company adopted the MAXXAM 1994 Omnibus Employee Incentive
Plan (the "1994 OMNIBUS PLAN"). Up to 1,000,000 shares of common stock and
1,000,000 shares of Class A Preferred Stock were reserved for awards or for
payment of rights granted under the 1994 Omnibus Plan of which 338,192 and
910,000 shares, respectively, were available to be awarded at December 31, 2000.
The 1994 Omnibus Plan replaced the Company's 1984 Phantom Share Plan (the "1984
PLAN") which expired in June 1994, although previous grants thereunder remain
outstanding. The options (or rights, as applicable) granted in 1998, 1999 and
2000 generally vest at the rate of 20% per year commencing one year from the
date of grant. The following table summarizes the options or rights outstanding
and exercisable relating to the 1984 Plan and the 1994 Omnibus Plan. The prices
shown are the weighted average price per share for the respective number of
underlying shares.

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

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


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


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

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

      Concurrent with the adoption of the 1994 Omnibus Plan, the Company adopted
the MAXXAM 1994 Non- Employee Director Plan (the "1994 DIRECTOR PLAN"). Up to
35,000 shares of common stock are reserved for awards under the 1994 Director
Plan. Options were granted to non-employee directors to purchase 2,300 shares of
common stock in 2000 and 1,800 shares for each of the years 1999 and 1998. The
weighted average exercise prices of these options are $26.19, $62.00 and $60.94
per share, respectively, based on the quoted market price at the date of grant.
The options vest at the rate of 25% per year commencing one year from the date
of grant. At December 31, 2000, options for 6,000 shares were exercisable.

      The Company applies the "intrinsic value" method described by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations to account for stock and stock-based compensation
awards. In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company calculated pro forma
compensation cost for all stock options granted using the "fair value" method.
The fair values of the stock options granted were estimated using the
Black-Scholes option pricing model. The Company's pro forma income (loss) before
extraordinary item and diluted earnings per share before extraordinary items
would have been $25.5 million and $3.37 per share, respectively, for the year
ended December 31, 2000, $69.1 million and $8.91 per share, respectively, for
the year ended December 31, 1999, and $(17.8) million and $(2.54) per share,
respectively, for the year ended December 31, 1998.

      Shares Reserved for Issuance
      At December 31, 2000, the Company had 2,446,702 common shares and
1,000,000 Class A Preferred shares reserved for future issuances in connection
with various options, convertible securities and other rights as described in
this Note.

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

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

      Voting Control
      As of December 31, 2000, Federated Development Inc., a wholly owned
subsidiary of Federated Development Company ("FEDERATED"), and Mr. Charles E.
Hurwitz beneficially owned (exclusive of securities acquirable upon exercise of
stock options) an aggregate of 99.1% of the Company's Class A Preferred Stock
and 42.4% of the Company's common stock (resulting in combined voting control of
approximately 70.6% of the Company). Mr. Hurwitz is the Chairman of the Board
and Chief Executive Officer of the Company and Chairman and Chief Executive
Officer of Federated. Federated is wholly owned by Mr. Hurwitz, members of his
immediate family and trusts for the benefit thereof.

17.   Commitments and Contingencies

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

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

   Aluminum Operations

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

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


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

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

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

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

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

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


      Kaiser maintains a liability for estimated asbestos-related costs for
claims filed to date and an estimate of claims to be filed over a 10 year period
(i.e., through 2010). Kaiser's estimate is based on its view, at each balance
sheet date, of the current and anticipated number of asbestos-related claims,
the timing and amounts of asbestos-related payments, the status of ongoing
litigation and settlement initiatives, and the advice of Wharton Levin
Ehrmantraut Klein & Nash, P.A., with respect to the current state of the law
related to asbestos claims. However, there are inherent uncertainties involved
in estimating asbestos-related costs, and Kaiser's actual costs could exceed its
estimates due to changes in facts and circumstances after the date of each
estimate. Further, while Kaiser does not believe there is a reasonable basis for
estimating asbestos-related costs beyond 2010 and, accordingly, no accrual has
been recorded for any costs which may be incurred beyond 2010, Kaiser expects
that such costs are likely to continue beyond 2010, and that such costs could be
substantial.

      Kaiser believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Although Kaiser has settled
asbestos-related coverage matters with certain of its insurance carriers, other
carriers have not yet agreed to settlements, and disputes with certain carriers
exist. The timing and amount of future recoveries from these and other insurance
carriers will depend on the pace of claims review and processing by such
carriers and on the resolution of any disputes regarding coverage under such
policies. Kaiser believes that substantial recoveries from the insurance
carriers are probable. Kaiser reached this conclusion after considering its
prior insurance-related recoveries in respect of asbestos-related claims,
existing insurance policies, and the advice of Heller Ehrman White &
McAuliffe LLP with respect to applicable insurance coverage law relating to the
terms and conditions of those policies. During 2000, Kaiser filed suit against a
group of its insurers, after negotiations with certain of the insurers regarding
an agreement covering both reimbursement amounts and the timing of reimbursement
payments were unsuccessful. The litigation is intended, among other things, to:
(1) ensure that the insurers provide Kaiser with timely and appropriate
reimbursement payments for asbestos-related settlements and related legal costs
incurred; and (2) to resolve certain issues between the parties with respect to
how specific provisions of the applicable insurance policies are to be applied.
Given the significance of expected asbestos-related payments in 2001 and 2002
based on settlement agreements in place at December 31, 2000, the receipt of
timely and appropriate reimbursements from such insurers is critical to Kaiser's
liquidity. The court is not expected to try the case until late 2001 or 2002.
Kaiser is continuing to receive cash payments from the insurers.

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


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

                                                                                         $     86.1    $      72.3
                                                                                         ===========   ============
- ----------------
(1)   The asbestos-related receivable was determined on the same basis as the
      asbestos-related cost accrual. However, no assurances can be given that
      Kaiser will be able to project similar recovery percentages for future
      asbestos-related claims or that the amounts related to future
      asbestos-related claims will not exceed Kaiser's aggregate insurance
      coverage. As of December 31, 2000 and 1999, $36.9 million and $25.0
      million, respectively, of the receivable amounts relate to costs paid. The
      remaining receivable amounts relate to costs that are expected to be paid
      by Kaiser in the future.


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


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


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

      Labor Matters
      In connection with the USWA strike and subsequent lock-out by Kaiser,
which was settled in September 2000, certain allegations of unfair labor
practices ("ULPS") were filed with the National Labor Relations Board ("NLRB")
by the USWA. Kaiser responded to all such allegations and believes that they
were without merit. Twenty-two of twenty-four allegations of ULPs previously
brought against Kaiser by the USWA have been dismissed. A trial before an
administrative law judge for the two remaining allegations commenced in November
2000 and is continuing. Kaiser is unable to estimate when the trial will be
completed. Any outcome from the trial before the administrative law judge would
be subject to additional appeals by the general counsel of the NLRB, the USWA
or Kaiser. This process could take months or years. If these proceedings
eventually resulted in a final ruling against Kaiser with respect to either
allegation, it could be obligated to provide back pay to USWA members at the
five plants and such amount could be significant. Kaiser continues to believe
that the charges are without merit. While uncertainties are inherent in matters
such as this and it is presently impossible to determine the actual costs, if
any, that may ultimately arise in connection with this matter, Kaiser's
management does not believe that the outcome of this matter will have a material
adverse impact on the Company's liquidity or financial position. However,
amounts paid, if any, in satisfaction of this matter could be significant to the
results of the period in which they are recorded.

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

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

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

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

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

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

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

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

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

      Post hearing briefing concluded on January 31, 2000. In its post-hearing
brief, the OTS claims, among other things, that the remaining Respondents, Mr.
Hurwitz, the Company and Federated, are jointly and severally liable to pay
either $821.3 million in restitution or reimbursement of $362.6 million for
alleged unjust enrichment. The OTS also claims that each remaining Respondent
should be required to pay $4.6 million in civil money penalties, and that Mr.
Hurwitz should be prohibited from engaging in the banking industry. The
Respondents' brief claims that none of them has any liability in this matter. A
recommended decision by the administrative law judge could be made at any time.
A final agency decision would thereafter be issued by the OTS Director. Such
decision would then be subject to appeal by any of the parties to the federal
appellate court.

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

      On May 31, 2000, the Company, Federated and Mr. Hurwitz filed a
counterclaim to the FDIC action (the "FDIC COUNTERCLAIM"). The FDIC Counterclaim
states that the FDIC illegally paid the OTS to bring claims against the Company,
Federated and Mr. Hurwitz. The Company, Federated and Mr. Hurwitz are asking
that the FDIC be ordered to not make any further payments to the OTS to fund the
administrative proceedings described above, and they are seeking reimbursement
of attorneys' fees and damages from the FDIC. As of December 31, 2000, such fees
were in excess of $30.0 million.

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

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

      The Company has concluded that it is unable to determine a reasonable
estimate of the loss (or range of loss), if any, that could result from the OTS
and FDIC matters. Accordingly, it is impossible to assess the ultimate outcome
of these matters or their potential impact on the Company; however, any adverse
outcome of these matters could have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity. With
respect to the Kahn lawsuit, although it is impossible to assess the ultimate
outcome of this matter, the Company believes that the resolution of this matter
should not result in a material adverse effect on its consolidated financial
position, results of operations or liquidity.

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

18.   Derivative Financial Instruments and Related Hedging Programs

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

      As Kaiser's hedging activities are generally designed to lock-in a
specified price or range of prices, gains or losses on the derivative contracts
utilized in these hedging activities (except the impact of those contracts
discussed below which have been marked to market) will generally offset at least
a portion of any losses or gains, respectively, on the transactions being
hedged. See Note 1 for a discussion of the effects of the new accounting
requirements under SFAS No. 133, which will be followed for reporting results
beginning with the first quarter of 2001. The following table summarizes
Kaiser's hedging positions at December 31, 2000:


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

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

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

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

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

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

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

19.     Supplemental Cash Flow and Other Information


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

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


20.   Quarterly Financial Information (Unaudited)

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


                                                                           Three Months Ended
                                                     --------------------------------------------------------------
                                                        March 31         June 30      September 30     December 31
                                                     --------------  --------------  --------------  --------------
2000:
   Net sales(1)....................................  $       637.6   $       627.1   $       618.3   $       565.0
   Operating income................................           38.5            60.6             1.4            30.1
   Income (loss) before extraordinary items........            3.5            10.3           (17.3)           33.5
   Extraordinary items, net........................            1.4               -             0.6             1.9
   Net income (loss)...............................            4.9            10.3           (16.7)           35.4
   Basic earnings per common share:
      Income (loss) before extraordinary items.....  $        0.48   $        1.49   $       (2.54)  $        4.96
      Extraordinary items, net.....................           0.20               -            0.07            0.29
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        0.68   $        1.49   $       (2.47)  $        5.25
                                                     ==============  ==============  ==============  ==============
   Diluted earnings per common and common
      equivalent share:
      Income (loss) before extraordinary items.....  $        0.44   $        1.36   $       (2.54)  $        4.51
      Extraordinary items, net.....................           0.18               -            0.07            0.27
                                                     --------------  --------------  --------------  --------------
      Net income (loss)............................  $        0.62   $        1.36   $       (2.47)  $        4.78
                                                     ==============  ==============  ==============  ==============
1999:
   Net sales(1)....................................  $       555.7   $       600.0   $       593.7   $       601.3
   Operating income (loss).........................          (35.2)           (2.6)          (19.1)            5.4
   Net income (loss)...............................          112.1           (18.1)          (37.4)           17.0
   Earnings (loss) per share:
      Basic........................................          16.02           (2.59)          (5.35)           2.41
      Diluted......................................          14.35           (2.59)          (5.35)           2.19

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

EX-99.2

                                                                    EXHIBIT 99.2


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To MAXXAM Group Inc.:

      We have audited the accompanying consolidated balance sheets of MAXXAM
Group Inc. (a Delaware corporation and a wholly owned subsidiary of MAXXAM Group
Holdings Inc.) and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholder's deficit and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MAXXAM Group
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

                                        ARTHUR ANDERSEN LLP


San Francisco, California
March 15, 2001


                       MAXXAM GROUP INC. AND SUBSIDIARIES

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2000         1999
                                                                                            -----------  -----------
ASSETS:

Current assets:
   Cash and cash equivalents..............................................................  $    154.7   $    180.8
   Marketable securities..................................................................        21.5         43.8
   Receivables:
      Trade...............................................................................        10.4         10.9
      Other...............................................................................         3.1          6.9
   Inventories............................................................................        53.3         41.3
   Prepaid expenses and other current assets..............................................        14.3         17.7
                                                                                            -----------  -----------
        Total current assets..............................................................       257.3        301.4
Property, plant and equipment, net of accumulated depreciation of $111.8 and
   $102.8 respectively....................................................................        99.5         99.7
Timber and timberlands, net of accumulated depletion of $251.9 and $249.1,
   respectively...........................................................................       262.8        275.2
Deferred financing costs, net.............................................................        17.9         20.9
Deferred income taxes.....................................................................        20.8         90.4
Restricted cash, marketable securities and other investments..............................        96.6        158.9
Other assets..............................................................................         7.8          8.9
                                                                                            -----------  -----------
                                                                                            $    762.7   $    955.4
                                                                                            ===========  ===========

LIABILITIES AND STOCKHOLDER'S DEFICIT:

Current liabilities:
   Accounts payable.......................................................................  $     6.1   $      6.1
   Accrued interest.......................................................................       26.4         28.2
   Accrued compensation and related benefits..............................................        8.2          3.7
   Deferred income taxes..................................................................        8.8          5.8
   Other accrued liabilities..............................................................        3.6          5.2
   Short-term borrowings and current maturities of long-term debt.........................       53.5         16.0
                                                                                            ----------  -----------
        Total current liabilities.........................................................      106.6         65.0
Long-term debt, less current maturities...................................................      767.8        844.2
Deferred income taxes.....................................................................       31.2         78.8
Other noncurrent liabilities..............................................................       26.6         45.8
                                                                                            ----------  -----------
        Total liabilities.................................................................      932.2      1,033.8
                                                                                            ----------  -----------

Contingencies

Stockholder's deficit:
   Common stock, $0.081/3 par value; 1,000 shares authorized; 100 shares issued...........          -            -
   Additional capital.....................................................................       81.3         81.3
   Accumulated deficit....................................................................     (251.4)      (159.7)
   Accumulated other comprehensive income.................................................        0.6            -
                                                                                            ----------  -----------
        Total stockholder's deficit.......................................................     (169.5)       (78.4)
                                                                                            ----------  -----------
                                                                                            $   762.7   $    955.4
                                                                                            ==========  ===========


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

                       MAXXAM GROUP INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS
                            (IN MILLIONS OF DOLLARS)


                                                                                     YEARS ENDED DECEMBER 31,
                                                                                ----------------------------------
                                                                                   2000        1999        1998
                                                                                ----------  ----------  ----------
Net sales:
   Lumber and logs............................................................  $   178.8   $   165.5   $   213.1
   Other......................................................................       21.3        22.3        20.5
                                                                                ----------  ----------  ----------
                                                                                    200.1       187.8       233.6
                                                                                ----------  ----------  ----------

Operating expenses:
   Cost of goods sold.........................................................      157.4       159.5       155.3
   Selling, general and administrative expenses...............................       15.4        15.4        14.9
   Depletion and depreciation.................................................       20.3        17.3        23.1
                                                                                ----------  ----------  ----------
                                                                                    193.1       192.2       193.3
                                                                                ----------  ----------  ----------

Operating income (loss).......................................................        7.0        (4.4)       40.3

Other income (expense):
   Gains on sales of timberlands..............................................       59.5       239.8           -
   Investment, interest and other income (expense), net.......................       20.6        26.9         9.2
   Interest expense...........................................................      (64.1)      (66.5)      (75.3)
                                                                                ----------  ----------  ----------
Income (loss) before income taxes.............................................       23.0       195.8       (25.8)
Credit (provision) in lieu of income taxes....................................      (10.2)      (77.6)        9.1
                                                                                ----------  ----------  ----------
Income (loss) before extraordinary item.......................................       12.8       118.2       (16.7)
Extraordinary items:
   Gains on repurchases of debt, net of provision in lieu of income
      taxes of $2.2...........................................................        3.8           -           -
   Loss on early extinguishment of debt, net of
      credit in lieu of income taxes of $22.7.................................          -           -       (40.1)
                                                                                ----------  ----------  ----------
Net income (loss).............................................................  $    16.6   $   118.2   $   (56.8)
                                                                                ==========  ==========  ==========


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

                       MAXXAM GROUP INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
              (IN MILLION OF DOLLARS, EXCEPT PER SHARE INFORMATION)




                                                                                      ACCUMU-
                                                                                      LATED
                                                                                      OTHER                 COMPRE-
                                                  COMMON        ADDI-      ACCUM-     COMPRE-               HENSIVE
                                                   STOCK       TIONAL      ULATED     HENSIVE               INCOME
                                               (.081/3 PAR)   CAPITAL     DEFICIT     INCOME       TOTAL    (LOSS)
                                               ------------  ----------  ----------  ----------  ---------  ----------
Balance, December 31, 1997.................... $         -   $    81.3   $  (183.7)  $       -   $ (102.4)
   Net loss and comprehensive loss............           -           -       (56.8)          -      (56.8)  $   (56.8)
                                                                                                            ==========
   Dividend...................................           -           -       (18.7)          -      (18.7)
                                               ------------  ----------  ---------  ----------  ---------
Balance, December 31, 1998....................           -        81.3      (259.2)          -     (177.9)
   Net income and comprehensive income........           -           -       118.2           -      118.2    $   118.2
                                                                                                            ==========
   Dividend...................................           -           -       (18.7)          -      (18.7)
                                               ------------   ----------  ---------  ----------  ---------
Balance, December 31, 1999....................           -         81.3     (159.7)          -      (78.4)
   Net income.................................           -            -       16.6           -       16.6    $   16.6
   Change in value of available-for-sale
      investments.............................           -            -          -         0.6        0.6         0.6
                                                                                                            ----------
   Comprehensive income.......................                                                              $    17.2
                                                                                                            ==========
   Dividend...................................           -            -     (108.3)          -     (108.3)
                                               ------------   ----------  ---------  ----------  ---------
Balance, December 31, 2000.................... $         -    $    81.3   $ (251.4)  $     0.6   $ (169.5)
                                               ============   ==========  =========  ==========  =========


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

                       MAXXAM GROUP INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN MILLIONS OF DOLLARS)


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------
Cash flows from operating activities:
   Net income (loss)...............................................................  $   16.6  $  118.2   $  (56.8)
   Adjustments to reconcile net income (loss) to net cash provided by (used for)
      operating activities:
      Depletion and depreciation...................................................      20.3      17.3       23.1
      Gains on sales of timberlands................................................     (59.5)   (239.8)         -
      Extraordinary loss (gains) on early extinguishments of debt, net.............      (3.8)        -       40.1
      Amortization of deferred financing costs and discounts on long-term debt.....       1.5       1.6       10.7
      Net gains on marketable securities...........................................      (8.2)    (11.5)      (2.9)
   Increase (decrease) in cash resulting from changes in:
      Receivables..................................................................       3.9      (6.7)       9.4
      Inventories, net of depletion................................................     (11.7)     (2.0)      14.0
      Prepaid expenses and other assets............................................      (3.3)     (4.5)      (2.7)
      Accounts payable.............................................................         -       2.7       (1.2)
      Accrued interest.............................................................      (1.8)     (0.1)       4.0
      Accrued and deferred income taxes............................................      10.6      75.8       (9.5)
      Long-term assets and long-term liabilities...................................       2.0       0.1       (3.8)
   Other ..........................................................................      (0.1)     (0.1)      (1.8)
                                                                                     --------- ---------  ---------
        Net cash provided by (used for) operating activities.......................     (33.5)    (49.0)      22.6
                                                                                     --------- ---------  ---------

Cash flows from investing activities:
   Net proceeds from dispositions of property and investments......................      67.3     298.3        6.6
   Net sales (purchases) of marketable securities..................................      30.9      (4.7)      42.6
   Capital expenditures............................................................     (14.0)    (23.1)     (21.2)
   Restricted cash withdrawals used to acquire timberlands.........................       0.8      12.9        8.9
                                                                                     --------- ---------  ---------
        Net cash provided by investing activities..................................      85.0     283.4       36.9
                                                                                     --------- ---------  ---------

Cash flows from financing activities:
   Proceeds from issuance of long-term debt........................................         -         -      867.2
   Premiums for early retirement of debt...........................................         -         -      (42.9)
   Net borrowings under revolving credit agreements................................      37.0         -          -
   Incurrence of deferred financing costs..........................................         -      (0.7)     (22.4)
   Redemptions, repurchases of and principal payments on long-term debt............     (16.0)     (8.3)    (796.8)
   Dividends paid..................................................................    (108.3)    (18.7)     (18.7)
   Other restricted cash withdrawals (deposits), net...............................       9.7    (171.1)       9.5
                                                                                     --------- ---------  ---------
        Net cash used for financing activities.....................................     (77.6)   (198.8)      (4.1)
                                                                                     --------- ---------  ---------

Net increase (decrease) in cash and cash equivalents...............................     (26.1)     35.6       55.4
Cash and cash equivalents at beginning of year.....................................     180.8     145.2       89.8
                                                                                     --------- ---------  ---------
Cash and cash equivalents at end of year...........................................  $  154.7  $  180.8   $  145.2
                                                                                     ========= =========  =========


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

                       MAXXAM GROUP INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PRESENTATION

      The consolidated financial statements include the accounts of MAXXAM Group
Inc. ("MGI") and its subsidiaries, collectively referred to herein as the
"Company." MGI is a wholly owned subsidiary of MAXXAM Group Holdings Inc.
("MGHI") which is a wholly owned subsidiary of MAXXAM Inc. ("MAXXAM").
Intercompany balances and transactions have been eliminated. Certain
reclassifications have been made to prior years' financial statements to be
consistent with the current year's presentation.

      The Company is engaged in forest products operations conducted through its
wholly owned subsidiaries, The Pacific Lumber Company ("PACIFIC LUMBER") and
Britt Lumber Co., Inc. ("BRITT"). Pacific Lumber's principal wholly owned
subsidiaries are Scotia Pacific Company LLC ("SCOTIA LLC") and Salmon Creek LLC;
("SALMON CREEK"). The Company operates in several principal aspects of the
lumber industry - the growing and harvesting of redwood and Douglas-fir timber,
the milling of logs into lumber and the manufacture of lumber into a variety of
finished products. Housing, construction and remodeling are the principal
markets for the Company's lumber products.

   USE OF ESTIMATES AND ASSUMPTIONS

      The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii) the
disclosure of contingent assets and liabilities known to exist as of the date
the financial statements are published and (iii) the reported amount of revenues
and expenses recognized during each period presented. The Company reviews all
significant estimates affecting its consolidated financial statements on a
recurring basis and records the effect of any necessary adjustments prior to
their filing the consolidated financial statements with the Securities and
Exchange Commission. Adjustments made using estimates often relate to improved
information not previously available. Uncertainties regarding such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, actual results could differ from estimates,
and it is possible that the subsequent resolution of any one of the contingent
matters described in Note 10 could differ materially from current estimates. The
results of an adverse resolution of such uncertainties could have a material
effect on the Company's consolidated financial position, results of operations
or liquidity.

   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

      The Company had three customers which accounted for 11.1%, 7.1% and 5.6%
of total net lumber sales for the year ended December 31, 2000. Trade
receivables from these customers totaled $1.3 million as of December 31, 2000.
As of December 31, 2000, the Company had receivables from Pacific Gas & Electric
Company ("PG&E") of $2.2 million. PG&E is currently experiencing financial
difficulties in connection with the power shortages in California, and therefore
the collectibility of the receivables is uncertain. As of March 15, 2001, $0.9
million of this balance had been collected. Additional sales of power to PG&E
have been made during the first quarter of 2001. As of March 15, 2001, the
uncollected receivable balance attributable to sales made in 2000 and 2001 was
$4.2 million.

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

      Deferred Financing Costs
      Costs incurred to obtain debt financing are deferred and amortized over
the estimated term of the related borrowing. The amortization of deferred
financing costs expense is included in interest expense on the income statement.

2.    HEADWATERS TRANSACTIONS

      On March 1, 1999, the United States and California acquired the Headwaters
Timberlands, approximately 5,600 acres of timberlands containing a significant
amount of virgin old growth timber, from Pacific Lumber and its wholly owned
subsidiary, Salmon Creek. Salmon Creek received $299.9 million for its 4,900
acres, and for its 700 acres Pacific Lumber received the 7,700 acre Elk River
Timberlands, which Pacific Lumber contributed to Scotia LLC in June 1999. See
Note 10 below for a discussion of additional agreements entered into on March 1,
1999.

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

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

3.    CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS

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

      Marketable securities consist primarily of investments in debt securities
and long and short positions in corporate common stocks and option contracts.
The Company determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Debt securities are classified as "held-to-maturity" when
the Company has the positive intent and ability to hold the securities to
maturity. Debt securities which the Company does not have the intent or ability
to hold to maturity are classified as "available-for- sale." "Held-to-maturity"
securities are stated at amortized cost. Debt securities classified as
"held-to-maturity" as of December 31, 2000 and 1999, totaled $18.9 million and
$169.1 million, respectively, and had a fair market value of $18.9 million and
$168.5 million, respectively. "Available-for-sale" securities are carried at
fair market value, with the unrealized gains and losses included in other
comprehensive income and reported in stockholder's deficit. The fair value of
substantially all securities is determined by quoted market prices. Marketable
securities which are considered "trading" securities consist of long and short
positions in corporate common stocks and option contracts and are carried at
fair value. The cost of the securities sold is determined using the first-in,
first-out method. Included in investment, interest and other income (expense),
net for each of the three years in the period ended December 31, 2000 were: 2000
- - net realized gains of $8.1 million and no net unrealized gains (losses); 1999
- - net realized gains of $12.5 million and net unrealized losses of $0.9 million;
1998 - net realized gains of $5.1 million and net unrealized losses of $2.2
million.

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

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


                                                                                               December 31,
                                                                                       ----------------------------
                                                                                           2000           1999
                                                                                       ------------- --------------
Current assets:
   Cash and cash equivalents:
      Amounts held as security for short positions in marketable securities..........  $        5.1  $        27.1
      Other restricted cash and cash equivalents.....................................          29.2              -
                                                                                       ------------- --------------
                                                                                               34.3           27.1
                                                                                       ------------- --------------
   Marketable securities, restricted:
      Amounts held in SAR Account....................................................          16.3           15.9
                                                                                       ------------- --------------

Long-term restricted cash, marketable securities and other investments:
   Amounts held in SAR Account.......................................................         144.4          153.2
   Amounts held in Prefunding Account................................................           2.5            3.3
   Other amounts restricted under the Timber Notes Indenture.........................           0.4            0.4
   Other long-term restricted cash...................................................           2.0            2.0
   Less:  Amounts attributable to Timber Notes held in SAR Account...................         (52.7)             -
                                                                                       ------------- --------------
                                                                                               96.6          158.9
                                                                                       ------------- --------------

Total restricted cash, marketable securities and other investments...................  $      147.2  $       201.9
                                                                                       ============= ==============

      Amounts in the Scheduled Amortization Reserve Account (the "SAR ACCOUNT")
are being held by the trustee under the indenture (the "TIMBER NOTES INDENTURE")
to support principal payments on Scotia LLC's Class A-1, Class A-2 and Class A-3
Timber Collateralized Notes due 2028 (the "TIMBER NOTES"). See Note 7 for
further discussion on the SAR Account. Amounts held in the "PREFUNDING ACCOUNT"
by the trustee are to be used by Scotia LLC to acquire additional timberlands.
The current portion of the SAR Account is determined based on the liquidity
needs of Scotia LLC which corresponds directly with the current portion of
Scheduled Amortization.

4.    INVENTORIES

      Inventories are stated at the lower of cost or market. Cost is primarily
determined using the last-in, first-out ("LIFO") method not in excess of market
value. Replacement cost is not in excess of LIFO cost. Inventory costs consist
of material, labor and manufacturing overhead, including depreciation and
depletion.

      Inventories consist of the following (in millions):


                                                           DECEMBER 31,
                                                       --------------------
                                                         2000       1999
                                                       ---------  ---------
Lumber................................................ $   30.7   $   17.2
Logs..................................................     22.6       24.1
                                                       ---------  ---------
                                                       $   53.3   $   41.3
                                                       =========  =========

5.    PROPERTY, PLANT AND EQUIPMENT

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

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


                                                                               ESTIMATED         DECEMBER 31,
                                                                                            -----------------------
                                                                             USEFUL LIVES      2000        1999
                                                                             -------------  ----------  -----------
Logging roads, land and improvements.......................................       15 years  $    34.0   $     27.7
Buildings..................................................................       33 years       37.5         36.7
Machinery and equipment....................................................   3 - 15 years      137.0        137.4
Construction in progress...................................................                       2.8          0.7
                                                                                            ----------  -----------
                                                                                                211.3        202.5
Less:  accumulated depreciation............................................                    (111.8)      (102.8)
                                                                                            ----------  -----------
                                                                                            $    99.5   $     99.7
                                                                                            ==========  ===========

      Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was 10.3 million, $10.0 million and $9.2 million, respectively.

6.    LONG-TERM AND SHORT-TERM DEBT

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------
Pacific Lumber Credit Agreement...........................................................  $    37.0   $        -
6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028..................      136.7        152.6
7.11% Scotia LLC Class A-2 Timber Collateralized Notes due July 20, 2028..................      243.2        243.2
7.71% Scotia LLC Class A-3 Timber Collateralized Notes due July 20, 2028..................      463.3        463.3
Other.....................................................................................        1.0          1.1
                                                                                            ----------  -----------
                                                                                                881.2        860.2
Less: current maturities..................................................................      (53.5)       (16.0)
   Timber Notes held in SAR Account.......................................................      (59.9)           -
                                                                                            ----------  -----------
                                                                                            $   767.8   $    844.2
                                                                                            ==========  ===========


      Scotia LLC Timber Notes
      Scotia LLC issued $867.2 million aggregate principal amount of Timber
Notes on July 20, 1998. Net proceeds from the offering of the Timber Notes were
used primarily to prepay certain debt, and accordingly, in 1998 the Company
recognized an extraordinary loss of $40.1 million, net of the related income tax
benefit of $22.7 million, for the early extinguishment.

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

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

      Pursuant to certain liquidity requirements under the Timber Notes
Indenture, Scotia LLC has entered into an agreement (the "SCOTIA LLC LINE OF
CREDIT") with a group of banks pursuant to which Scotia LLC may borrow to pay
interest on the Timber Notes. The maximum amount Scotia LLC may borrow is equal
to one year's interest on the aggregate outstanding principal balance of the
Timber Notes (the "REQUIRED LIQUIDITY AMOUNT"). At December 31, 2000, the
Required Liquidity Amount was $62.0 million. The Scotia LLC Line of Credit
expires on July 15, 2001. Annually, Scotia LLC will request that the banks
extend the Scotia LLC Line of Credit for a period of not less than 364 days. If
not extended, Scotia LLC may draw upon the full amount available. Borrowings
under the Scotia LLC Line of Credit generally bear interest at the Base Rate (as
defined in the agreement) plus 0.25% or at a one month or six month LIBOR rate
plus 1% at any time the borrowings have not been continually outstanding for
more than six months. As of December 31, 2000, Scotia LLC had no borrowings
outstanding under the Scotia LLC Line of Credit.

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

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

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

      Maturities
      Scheduled maturities of long-term and short-term debt outstanding at
December 31, 2000 are as follows: $53.5 million in 2001, $17.3 million in 2002,
$19.5 million in 2003, $22.4 million in 2004, $25.2 million in 2005 and $683.4
million thereafter.

      Restricted Net Assets of Subsidiaries
      As of December 31, 2000, all of the assets of Pacific Lumber are subject
to certain debt instruments which restrict the ability to transfer assets, make
loans and advances and pay dividends to the Company.

7.    CREDIT (PROVISION) IN LIEU OF INCOME TAXES

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

      The Company and its corporate subsidiaries are members of MAXXAM's
consolidated return group for federal income tax purposes.

      Pursuant to a tax allocation agreement between MAXXAM, Pacific Lumber, and
Salmon Creek (the "PL TAX ALLOCATION AGREEMENT"), Pacific Lumber is liable to
MAXXAM for the federal consolidated income tax liability of Pacific Lumber,
Scotia LLC and certain other subsidiaries of Pacific Lumber (but excluding
Salmon Creek) (collectively, the "PL SUBGROUP") computed as if the PL Subgroup
was a separate affiliated group of corporations which was never connected with
MAXXAM. The PL Tax Allocation Agreement further provides that Salmon Creek is
liable to MAXXAM for its federal income tax liability computed on a separate
company basis as if it was never connected with MAXXAM. For taxable periods
beginning after December 7, 1999 (the day on which Salmon Creek was converted
from a corporation to a limited liability company), the PL Subgroup includes
Salmon Creek and there is no separate calculation for Salmon Creek. The
remaining subsidiaries of the Company are each liable to MAXXAM for their
respective income tax liabilities computed on a separate company basis as if
they were never connected with MAXXAM, pursuant to their respective tax
allocation agreements.

      MGI's tax allocation agreement with MAXXAM (the "MGI TAX ALLOCATION
AGREEMENT") provides that the Company's federal income tax liability is computed
as if the Company files a consolidated tax return with all of its subsidiaries
except Salmon Creek, and that such corporations were never connected with MAXXAM
(the "MGI CONSOLIDATED TAX LIABILITY"). For taxable periods beginning after
December 7, 1999, the MGI Consolidated Tax Liability includes Salmon Creek. The
federal income tax liability of the Company is the difference between (i) the
MGI Consolidated Tax Liability and (ii) the sum of the separate tax liabilities
for the Company's subsidiaries (computed as discussed above), but excluding
Salmon Creek for taxable periods through December 7, 1999. To the extent that
the MGI Consolidated Tax Liability is less than the aggregate amounts in (ii),
MAXXAM is obligated to pay the amount of such difference to the Company.

      The credit (provision) in lieu of income taxes on income (loss) before
income taxes consists of the following (in millions):


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------
Current:
   Federal in lieu of income taxes.................................................  $    0.1  $   (3.0)  $    0.1
   State and local.................................................................         -       0.1       (0.1)
                                                                                     --------- ---------  ---------
                                                                                          0.1      (2.9)         -
                                                                                     --------- ---------  ---------
Deferred:
   Federal in lieu of income taxes.................................................      (6.2)    (53.1)       6.9
   State and local.................................................................      (4.1)    (21.6)       2.2
                                                                                     --------- ---------  ---------
                                                                                        (10.3)    (74.7)       9.1
                                                                                     --------- ---------  ---------
                                                                                     $  (10.2) $  (77.6)  $    9.1
                                                                                     ========= =========  =========

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


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------

Income (loss) before income taxes..................................................  $   23.0  $  195.8   $  (25.8)
                                                                                     ========= =========  =========

Amount of federal income tax credit (provision) based upon the statutory rate......  $   (8.1) $  (68.6)  $    9.0
Revision of prior years' tax estimates and other changes in valuation allowances...       0.7       4.5       (1.1)
State and local taxes, net of federal tax effect...................................      (2.7)    (13.1)       1.4
Expenses for which no federal tax benefit is available.............................      (0.2)     (0.4)      (0.3)
Other                                                                                     0.1         -        0.1
                                                                                     --------- ---------  ---------
                                                                                     $  (10.2) $  (77.6)  $    9.1
                                                                                     ========= =========  =========

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

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2000        1999
                                                                                            ----------  -----------
Deferred income tax assets:
   Loss and credit carryforwards..........................................................  $   144.7   $    134.2
   Timber and timberlands.................................................................       21.0         24.3
   Other..................................................................................       20.4         13.4
   Valuation allowances...................................................................      (47.6)       (47.6)
                                                                                            ----------  -----------
      Total deferred income tax assets, net...............................................      138.5        124.3
                                                                                            ----------  -----------
Deferred income tax liabilities:
   Deferred gains on sales of timber and timberlands......................................     (130.4)      (104.3)
   Property, plant and equipment..........................................................      (14.7)       (16.8)
   Inventories............................................................................       (8.2)        (9.1)
   Other..................................................................................       (6.1)        (1.3)
                                                                                            ----------  -----------
      Total deferred income tax liabilities...............................................     (159.4)      (131.5)
                                                                                            ----------  -----------
Net deferred income tax liabilities.......................................................  $   (20.9)  $     (7.2)
                                                                                            ==========  ===========

      Included in net deferred income tax assets as of December 31, 2000 is
$97.1 million attributable to the tax benefit of loss and credit carryforwards,
net of valuation allowances. The Company evaluated all appropriate factors in
determining the realizability of the deferred tax assets attributable to loss
and credit carryforwards, including any limitations on their use, the year the
carryforwards expire and the levels of taxable income necessary for utilization.
Based on this evaluation of the appropriate factors to determine the proper
valuation allowances for the carryforwards, the Company believes that it is more
likely than not that it will realize the benefit for the carryforwards for which
valuation allowances were not provided. The deferred income tax liabilities
related to deferred gains on the sales of timber and timberlands are a result of
the sales of the Headwaters Timberlands (1999) and the Owl Creek grove (2000).

      Included in the net deferred income tax assets listed above are $(1.9)
million and $7.4 million at December 31, 2000 and 1999, respectively, which are
recorded pursuant to the tax allocation agreements with MAXXAM.

      The following table presents the estimated tax attributes for federal
income tax purposes for the Company and its subsidiaries as of December 31,
2000, under the terms of the respective tax allocation agreements (in millions).
The utilization of certain of these tax attributes is subject to limitations.


                                                                                                         EXPIRING
                                                                                                          THROUGH
                                                                                                        -----------
Regular Tax Attribute Carryforwards:
   Net operating losses...................................................................  $   394.3         2020
   Alternative Minimum tax credit.........................................................        0.7   Indefinite
Alternative Minimum Tax Attribute Carryforwards:
   Net operating losses...................................................................  $   346.4         2020

      The income tax provision related to other comprehensive income for the
year ended December 31, 2000 was $(0.5) million. There was no provision related
to other comprehensive income for the years ended December 31, 1999 and 1998.

8.    EMPLOYEE BENEFIT PLANS

      Pension and Other Postretirement Benefit Plans
      Pacific Lumber has a defined benefit plan which covers all employees of
Pacific Lumber. Under the plan, employees are eligible for benefits at age 65 or
earlier, if certain provisions are met. The benefits are determined under a
career average formula based on each year of service with Pacific Lumber and the
employee's compensation for that year. Pacific Lumber's funding policy is to
contribute annually an amount at least equal to the minimum cash contribution
required by the Employee Retirement Income Security Act of 1974, as amended.

      Pacific Lumber has an unfunded benefit plan for certain postretirement
medical benefits which covers substantially all employees of Pacific Lumber.
Participants of the plan are eligible for certain health care benefits upon
retirement. Participants make contributions for a portion of the cost of their
health care benefits. The expected costs of postretirement medical benefits are
accrued over the period the employees provide services to the date of their full
eligibility for such benefits.

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


                                                                            PENSION BENEFITS   MEDICAL/LIFE BENEFITS
                                                                          -------------------- --------------------
                                                                                  YEARS ENDED DECEMBER 31,
                                                                          -----------------------------------------
                                                                            2000       1999      2000       1999
                                                                          ---------  --------- ---------  ---------
Change in benefit obligation:
   Benefit obligation at beginning of year..............................  $   33.7   $   34.3  $    4.9   $    5.0
   Service cost.........................................................       1.9        2.4       0.2        0.3
   Interest cost........................................................       2.7        2.5       0.3        0.4
   Plan participants' contributions.....................................         -          -       1.1        0.3
   Actuarial (gain) loss................................................       0.8       (4.8)      1.2       (0.7)
   Benefits paid........................................................      (0.9)      (0.7)     (1.7)      (0.4)
                                                                          ---------  --------- ---------  ---------
      Benefit obligation at end of year                                       38.2       33.7       6.0        4.9
                                                                          ---------  --------- ---------  ---------

Change in plan assets:
   Fair value of plan assets at beginning of year.......................      37.1       29.9         -          -
   Actual return on assets..............................................      (1.5)       5.7         -          -
   Employer contributions...............................................         -        2.2       0.6        0.1
   Plan participants' contributions.....................................         -          -       1.1        0.3
   Benefits paid........................................................      (0.9)      (0.7)     (1.7)      (0.4)
                                                                          ---------  --------- ---------  ---------
   Fair value of plan assets at end of year.............................      34.7       37.1         -          -
                                                                          ---------  --------- ---------  ---------

   Benefit obligation in excess of (less than) plan assets..............       3.5       (3.4)      6.0        4.9
   Unrecognized actuarial gain..........................................       7.5       12.8       0.8        2.1
   Unrecognized prior service costs.....................................      (0.7)      (0.8)        -          -
                                                                          ---------  --------- ---------  ---------
      Accrued benefit liability.........................................  $   10.3   $    8.6  $    6.8   $    7.0
                                                                          =========  ========= =========  =========





                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2000       1999      1998       2000      1999       1998
                                                     ---------  --------  ---------  --------- ---------  ---------
Components of net periodic benefit costs:
   Service cost....................................  $    1.9   $   2.4   $    2.2   $    0.2  $    0.3   $    0.3
   Interest cost...................................       2.7       2.5        2.2        0.3       0.4        0.3
   Expected return on assets.......................      (2.6)     (2.1)      (1.8)         -         -          -
   Amortization of prior service costs.............       0.1       0.1        0.1          -         -          -
   Recognized net actuarial gain...................      (0.4)        -          -       (0.1)     (0.1)      (0.1)
                                                     ---------  --------  ---------  --------- ---------  ---------
      Adjusted net periodic benefit costs..........  $    1.7   $   2.9   $    2.7   $    0.4  $    0.6   $    0.5
                                                     =========  ========  =========  ========= =========  =========





                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2000       1999      1998       2000      1999       1998
                                                     ---------  --------  ---------  --------- ---------  ---------
Weighted-average assumptions:
   Discount rate...................................    7.5%       7.8%      7.0%       7.5%      7.8%       7.0%
   Expected return on plan assets..................    8.0%       8.0%      8.0%         -         -          -
   Rate of compensation increase...................    5.0%       5.0%      5.0%       5.0%      5.0%       5.0%

      Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates as of December 31, 2000 would have the
following effects (in millions):


                                                                       1-PERCENTAGE-POINT              1-PERCENTAGE-POINT
                                                                            INCREASE                        DECREASE
                                                                   ---------------------------     ---------------------------
Effect on total of service and interest cost components.......              $    0.1                        $    (0.1)
Effect on the postretirement benefit obligations..............                   0.8                             (0.7)


      Employee Savings Plan
      Pacific Lumber's employees are eligible to participate in a defined
contribution savings plan sponsored by MAXXAM. This plan is designed to enhance
the existing retirement programs of participating employees. The cost to the
Company of this plan was $1.5 million, $1.4 million and $1.4 million for the
years ended December 31, 2000, 1999 and 1998, respectively.

      Workers' Compensation Benefits
      Pacific Lumber is self-insured for workers' compensation benefits, whereas
Britt is insured for workers' compensation benefits by an outside party.
Included in accrued compensation and related benefits and other noncurrent
liabilities are accruals for workers' compensation claims amounting to $9.2
million and $9.8 million at December 31, 2000 and 1999, respectively. Workers'
compensation expenses amounted to $3.4 million, $3.9 million and $3.5 million
for the years ended December 31, 2000, 1999 and 1998, respectively.

9.    RELATED PARTY TRANSACTIONS

      MAXXAM provides the Company and certain of the Company's subsidiaries with
accounting, data processing services, office space and various office personnel,
insurance, legal, operating, financial and certain other services. MAXXAM's
expenses incurred on behalf of the Company are reimbursed by the Company through
payments consisting of (i) an allocation of the lease expense for the office
space utilized by or on behalf of the Company and (ii) a reimbursement of actual
out-of-pocket expenses incurred by MAXXAM, including, but not limited to, labor
costs of MAXXAM personnel rendering services to the Company. Charges by MAXXAM
for such services were $2.0 million, $3.0 million and $3.4 million for the years
ended December 31, 2000, 1999 and 1998, respectively. The Company believes that
the services being rendered are on terms not less favorable to the Company than
those which would be obtainable from unaffiliated third parties.

10.   COMMITMENTS AND CONTINGENCIES

      Commitments
      Minimum rental commitments under operating leases at December 31, 2000 are
as follows: years ending December 31, 2001--$4.2 million; 2002--$3.5 million;
2003--$2.8 million; 2004--$1.7 million; 2005--$1.2 million; thereafter--$2.5
million. Rental expense for operating leases was $4.7 million, $4.2 million and
$3.0 million for the years ended December 31, 2000, 1999 and 1998, respectively.

      Contingencies
      Regulatory and environmental matters play a significant role in the
Company's forest products business, which is subject to a variety of California
and federal laws and regulations, as well as the HCP and SYP and Pacific
Lumber's timber operator's license, dealing with timber harvesting practices,
threatened and endangered species and habitat for such species, and air and
water quality. As further described in Note 2, on March 1, 1999, Pacific Lumber
and MAXXAM consummated the Headwaters Agreement with the United States and
California. In addition to the transfer of the Headwaters Timberlands described
in Note 2, the SYP and the HCP were approved and incidental take permits related
to the HCP (the "PERMITS") were issued.

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

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

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

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

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

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

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

11.   SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2000      1999       1998
                                                                                     --------- ---------  ---------
                                                                                              (IN MILLIONS)
Supplemental information on non-cash investing and financing activities:
   Acquisition of assets subject to other liabilities............................... $      -  $      -   $    0.8
   Repurchases of debt using restricted cash........................................     52.5         -          -
   Purchases of marketable securities and other investments using restricted cash...      0.4      15.9          -

Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized interest....................................... $   64.5  $   65.0   $   62.7
   Tax allocation payments to (from) MAXXAM.........................................     (0.5)      1.8        0.2


12.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

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


                                                                            THREE MONTHS ENDED
                                                        -----------------------------------------------------------
                                                          MARCH 31        JUNE 30     SEPTEMBER 30     DECEMBER 31
                                                        -------------  -------------  -------------- --------------
2000:
   Net sales..........................................  $       47.4   $       55.9   $        49.4  $        47.4
   Operating income (loss)............................           5.7            8.4             0.1           (7.2)
   Income (loss) before extraordinary items...........          (2.7)          (1.0)           (7.8)          24.3
   Extraordinary items, net...........................           1.4              -             0.1            2.3
   Net income (loss)..................................          (1.3)          (1.0)           (7.7)          26.6

1999:
   Net sales..........................................  $       46.7   $       41.4   $        49.0  $        50.7
   Operating income (loss)............................          (1.4)          (3.4)           (3.9)           4.3
   Net income (loss)..................................         134.0           (5.8)           (5.6)          (4.4)

EX-99.3

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Stockholders and the Board of Directors of Kaiser Aluminum Corporation:

We have audited the accompanying consolidated balance sheets of Kaiser Aluminum
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2000
and 1999, and the related statements of consolidated income (loss),
stockholders' equity and comprehensive income (loss) and cash flows for each of
the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kaiser Aluminum Corporation and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.



ARTHUR ANDERSEN LLP




Houston, Texas
March 27, 2001

CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------

                                                                                        December 31,
                                                                                 -------------------------
(In millions of dollars, except share amounts)                                        2000         1999
- ----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
   Cash and cash equivalents                                                     $     23.4    $     21.2
   Receivables:
     Trade, less allowance for doubtful receivables of $5.8 and $5.9                  188.7         154.1
     Other                                                                            241.1         106.9
   Inventories                                                                        396.2         546.1
   Prepaid expenses and other current assets                                          162.7         145.6
                                                                                 -----------   -----------
     Total current assets                                                           1,012.1         973.9

Investments in and advances to unconsolidated affiliates                               77.8          96.9
Property, plant, and equipment - net                                                1,176.1       1,053.7
Deferred income taxes                                                                 454.2         440.0
Other assets                                                                          622.9         634.3
                                                                                 -----------   -----------
     Total                                                                       $  3,343.1    $  3,198.8
                                                                                 ===========   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                              $    236.8    $    231.7
   Accrued interest                                                                    37.5          37.7
   Accrued salaries, wages, and related expenses                                      110.3          62.1
   Accrued postretirement medical benefit obligation - current portion                 58.0          51.5
   Other accrued liabilities                                                          288.9         168.8
   Payable to affiliates                                                               78.3          85.8
   Long-term debt - current portion                                                    31.6            .3
                                                                                 -----------   -----------

     Total current liabilities                                                        841.4         637.9

Long-term liabilities                                                                 703.7         727.1
Accrued postretirement medical benefit obligation                                     656.9         678.3
Long-term debt                                                                        957.8         972.5
Minority interests                                                                    101.1         117.7
Commitments and contingencies
Stockholders' equity:
   Common stock, par value $.01, authorized 125,000,000 shares; issued
     and outstanding 79,599,557 and 79,405,333 shares                                    .8            .8
   Additional capital                                                                 537.5         536.8
   Accumulated deficit                                                               (454.3)       (471.1)
   Accumulated other comprehensive income (loss)                                       (1.8)         (1.2)
                                                                                 -----------   -----------
     Total stockholders' equity                                                        82.2          65.3
                                                                                 -----------   -----------
     Total                                                                       $  3,343.1    $  3,198.8
                                                                                 ===========   ===========


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

STATEMENTS OF CONSOLIDATED INCOME (LOSS)
- --------------------------------------------------------------------------------


                                                                               Year Ended December 31,
                                                                       ---------------------------------------
(In millions of dollars, except share amounts)                              2000          1999          1998
- --------------------------------------------------------------------------------------------------------------
Net sales                                                              $  2,169.8    $  2,083.6    $  2,302.4
                                                                       -----------   -----------   -----------
Costs and expenses:
   Cost of products sold                                                  1,891.4       1,893.5       1,892.2
   Depreciation and amortization                                             76.9          89.5          99.1
   Selling, administrative, research and development, and general           104.1         105.4         115.5
   Labor settlement charge                                                   38.5           -             -
   Other non-recurring operating items, net                                 (80.4)         24.1         105.0
                                                                       -----------   -----------   -----------
     Total costs and expenses                                             2,030.5       2,112.5       2,211.8
                                                                       -----------   -----------   -----------

Operating income (loss)                                                     139.3         (28.9)         90.6

Other income (expense):
   Interest expense                                                        (109.6)       (110.1)       (110.0)
   Gain on involuntary conversion at Gramercy facility                      -              85.0           -
   Other - net                                                               (4.3)        (35.9)          3.5
                                                                       -----------   -----------   -----------

Income (loss) before income taxes and minority interests                     25.4         (89.9)        (15.9)

(Provision) benefit for income taxes                                        (11.6)         32.7         16.4

Minority interests                                                            3.0           3.1            .1
                                                                       -----------   -----------   -----------

Net income (loss)                                                      $     16.8    $    (54.1)   $       .6
                                                                       ===========   ===========   ===========
Earnings (loss) per share:
   Basic/Diluted                                                       $      .21    $     (.68)   $      .01
                                                                       ===========   ===========   ===========
Weighted average shares outstanding (000):
   Basic                                                                   79,520        79,336        79,115
                                                                       ===========   ===========   ===========

   Diluted                                                                 79,523        79,336        79,156
                                                                       ===========   ===========   ===========


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


STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
- --------------------------------------------------------------------------------

(In millions of dollars)
- --------------------------------------------------------------------------------

                                                                                                    Accumulated
                                                                                                          Other
                                                    Common       Additional     Accumulated       Comprehensive
                                                     Stock          Capital         Deficit       Income (Loss)       Total
                                            --------------  ---------------  --------------   ----------------- -----------
BALANCE, DECEMBER 31, 1997                  $          .8   $        533.8   $      (417.6)   $         -       $    117.0
   Net income/Comprehensive income                   -               -                  .6              -               .6
   Stock options exercised                           -                  .1            -                 -               .1
   Incentive plan accretion                          -                 1.5            -                 -              1.5
                                            --------------  ---------------  --------------   ----------------- -----------

BALANCE, DECEMBER 31, 1998                             .8            535.4          (417.0)             -            119.2

   Net income (loss)                                 -               -               (54.1)             -            (54.1)
   Minimum pension liability
     adjustment, net of tax                          -               -                -                   (1.2)       (1.2)
                                                                                                                -----------

     Comprehensive income (loss)                     -               -                -                 -            (55.3)
   Stock options exercised                           -                  .1            -                 -               .1
   Incentive plan accretion                          -                 1.3            -                 -              1.3
                                            --------------  ---------------  --------------   ----------------- -----------

BALANCE, DECEMBER 31, 1999                             .8            536.8          (471.1)               (1.2)       65.3

   Net income                                        -               -                16.8              -             16.8
   Minimum pension liability
     adjustment, net of tax                          -               -                -                    (.6)        (.6)
                                                                                                                -----------
     Comprehensive income                            -               -                -                 -             16.2
   Incentive plan accretion                          -                  .7            -                 -               .7
                                            --------------  ---------------  --------------   ----------------- -----------

BALANCE, DECEMBER 31, 2000                  $          .8   $        537.5   $      (454.3)   $           (1.8) $     82.2
                                            ==============  ===============  ==============   ================= ===========


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


STATEMENTS OF CONSOLIDATED CASH FLOWS
- --------------------------------------------------------------------------------

                                                                                              Year Ended December 31,
                                                                                        -----------------------------------
(In millions of dollars)                                                                    2000        1999         1998
                                                                                        ----------   ---------   ----------
Cash flows from operating activities:
   Net income (loss)                                                                    $    16.8    $  (54.1)   $      .6
   Adjustments to reconcile net income to net cash (used) provided by operating
       activities:
       Depreciation and amortization (including deferred financing costs of $4.4,
         $4.3 and $3.9)                                                                      81.3        93.8        103.0
       Non-cash impairment charges (Notes 1 and 6)                                           63.3        19.1         45.0
       Gain on involuntary conversion at Gramercy facility                                   -          (85.0)         -
       Gains - real estate related (2000); sale of interests in AKW L.P. (1999)             (39.0)      (50.5)         -
       Non-cash benefit for income taxes                                                      -           -           (8.3)
       Equity in loss (income) of unconsolidated affiliates, net of distributions            13.1        (4.9)          .1
       Minority interests                                                                    (3.0)       (3.1)         (.1)
       (Increase) decrease in trade and other receivables                                  (168.8)       21.7         61.5
       Decrease (increase) in inventories                                                   125.8        (2.6)        24.8
       Decrease (increase) in prepaid expenses and other current assets                      20.8       (66.9)        30.1
       (Decrease) increase in accounts payable (associated with operating activities) and
         accrued interest                                                                   (29.7)       58.8         (3.2)
       Increase (decrease) in payable to affiliates and other accrued liabilities            68.9        19.6        (45.3)
       Decrease in accrued and deferred income taxes                                        (10.2)      (55.2)       (26.2)
       Net (used) provided by long-term assets and liabilities                              (69.4)       15.7        (23.9)
       Other                                                                                 14.7         4.3         12.6
                                                                                        ----------   ---------   ----------

         Net cash provided (used) by operating activities                                    84.6       (89.3)       170.7
                                                                                        ----------   ---------   ----------
Cash flows from investing activities:
   Capital expenditures, net of accounts payable of $34.6 in 2000                          (261.9)      (68.4)       (77.6)
   Gramercy-related property damage insurance recoveries                                    100.0          -            -
   Net proceeds from disposition of property and investments                                 66.9        74.8          6.7
   Other                                                                                       .2        (3.3)        (3.5)
                                                                                        ----------   ---------   ----------

         Net cash (used) provided by investing activities                                   (94.8)        3.1        (74.4)
                                                                                        ----------   ---------   ----------

Cash flows from financing activities:
   Borrowings under credit agreement, net                                                    20.0        10.4           -
   Repayments of long-term debt                                                              (4.4)        (.6)        (8.9)
   Redemption of minority interests' preference stocks                                       (2.8)       (1.6)        (8.7)
   Incurrence of financing costs                                                              (.4)         -           (.6)
   Capital stock issued                                                                      -             .1           .1
   Decrease in restricted cash, net                                                          -             .8          4.3
                                                                                        ----------   ---------   ----------

         Net cash provided (used) by financing activities                                    12.4         9.1        (13.8)
                                                                                        ----------   ---------   ----------

Net increase (decrease) in Cash and cash equivalents during the year                          2.2       (77.1)        82.5
Cash and cash equivalents at beginning of year                                               21.2        98.3         15.8
                                                                                        ----------   ---------   ----------

Cash and cash equivalents at end of year                                                $    23.4    $   21.2    $    98.3
                                                                                        ==========   =========   ==========

Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized interest of $6.5, $3.4 and $3.0                    $   105.3    $  105.4    $   106.3
   Income taxes paid                                                                         19.6        24.1         16.8


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

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The consolidated financial statements include the
statements of Kaiser Aluminum Corporation ("Kaiser" or the "Company") and its
majority owned subsidiaries. The Company is a subsidiary of MAXXAM Inc.
("MAXXAM") and conducts its operations through its wholly-owned subsidiary,
Kaiser Aluminum & Chemical Corporation ("KACC"). KACC operates in all
principal aspects of the aluminum industry-the mining of bauxite (the major
aluminum bearing ore), the refining of bauxite into alumina (the intermediate
material), the production of primary aluminum, and the manufacture of fabricated
and semi-fabricated aluminum products. Kaiser's production levels of alumina,
before consideration of the Gramercy incident (see Note 2), and primary aluminum
exceed its internal processing needs, which allows it to be a major seller of
alumina and primary aluminum to domestic and international third parties (see
Note 14).

The preparation of financial statements in accordance with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities known to exist as of the date the financial statements are
published, and the reported amounts of revenues and expenses during the
reporting period. Uncertainties, with respect to such estimates and assumptions,
are inherent in the preparation of the Company's consolidated financial
statements; accordingly, it is possible that the actual results could differ
from these estimates and assumptions, which could have a material effect on the
reported amounts of the Company's consolidated financial position and results of
operation.

Investments in 50%-or-less-owned entities are accounted for primarily by the
equity method. Intercompany balances and transactions are eliminated.

Net sales and cost of products sold for 1999 and 1998 have been restated to
conform to a new accounting principle that requires freight charges ($39.3 in
1999 and $46.0 in 1998) to be included in cost of products sold.

Liquidity/Cash Resources. KACC has significant near-term debt maturities. KACC's
ability to make payments on and refinance its debt depends on its ability to
generate cash in the future. In addition to being impacted by power sales and
normal operating items, the Company's and KACC"s near-term liquidity and cash
flows will also be affected by the Gramercy incident, net payments for
asbestos-related liabilities and possible proceeds from asset dispositions. For
discussions of these matters, see Notes 2, 7, 8 and 12.

Recognition of Sales. Sales are recognized when title, ownership and risk of
loss pass to the buyer. No changes were required to the Company's revenue
recognition policy as a result of Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements", which become effective during 2000.

Earnings per Share. Basic earnings per share is computed by dividing the
weighted average number of common shares outstanding during the period,
including the weighted average impact of the shares of common stock issued
during the year from the date(s) of issuance.

Diluted earnings per share for the years ended December 31, 2000 and 1998
include the dilutive effect of outstanding stock options (3,000 shares and
41,000 shares, respectively). The impact of outstanding stock options was
excluded from the computation of diluted loss per share for the year ended
December 31, 1999, as its effect would have been antidilutive.

Cash and Cash Equivalents. The Company considers only those short-term, highly
liquid investments with original maturities of 90 days or less to be cash
equivalents.

Inventories. Substantially all product inventories are stated at last-in,
first-out ("LIFO") cost, not in excess of market value. Replacement cost is not
in excess of LIFO cost. Inventories at December 31, 2000, have been reduced by
LIFO inventory charges totaling $24.1 ($.6 in cost of products sold and $23.5 in
non-recurring operating items, net). The non-recurring LIFO charges result
primarily from the Washington smelters' curtailment ($4.5), the exit from the
can body stock product line ($11.1) and the delayed restart of the Gramercy
facility ($7.0). Other inventories, principally operating supplies and repair
and maintenance parts, are stated at the lower of average cost or market.
Inventory costs consist of material, labor, and manufacturing overhead,
including depreciation. Inventories consist of the following:

                                                                           December 31,
                                                                    --------------------------
                                                                          2000           1999
- ----------------------------------------------------------------------------------------------
Finished fabricated products                                        $      54.6     $    118.5
Primary aluminum and work in process                                      126.9          189.4
Bauxite and alumina                                                        88.6          124.1
Operating supplies and repair and maintenance parts                       126.1          114.1
                                                                    -----------     ----------
                                                                    $     396.2     $    546.1
                                                                    ===========     ==========

Depreciation. Depreciation is computed principally by the straight-line method
at rates based on the estimated useful lives of the various classes of assets.
The principal estimated useful lives of land improvements, buildings, and
machinery and equipment are 8 to 25 years, 15 to 45 years, and 10 to 22 years,
respectively.

Stock-Based Compensation. The Company applies the intrinsic value method to
account for a stock-based compensation plan whereby compensation cost is
recognized only to the extent that the quoted market price of the stock at the
measurement date exceeds the amount an employee must pay to acquire the stock.
No compensation cost has been recognized for this plan as the exercise price of
the stock options granted in 2000, 1999 and 1998 were at or above the market
price. The pro forma after-tax effect of the estimated fair value of the grants
would be to reduce net income in 2000 by $2.2, increase the net loss in 1999 by
$1.8 and reduce net income in 1998 by $1.5. The fair value of the 2000, 1999 and
1998 stock option grants were estimated using a Black-Scholes option pricing
model.

Other Income (Expense). Amounts included in other income (expense) in 2000, 1999
and 1998, other than interest expense and gain on involuntary conversion at the
Gramercy facility, included the following pre-tax gains (losses):



                                                                                          Year Ended December 31,
                                                                                -------------------------------------
                                                                                    2000          1999        1998
- ---------------------------------------------------------------------------------------------------------------------
Asbestos-related charges (Note 12)                                              $    (43.0)  $    (53.2)  $    (12.7)
Gain on sale of Pleasanton complex (Note 4)                                           22.0          -           -
Lease obligation adjustment (Note 12)                                                 17.0          -           -
Mark-to-market gains (losses) (Note 13)                                               11.0        (32.8)        -
Gain on sale of interests in AKW L.P. (Note 3)                                        -            50.5         -
Environmental cost insurance recoveries (Note 12)                                     -             -           12.0
All other, net                                                                       (11.3)         (.4)         4.2
                                                                                -----------  -----------  -----------
                                                                                $     (4.3)  $    (35.9)  $      3.5
                                                                                ===========  ===========  ===========

Deferred Financing Costs. Costs incurred to obtain debt financing are deferred
and amortized over the estimated term of the related borrowing. Such
amortization is included in Interest expense.

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

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

Most of KACC's hedging activities involve the use of option contracts (which
establish a maximum and/or minimum amount to be paid or received) and forward
sales contracts (which effectively fix or lock-in the amount KACC will pay or
receive). Option contracts typically require the payment of an up-front premium
in return for the right to lock-in a minimum or maximum price. Forward sales
contracts do not require an up-front payment and are settled by the receipt or
payment of the amount by which the price at the settlement date varies from the
contract price. Consistent with accounting guidelines in place through December
31, 2000, any interim fluctuations in option prices prior to the settlement date
were deferred until the settlement date of the underlying hedged transaction, at
which time they were reflected in net sales or cost of products sold (as
applicable) together with the related premium cost. No accounting recognition
was accorded to interim fluctuations in prices of forward sales contracts. Hedge
(deferral) accounting would have been terminated (resulting in the applicable
derivative positions being marked-to-market) if the level of underlying physical
transactions ever fell below the net exposure hedged. This did not occur in
1998, 1999 or 2000. Deferred gains or losses as of December 31, 2000, were
included in Prepaid expenses and other current assets and Other accrued
liabilities (see Note 13).

Beginning with the quarterly period ending March 31, 2001, the Company will
begin reporting derivative activities consistent with Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133, which has been adopted as of January 1, 2001,
requires companies to recognize all derivative instruments as assets or
liabilities in the balance sheet and to measure those instruments at fair value.
Under SFAS No. 133, the Company will be required to "mark-to-market" all of its
hedging positions at each period-end. This contrasts with guidance under
pre-2001 accounting principles which generally only required certain
"non-qualifying" hedging positions to be marked-to-market. Changes in the market
value of the Company's open hedging positions resulting from the mark-to-market
process will represent unrealized gains or losses. Such unrealized gains or
losses will change, based on prevailing market prices at each subsequent balance
sheet date, until the transaction date occurs. Under SFAS No. 133, these changes
will be reflected as an increase or reduction in stockholders' equity through
either other comprehensive income or net income, depending on the nature of the
hedging instrument used. To the extent that changes in market value of the
Company's hedging positions are initially recorded in other comprehensive
income, such changes will reverse out of other comprehensive income (net of any
fluctuations in other "open" positions) and will be reflected in net income when
the subsequent physical transactions occur. As of December 31, 2000, the amount
of the Company's other comprehensive income adjustments were not significant so
there was not a significant difference between net income and comprehensive
income. However, differences between comprehensive income and net income may
become significant in future periods as a result of SFAS No. 133. In general,
SFAS No. 133 will result in material fluctuations in comprehensive income, net
income and stockholders' equity in periods of price volatility, despite the fact
that the Company's cash flow and earnings will be "fixed" to the extent hedged.
This result is contrary to the intent of the Company's hedging program, which is
to "lock-in" a price (or range of prices) for products sold/used so that
earnings and cash flows are subject to reduced risk of volatility.

SFAS No. 133 requires that as of the date of the initial adoption, the
difference between the market value of derivative instruments recorded on the
Company's consolidated balance sheet and the previous carrying amount of those
derivatives be reported in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle. As
previously discussed, this impact will be reflected in the Company's first
quarter 2001 financial statements. The adoption of SFAS No. 133 will result in a
pre-tax benefit of $21.2 to other comprehensive income and an essentially
offsetting pre-tax charge of $18.9 to earnings, such that the net effect of the
adoption of SFAS No. 133 on stockholders' equity will be small. See Note 13 for
additional discussions regarding the Company's derivatives.

Fair Value of Financial Instruments. The Company estimates the fair value of its
outstanding indebtedness to be $798.3 and $970.5 as of December 31, 2000 and
1999, respectively, based on quoted market prices for KACC's 97/8% Senior Notes
due 2002 (the "97/8% Notes"), 12 3/4% Senior Subordinated Notes due 2003 (the
"12 3/4% Notes"), and 107/8% Senior Notes due 2006 (the "107/8% Notes"), and the
discounted future cash flows for all other indebtedness, using the current rate
for debt of similar maturities and terms. The Company believes that the carrying
amount of other financial instruments is a reasonable estimate of their fair
value, unless otherwise noted.

2.   INCIDENT AT GRAMERCY FACILITY

In July 1999, KACC's Gramercy, Louisiana alumina refinery was extensively
damaged by an explosion in the digestion area of the plant. A number of
employees were injured in the incident, several of them severely. In connection
with the settlement of the U.S. Mine Safety and Health Administration's ("MSHA")
investigation of the incident, KACC is paying a fine of $.5 but denied the
alleged violations. As a result of the incident, alumina production at the
facility was completely curtailed. Construction on the damaged part of the
facility began during the first quarter of 2000. Initial production at the plant
commenced during the middle of December 2000. The plant is expected to increase
production progressively to approximately 75% of its newly rated estimated
annual capacity of 1,250,000 tons by the end of March 2001. At February 28,
2001, the plant was operating at 70% of capacity. Based on current estimates,
construction at the facility is expected to be completed during the third
quarter of 2001.

KACC has significant amounts of insurance coverage related to the Gramercy
incident. Deductibles and self-retention provisions under the insurance coverage
for the incident total $5.0, which amounts were charged to Other non-recurring
operating items, net in 1999 (Note 6). KACC's insurance coverage has five
separate components: property damage, clean-up and site preparation, business
interruption, liability and workers' compensation. The insurance coverage
components are discussed below.

Property Damage. KACC's insurance policies provide that KACC will be reimbursed
for the costs of repairing or rebuilding the damaged portion of the facility
using new materials of like kind and quality with no deduction for depreciation.
In 1999, based on discussions with the insurance carriers and their
representatives and third party engineering reports, KACC recorded a pretax gain
of $85.0, representing the difference between the minimum expected property
damage reimbursement amount of $100.0 and the net carrying value of the damaged
property of $15.0. The reimbursement amount was classified as a receivable in
Other assets at December 31, 1999. The full amount of the receivable was
collected in 2000. Additional recoveries are possible. See "Timing and Amount of
Additional Insurance Recoveries" below.

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

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

Depreciation expense for the first six months of 1999 was approximately $6.0.
KACC suspended depreciation at the facility starting in July 1999 since
production had been completely curtailed. However, in accordance with an
agreement with KACC's insurers, during the second half of 2000, the Company
recorded a depreciation charge of $14.3, of which $1.5 was recorded in the
fourth quarter, representing the previously unrecorded depreciation related to
the undamaged portion of the facility for the period from July 1999 through
November 2000. However, this charge did not have any impact on the Company's
operating results as the Company has reflected (as a reduction of depreciation
expense) an equal and offsetting insurance receivable (incremental to the
amounts discussed in the preceding paragraph) since the insurers have agreed to
reimburse the Company this amount. Since production at the facility was
partially restored during December 2000, normal depreciation has commenced. Such
depreciation will exceed prior historical rates primarily due to the capital
costs on the newly constructed assets.

Liability. The incident has also resulted in more than ninety individual and
class action lawsuits being filed against KACC and others alleging, among other
things, property damage, business interruption losses by other businesses and
personal injury. The aggregate amount of damages sought in the lawsuits and
other claims cannot be determined at this time; however, KACC does not currently
believe the damages will exceed the amount of coverage under its liability
policies.

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

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

Neither KACC nor the Company intend to record any additional insurance-related
recoveries in 2001 unless and until agreed to by the insurers or until the
arbitration process is completed. As such, the Company's and KACC's future
operating results will be adversely affected until all of the additional
costs/lost profits related to the Gramercy plant's start-up and return to full
production are eliminated or until any amounts related to 2001 ultimately
determined to be due to KACC through negotiation with the insurers or as a part
of the arbitration process are received.

Other. During the third quarter of 2000, KACC incurred approximately $11.5 of
normal recurring maintenance expenditures for the Gramercy facility (which
amounts were reflected in Other non-recurring operating items, net - see Note 6)
that otherwise would have been incurred in the ordinary course of business over
the next one to three years. The Company chose to incur these expenditures now
to avoid normal operational outages that otherwise would have occurred once the
facility resumes production.

3.   INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

Summary of combined financial information is provided below for unconsolidated
aluminum investments, most of which supply and process raw materials. The
investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey
Aluminium Limited ("Anglesey") (49.0% owned) and Kaiser Jamaica Bauxite Company
(49.0% owned). The equity in income (loss) before income taxes of such
operations is treated as a reduction (increase) in Cost of products sold. At
December 31, 2000 and 1999, KACC's net receivables from these affiliates were
not material.

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

On April 1, 1999, KACC sold its 50% interest in AKW L.P. ("AKW") to its partner
for $70.4, which resulted in the Company recognizing a net pre-tax gain of $50.5
(included in Other income (expense) - Note 1). The Company's equity in income of
AKW was $2.5 and $7.8 for the years ended December 31, 1999 and 1998,
respectively.

Summary of Combined Financial Position

                                                                                 December 31,
                                                                          --------------------------
                                                                                2000            1999
- ----------------------------------------------------------------------------------------------------
Current assets                                                            $    350.1      $    370.4
Long-term assets (primarily property, plant, and equipment, net)               327.3           344.1
                                                                          ----------      ----------
     Total assets                                                         $    677.4      $    714.5
                                                                          ==========      ==========
Current liabilities                                                       $    144.1      $    120.4
Long-term liabilities (primarily long-term debt)                               331.4           368.3
Stockholders' equity                                                           201.9           225.8
                                                                          ----------      ----------
     Total liabilities and stockholders' equity                           $    677.4      $    714.5
                                                                          ==========      ==========


Summary of Combined Operations

                                                                                              Year Ended December 31,
                                                                                        -----------------------------------
                                                                                          2000          1999         1998
- ---------------------------------------------------------------------------------------------------------------------------
Net sales                                                                               $ 602.9       $ 594.9      $ 659.2
Costs and expenses                                                                       (617.1)       (582.9)      (651.7)
Benefit (provision) for income taxes                                                       (4.5)           .8         (2.7)
                                                                                        --------      --------     --------
Net income (loss)                                                                       $ (18.7)      $  12.8      $   4.8
                                                                                        ========      ========     ========
Company's equity in income (loss)                                                       $  (4.8)      $   4.9      $   5.4
                                                                                        ========      ========     ========
Dividends received                                                                      $   8.3       $    -       $   5.5
                                                                                        ========      ========     ========

The Company's equity in income differs from the summary net income (loss) due to
varying percentage ownerships in the entities and equity method accounting
adjustments. Prior to December 31, 2000, KACC's investment in its unconsolidated
affiliates exceeded its equity in their net assets and such excess was being
amortized to Depreciation and amortization. At December 31, 2000, the excess
investment had been fully amortized. Such amortization was approximately $10.0
for each of the years ended December 31, 2000, 1999 and 1998.

The Company and its affiliates have interrelated operations. KACC provides some
of its affiliates with services such as management and engineering. Significant
activities with affiliates include the acquisition and processing of bauxite,
alumina, and primary aluminum. Purchases from these affiliates were $235.7,
$223.7 and $235.1, in the years ended December 31, 2000, 1999 and 1998,
respectively.

4.   PROPERTY, PLANT, AND EQUIPMENT

The major classes of property, plant, and equipment are as follows:

                                                            December 31,
                                                     --------------------------
                                                         2000            1999
- -------------------------------------------------------------------------------
Land and improvements                                $   130.7       $   166.1
Buildings                                                197.2           230.0
Machinery and equipment                                1,702.8         1,519.7
Construction in progress                                 130.3            67.7
                                                     ----------      ----------
                                                       2,161.0         1,983.5
Accumulated depreciation                                (984.9)         (929.8)
                                                     ----------      ----------
     Property, plant, and equipment, net             $ 1,176.1       $ 1,053.7
                                                     ==========      ==========

KACC evaluated the recoverability of the approximate $200.0 carrying value of
its Washington smelters, as a result of the change in the economic environment
of the Pacific Northwest associated with the reduced power availability and
higher power costs for KACC's Washington smelters under the terms of the new
contract with the Bonneville Power Administration ("BPA") starting in October
2001 (see Note 7). The Company determined that the expected future undiscounted
cash flows of the Washington smelters were below their carrying value.
Accordingly, during the fourth quarter of 2000, KACC adjusted the carrying value
of its Washington smelting assets to their estimated fair value, which resulted
in a non-cash impairment charge of approximately $33.0 (which amount was
reflected in Other non-recurring operating items, net - see Note 6). The
estimated fair value was based on anticipated future cash flows discounted at a
rate commensurate with the risk involved.

During September 2000, KACC sold its Pleasanton, California, office complex
because the complex had become surplus to the Company's needs. Net proceeds from
the sale were approximately $51.6 and resulted in a net pre-tax gain of $22.0
(included in Other income (expense) - see Note 1).

In May 2000, KACC acquired the assets of a drawn tube aluminum fabricating
operation in Chandler, Arizona. Total consideration for the acquisition was
$16.1, consisting of cash payments of $15.1 and assumed current liabilities of
$1.0. The purchase price was allocated to the assets acquired based on their
estimated fair values, of which approximately $1.1 was allocated to property,
plant and equipment and $2.8 was allocated to receivables, inventory and prepaid
expenses. The excess of the purchase price over the fair value of the assets
acquired (goodwill) was approximately $12.2 and is being amortized on a
straight- line basis over 20 years. Total revenues for the Chandler facility
were approximately $13.8 for the year ended December 31, 1999 (unaudited).

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

In February 2000, KACC completed the sale of the Micromill assets and technology
for a nominal payment at closing and possible future payments based on
subsequent performance and profitability of the Micromill technology. The sale
did not have a material impact on the Company's 2000 operating results. As a
result of the changes in strategic course in the further development and
deployment of KACC's Micromill technology , the carrying value of the Micromill
assets was reduced by recording impairment charges of $19.1 and $45.0 in 1999
and 1998, respectively (see Note 6).

5.   LABOR DISPUTE, SETTLEMENT AND RELATED COSTS

As previously reported, prior to the settlement of the labor dispute discussed
below, KACC was operating five of its U.S. facilities with salaried employees
and other employees as a result of the September 30, 1998, strike by the United
Steelworkers of America ("USWA") and the subsequent "lock-out" by KACC in
January 1999. The labor dispute was settled in September 2000. A significant
portion of the issues were settled through direct negotiations between KACC and
the USWA and the remaining issues were settled pursuant to an agreed-upon
arbitration process. Under the terms of the settlement, USWA members generally
returned to the affected plants during October 2000. The new labor contract,
which expires in September 2005, provides for a 2.6% average annual increase in
the overall wage and benefit packages, results in the reduction of at least 540
hourly jobs at the five facilities (from approximately 2,800 on September 30,
1998), allows KACC greater flexibility in using outside contractors and provides
for productivity gains by allowing KACC to utilize the knowledge obtained during
the labor dispute without many of the work-rule restrictions that were a part of
the previous labor contract. The Company has recorded a one-time pre-tax charge
of $38.5 in its results of operations for the year ended December 31, 2000, to
reflect the incremental, non-recurring impacts of the labor settlement,
including severance and other contractual obligations for non-returning workers.
At December 31, 2000, the total remaining liability associated with the labor
settlement charge was $16.3. It is anticipated that substantially all remaining
costs will be incurred during 2001 or early 2002. See Note 14 for the allocation
of the labor settlement charge by business unit.

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

On March l, 2001, in connection with the USWA settlement agreement, KACC
redeemed all of its Cumulative (1985 Series A) and Cumulative (1985 Series B)
Preference Stock. See Note 11.

6.   NON-RECURRING OPERATING ITEMS, NET (OTHER THAN LABOR SETTLEMENT)

The income (loss) impact associated with non-recurring operating items, net,
other than the labor settlement charge, for 2000, 1999 and 1998 was as follows:


                                                                                      Year Ended December 31,
                                                                             ----------------------------------------
                                                    Business Segment                2000          1999         1998
- ---------------------------------------------------------------------------------------------------------------------
Net gains from power sales (Note 7)              Primary Aluminum            $     159.5   $     -        $    -
Impairment charge - Washington
     smelters  (Note 4)                          Primary Aluminum                  (33.0)        -             -
Gramercy related items:
     Incremental maintenance (Note 2)            Bauxite & Alumina             (11.5)        -             -
     Insurance deductibles, etc. (Note 2)        Bauxite & Alumina            -               (4.0)        -
                                                 Corporate                        -               (1.0)        -
     LIFO inventory charge (Note 1)              Bauxite & Alumina              (7.0)        -             -
Impairment charges associated with
     product line exits                          Flat-Rolled Products              (12.6)        -             -
                                                 Engineered Products                (5.6)        -             -
Restructuring charges                            Bauxite & Alumina               (.8)        -             -
                                                 Primary Aluminum                   (3.1)        -             -
                                                 Corporate                          (5.5)        -             -
Micromill impairment (Note 4)                    Micromill                        -              (19.1)       (45.0)
Incremental strike-related costs                 Bauxite & Alumina            -              -            (11.0)
                                                 Primary Aluminum                 -              -            (29.0)
                                                 Flat-Rolled Products             -              -            (16.0)
                                                 Engineered Products              -              -             (4.0)
                                                                             ------------  ------------   ----------
                                                                             $      80.4   $     (24.1)   $  (105.0)
                                                                             ============  ============   ==========

The $12.6 impairment charge reflected by KACC's Flat-Rolled products segment in
2000 includes a $11.1 LIFO inventory charge (see Note 1), of which $3.6 was
recorded in the fourth quarter of 2000, and a $1.5 charge to reduce the carrying
value of certain assets to their estimated net realizable value as a result of
the segment's decision to exit the can body stock product line. The $5.6
impairment charge recorded by KACC's Engineered products segment in 2000
includes a $.9 LIFO inventory charge (all in the fourth quarter of 2000) and a
$4.7 charge to reduce the carrying value of certain machining facilities and
assets, which are no longer required as a result of the segment's decision to
exit a marginal product line, to their estimated net realizable value.

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

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

7.   PACIFIC NORTHWEST POWER SALES AND OPERATING LEVEL

Power Sales. In response to the unprecedented high market prices for power in
the Pacific Northwest, KACC temporarily curtailed the primary aluminum
production at the Tacoma and Mead, Washington smelters during the second half of
2000 and sold a portion of the power that it had under contract through
September 30, 2001. As a result of the curtailments, KACC avoided the need to
purchase power on a variable market price basis and will receive cash proceeds
sufficient to more than offset the cash impact of the potline curtailments over
the period for which the power was sold. To implement the curtailment, KACC
temporarily curtailed the two and one-half operating potlines at its Tacoma
smelter and two and one-half out of a total of eight potlines at its Mead
smelter in June 2000 and temporarily curtailed the remaining Mead potlines
during the fourth quarter of 2000. One-half of a potline at the Tacoma smelter
was already curtailed. The Company recorded net pre-tax gains of approximately
$159.5 in 2000, of which $103.2 was recorded in the fourth quarter, as a result
of these power sales. The net gain amounts were composed of gross proceeds of
$207.8, of which $88.0 (included in Receivables - other at December 31, 2000)
was received through February 28, 2001. The gross proceeds were offset by
employee-related expenses, incremental excess power costs, a non- cash LIFO
inventory charge and other fixed commitments, which amounts are expected to be
paid through September 2001. The resulting net gains have been reflected in
Other non-recurring operating items, net (see Note 6).

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

Future Power Supply. During October 2000, KACC signed a new power contract with
the BPA under which the BPA will provide KACC's operations in the State of
Washington with power during the period October 2001 through September 2006. The
contract will provide KACC with sufficient power to fully operate KACC's
Trentwood facility as well as approximately 40% of the combined capacity of
KACC's Mead and Tacoma aluminum smelting operations. Power costs under the new
contract are expected to exceed the cost of power under KACC's current BPA
contract by between 20% to 60% and, perhaps, by as much as 100% in certain
periods. Additional provisions of the new BPA contract include a take-or-pay
requirement, an additional cost recovery mechanism under which KACC's base power
rate could be increased and clauses under which KACC's power allocation could be
curtailed, or its costs increased, in certain instances. KACC does not have any
remarketing rights under the new BPA contract. KACC has the right to terminate
the contract until certain pricing and other provisions of the BPA contract are
finalized, which is expected to be mid-2001.

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

8.   LONG-TERM DEBT

Long-term debt and its maturity schedule are as follows:

                                                                                                               December 31,
                                                                                                             ----------------
                                                                                                     2006
                                                                                                      and       2000     1999
                                                       2001      2002    2003     2004     2005     After      Total    Total
- -----------------------------------------------------------------------------------------------------------------------------

Credit Agreement                                    $  30.4                                                  $  30.4  $  10.4
97/8% Senior Notes due 2002, net                             $  224.8                                          224.8    224.6
107/8% Senior Notes due 2006, net                                                                  $  225.5    225.5    225.6
12 3/4% Senior Subordinated Notes due 2003                               $ 400.0                               400.0    400.0
Alpart CARIFA Loans - (fixed and variable rates)
     due 2007, 2008                                                                                    56.0     56.0     60.0
Other borrowings (fixed and variable rates)             1.2        .2         .2  $    .2  $    .2     50.7     52.7     52.2
                                                    -------  ---------   -------- -------  ------- --------  -------  -------
Total                                               $  31.6  $  225.0    $ 400.2  $    .2  $    .2 $  332.2    989.4    972.8
                                                    =======  =========   ======== =======  ======= ========
Less current portion                                                                                            31.6       .3
                                                                                                             -------  -------
     Long-term debt                                                                                          $ 957.8  $ 972.5
                                                                                                             =======  =======

Credit Agreement and Liquidity. The Company and KACC have a credit agreement, as
amended, (the "Credit Agreement") which provides a secured, revolving line of
credit through August 15, 2001. KACC is able to borrow under the facility by
means of revolving credit advances and letters of credit (up to $125.0) in an
aggregate amount equal to the lesser of $300.0 (reduced from $325.0 in December
2000) or a borrowing base relating to eligible accounts receivable and eligible
inventory. As of December 31, 2000, $155.3 (of which $69.3 could have been used
for letters of credit) was available to KACC under the Credit Agreement. The
Credit Agreement is unconditionally guaranteed by the Company and by certain
significant subsidiaries of KACC. Interest on any outstanding balances will bear
a spread (which varies based on the results of a financial test) over either a
base rate or LIBOR, at KACC's option. The interest rate at December 31, 2000 was
11.0%. As of February 28, 2001, there were $94.0 of borrowings outstanding under
the Credit Agreement and remaining availability of approximately $120.0.
However, proceeds of approximately $130.0 related to 2001 power sales are
expected to be received at or near March 30, 2001, and an additional $130.0 of
power proceeds will be received periodically through October 2001 with respect
to other power sales made during the first quarter of 2001.

It is the Company's and KACC's intention to extend or replace the Credit
Agreement prior to its expiration. However, in order for the Credit Agreement to
be extended, on a short-term basis, beyond August 2001, KACC will have to have a
plan to mitigate the $225.0 million of 97/8% Notes, due February 2002. For the
Credit Agreement to be extended past February 2003, both the 97/8% Notes and the
12 3/4% Notes, due February 2003, will have to be retired and/or refinanced. As
of February 28, 2001, KACC had received approval from the Credit Agreement
lenders to purchase up to $50.0 of the 97/8% Notes. As of February 28, 2001,
KACC has purchased approximately $1.0 of 97/8% Notes.

As previously disclosed, KACC is considering the possible sale of part or all of
its interests in certain operating assets. The contemplated transactions are in
various stages of development. KACC expects that at least one operating asset
will be sold.

KACC has multiple transactions under way. It is unlikely, however, that it would
consummate all of the transactions under consideration. Further, there can be no
assurance as to the likelihood, timing or terms of such sales. The Company would
expect to use the proceeds from any such sales for debt reduction, capital
spending or some combination thereof.

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

During March 2000, Alpart redeemed $4.0 principal amount of the CARIFA loans.
During March 2001, Alpart redeemed an additional $34.0 principal amount of the
CARIFA loans and, accordingly, KACC's letter of credit securing the loans was
reduced to $15.3. The March 2001 redemption had a modest beneficial effect on
the unused availability remaining under the Credit Agreement as the additional
Credit Agreement borrowings of $22.1 required for KACC's share of the redemption
were more than offset by a reduction in the amount of letters of credit
outstanding.

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

The obligations of KACC with respect to its 97/8% Notes, its 107/8% Notes and
its 12 3/4% Notes are guaranteed, jointly and severally, by certain subsidiaries
of KACC. The indentures governing the 97/8% Notes, the 107/8% Notes and the 12
3/4% Notes (collectively, the "Indentures") restrict, among other things, KACC's
ability to incur debt, undertake transactions with affiliates, and pay
dividends. Further, the Indentures provide that KACC must offer to purchase the
97/8% Notes, the 107/8% Notes and the 12 3/4% Notes, respectively, upon the
occurrence of a Change of Control (as defined therein), and the Credit Agreement
provides that the occurrence of a Change in Control (as defined therein) shall
constitute an Event of Default thereunder.

The Credit Agreement does not permit the Company, and significantly restricts
KACC's ability, to pay dividends on their common stock.

Restricted Net Assets of Subsidiaries. Certain debt instruments restrict the
ability of KACC to transfer assets, make loans and advances, and pay dividends
to the Company. The restricted net assets of KACC totaled $87.0 and $70.7 at
December 31, 2000 and 1999, respectively.

9.   INCOME TAXES

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

                                                        Year Ended December 31,
                                              -------------------------------------------
                                                  2000             1999            1998
- -----------------------------------------------------------------------------------------
Domestic                                      $   (96.6)      $    (81.8)      $   (93.6)
Foreign                                           122.0             (8.1)           77.7
                                              ----------      -----------      ----------

     Total                                    $    25.4       $    (89.9)      $   (15.9)
                                              =========       ===========      ==========


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

The (provision) benefit for income taxes on income (loss) before income taxes
and minority interests consists of:


                                             Federal           Foreign           State          Total
- -----------------------------------------------------------------------------------------------------
2000     Current                        $      (1.9)      $     (35.3)     $      (.3)     $   (37.5)
         Deferred                              35.5              (8.9)            (.7)          25.9
                                        ------------      ------------     -----------     ----------
              Total                     $      33.6       $     (44.2)     $     (1.0)     $   (11.6)
                                        ============      ============     ===========     ==========

1999     Current                        $       (.5)      $     (23.1)     $      (.3)     $   (23.9)
         Deferred                              43.8               7.1             5.7           56.6
                                        ------------      ------------     -----------     ----------
              Total                     $      43.3       $     (16.0)     $      5.4      $    32.7
                                        ============      ============     ===========     ==========

1998     Current                        $      (1.8)      $     (16.5)     $      (.2)     $   (18.5)
         Deferred                              44.4             (12.5)            3.0           34.9
                                        ------------      ------------     -----------     ----------
              Total                     $      42.6       $     (29.0)     $      2.8      $    16.4
                                        ============      ============     ===========     ==========

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

                                                                                              Year Ended December 31,
                                                                                        -----------------------------------
                                                                                            2000          1999         1998
- ---------------------------------------------------------------------------------------------------------------------------
Amount of federal income tax (provision) benefit based on the statutory rate            $  (8.9)      $  31.2      $   5.6
Revision of prior years' tax estimates and other changes in valuation allowances           (1.8)          1.1          8.3
Percentage depletion                                                                        3.0           2.8          3.2
Foreign taxes, net of federal tax benefit                                                  (3.2)         (3.2)        (1.9)
Other                                                                                       (.7)           .8          1.2
                                                                                        --------      --------     --------
(Provision) benefit for income taxes                                                    $ (11.6)      $  32.7      $  16.4
                                                                                        ========      ========     ========

The components of the Company's net deferred income tax assets are as follows:
                                                                           December 31,
                                                                   ----------------------------
                                                                       2000             1999
- -----------------------------------------------------------------------------------------------
Deferred income tax assets:
     Postretirement benefits other than pensions                   $     267.4       $    274.7
     Loss and credit carryforwards                                       125.2            119.3
     Other liabilities                                                   143.7            146.3
     Other                                                               181.5            193.9
     Valuation allowances                                               (122.3)          (125.6)
                                                                   ------------      -----------
         Total deferred income tax assets-net                            595.5            608.6
                                                                   ------------      -----------
Deferred income tax liabilities:
     Property, plant, and equipment                                     (105.1)          (101.6)
     Other                                                               (26.2)           (69.6)
                                                                   ------------      -----------
         Total deferred income tax liabilities                          (131.3)          (171.2)
                                                                   ------------      -----------
Net deferred income tax assets                                     $     464.2       $    437.4
                                                                   ============      ===========

The principal component of the Company's net deferred income tax assets is the
tax benefit, net of certain valuation allowances, associated with the accrued
liability for postretirement benefits other than pensions. The future tax
deductions with respect to the turnaround of this accrual will occur over a
30-to-40-year period. If such deductions create or increase a net operating
loss, the Company has the ability to carry forward such loss for 20 taxable
years. Accordingly, the Company believes that a long-term view of profitability
is appropriate and has concluded that this net deferred income tax asset will
more likely than not be realized.

A substantial portion of the valuation allowances provided by the Company
relates to loss and credit carryforwards. To determine the proper amount of
valuation allowances with respect to these carryforwards, the Company evaluated
all appropriate factors, including any limitations concerning their use and the
year the carryforwards expire, as well as the levels of taxable income necessary
for utilization. With regard to future levels of income, the Company believes,
based on the cyclical nature of its business, its history of operating earnings,
and its expectations for future years, that it will more likely than not
generate sufficient taxable income to realize the benefit attributable to the
loss and credit carryforwards for which valuation allowances were not provided.

As of December 31, 2000 and 1999, $56.0 and $39.1, respectively, of the net
deferred income tax assets listed above are included in the Consolidated Balance
Sheets in the caption entitled Prepaid expenses and other current assets.
Certain other portions of the deferred income tax liabilities listed above are
included in the Consolidated Balance Sheets in the captions entitled Other
accrued liabilities and Long-term liabilities.

The Company and its domestic subsidiaries file consolidated federal income tax
returns. During the period from October 28, 1988, through June 30, 1993, the
Company and its domestic subsidiaries were included in the consolidated federal
income tax returns of MAXXAM. The tax allocation agreements of the Company and
KACC with MAXXAM terminated pursuant to their terms, effective for taxable
periods beginning after June 30, 1993. However, payments or refunds for periods
prior to July 1, 1993 related to certain jurisdictions could still be required
pursuant to the Company's and KACC's respective tax allocation agreements with
MAXXAM. In accordance with the Credit Agreement, any such payments to MAXXAM by
KACC would require lender approval, except in certain specific circumstances.

At December 31, 2000, the Company had certain tax attributes available to offset
regular federal income tax requirements, subject to certain limitations,
including net operating loss and general business credit carryforwards of $84.9
and $1.0, respectively, which expire periodically through 2019 and 2011,
respectively, foreign tax credit ("FTC") carryforwards of $67.1, which expire
primarily in 2004 and 2005, and alternative minimum tax ("AMT") credit
carryforwards of $25.8, which have an indefinite life. The Company also has AMT
net operating loss and FTC carryforwards of $45.3 and $89.8, respectively,
available, subject to certain limitations, to offset future alternative minimum
taxable income, which expire periodically through 2019 and 2005, respectively.

10.  EMPLOYEE BENEFIT AND INCENTIVE PLANS

Pension and Other Postretirement Benefit Plans. Retirement plans are
non-contributory for salaried and hourly employees and generally provide for
benefits based on formulas which consider such items as length of service and
earnings during years of service. The Company's funding policies meet or exceed
all regulatory requirements.

The Company and its subsidiaries provide postretirement health care and life
insurance benefits to eligible retired employees and their dependents.
Substantially all employees may become eligible for those benefits if they reach
retirement age while still working for the Company or its subsidiaries. The
Company has not funded the liability for these benefits, which are expected to
be paid out of cash generated by operations. The Company reserves the right,
subject to applicable collective bargaining agreements, to amend or terminate
these benefits. Assumptions used to value obligations at year-end and to
determine the net periodic benefit cost in the subsequent year are:


                                                               Pension Benefits                  Medical/Life Benefits
                                                        --------------------------------    -------------------------------
                                                             2000        1999       1998         2000       1999       1998
                                                        --------------------------------    -------------------------------
Weighted-average assumptions as of December 31,
Discount rate                                               7.75%       7.75%      7.00%        7.75%      7.75%      7.00%
Expected return on plan assets                              9.50%       9.50%      9.50%          -          -          -
Rate of compensation increase                               4.00%       4.00%      5.00%        4.00%      4.00%      4.00%

In 2000, the average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 8.0% for all
participants. The assumed rate of increase is assumed to decline gradually to
5.0% in 2009 for all participants and remain at that level thereafter.

The following table presents the funded status of the Company's pension and
other postretirement benefit plans as of December 31, 2000 and 1999, and the
corresponding amounts that are included in the Company's Consolidated Balance
Sheets:

                                                               Pension Benefits                  Medical/Life Benefits
                                                       --------------------------------    --------------------------------
                                                            2000              1999              2000              1999
                                                       --------------    --------------    --------------     -------------
Change in Benefit Obligation:
     Obligation at beginning of year                   $       806.0     $       872.5     $       615.4      $      616.8
     Service cost                                               19.0              14.6               5.3               5.2
     Interest cost                                              60.5              59.7              45.0              41.5
     Currency exchange rate change                              -                 (5.7)               -                 -
     Curtailments, settlements and amendments                   33.7                .4             (33.4)               -
     Actuarial (gain) loss                                       9.1             (44.5)             79.5                .1
     Benefits paid                                             (92.5)            (91.0)            (53.6)            (48.2)
                                                       --------------    --------------    --------------     -------------
         Obligation at end of year                             835.8             806.0             658.2             615.4
                                                       --------------    --------------    --------------     -------------
Change in Plan Assets:
     FMV of plan assets at beginning of year                   857.8             801.8                -                 -
     Actual return on assets                                   (18.0)            133.0                -                 -
     Employer contributions                                     10.7              14.0              53.6              48.2
     Benefits paid                                             (92.5)            (91.0)            (53.6)            (48.2)
                                                       --------------    --------------    --------------     -------------
     FMV of plan assets at end of year                         758.0             857.8               -                 -
                                                       --------------    --------------    --------------     -------------
     Obligation in excess of (less than) plan
         assets                                                 77.8             (51.8)            658.2             615.4
     Unrecognized net actuarial gain (loss)                     25.1             131.9             (21.6)             56.7
     Unrecognized prior service costs                          (45.1)            (15.2)             78.3              57.7
     Adjustment required to recognize minimum liability          1.8               1.2                -                 -
     Intangible asset and other                                  3.0               2.6                -                 -
                                                       --------------    --------------    --------------     -------------
         Accrued benefit liability                     $        62.6     $        68.7     $       714.9      $      729.8
                                                       ==============    ==============    ==============     =============


The aggregate accumulated benefit obligation and fair value of plan assets for
pension plans with accumulated benefit obligation in excess of plan assets were
$789.3 and $748.5, respectively, as of December 31, 2000, and $92.4 and $79.7,
respectively, as of December 31, 1999.

                                                               Pension Benefits                  Medical/Life Benefits
                                                       ---------------------------------   --------------------------------
                                                          2000       1999        1998         2000       1999       1998
                                                       ---------- ----------- ----------   ---------- ---------- ----------
Components of Net Periodic Benefit Costs:
     Service cost                                      $    19.0  $     14.6  $    14.2    $     5.3  $     5.2  $     4.2
     Interest cost                                          60.5        59.7       59.7         45.0       41.5       37.5
     Expected return on assets                             (77.9)      (72.9)     (69.4)            -          -         -
     Amortization of prior service cost                      3.9         3.3        3.2        (12.8)     (12.1)     (12.4)
     Recognized net actuarial (gain) loss                   (1.9)         .7        1.4            -          -       (7.1)
                                                       ---------- ----------- ----------   ---------- ---------- ----------
     Net periodic benefit cost                               3.6         5.4        9.1         37.5       34.6       22.2
     Curtailments, settlements, etc.                          .1          .4        3.2            -          -          -
                                                       ---------- ----------- ----------   ---------- ---------- ----------
         Adjusted net periodic benefit costs           $     3.7  $      5.8  $    12.3    $    37.5  $    34.6  $    22.2
                                                       ========== =========== ==========   ========== ========== ==========

Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage- point change in assumed
health care cost trend rates would have the following effects:

                                                                       1% Increase           1% Decrease
                                                                      --------------        -------------
Increase (decrease) to total of service and interest cost             $        6.8          $       (5.0)
Increase (decrease) to the postretirement benefit obligation          $       68.3          $      (48.0)

Postemployment Benefits. The Company provides certain benefits to former or
inactive employees after employment but before retirement.

Incentive Plans. The Company has an unfunded incentive compensation program,
which provides incentive compensation based on performance against annual plans
and over rolling three-year periods. In addition, the Company has a
"nonqualified" stock option plan and KACC has a defined contribution plan for
salaried employees. The Company's expense for all of these plans was $5.7, $6.0
and $7.5 for the years ended December 31, 2000, 1999 and 1998, respectively.

Up to 8,000,000 shares of the Company's Common Stock were reserved for issuance
under its stock incentive compensation plans. At December 31, 2000, 1,861,752
shares of Common Stock remained available for issuance under those plans. Stock
options granted pursuant to the Company's nonqualified stock option program are
granted at or above the prevailing market price, generally vest at a rate of 20
- - 33% per year, and have a five or ten year term. Information concerning
nonqualified stock option plan activity is shown below. The weighted average
price per share for each year is shown parenthetically.


                                                                         2000          1999         1998
- ----------------------------------------------------------------------------------------------------------
Outstanding at beginning of year ($10.24, $9.98 and $10.45)          4,239,210     3,049,122      819,752
Granted ($10.23, $11.15 and $9.79)                                     757,335     1,218,068    2,263,170
Exercised ($7.25 in both years)                                           -           (7,920)     (10,640)
Expired or forfeited ($11.08, $11.02 and $9.60)                       (620,598)      (20,060)     (23,160)
                                                                     ----------    ----------   ----------
Outstanding at end of year ($10.24, $10.24 and $9.98)                4,375,947     4,239,210    3,049,122
                                                                     ==========    ==========   ==========
Exercisable at end of year ($10.18, $10.17 and $10.09)               2,380,491     1,763,852    1,261,262
                                                                     ==========    ==========   ==========

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

11.  MINORITY INTERESTS AND PLEDGED SHARES OF COMMON STOCK

Minority Interests. The Company owns a 90% interest in Volta Aluminium Company
Limited ("Valco") and a 65% interest in Alumina Partners of Jamaica ("Alpart").
These companies' financial statements are fully consolidated into the Company's
consolidated financial statements because they are majority-owned. Interests of
Alpart's and Valco's minority shareholders' (included in "Other" in the table
below) are included in minority interests together with KACC's Redeemable
Preference Stock and KACC's Preference Stock discussed below. Changes in
minority interest were:

                                             2000                           1999                           1998
                                   -------------------------     ----------------------    ---------------------------
                                     Redeemable                  Redeemable                  Redeemable
                                     Preference                  Preference                  Preference
                                          Stock      Other            Stock      Other          Stock        Other
- ----------------------------------------------------------------------------------------------------------------------
Beginning of period balance        $    19.5    $    98.2      $     20.1   $    103.4     $     27.7    $   100.0
Redeemable preference stock -
   Accretion                                -           -             1.0            -            1.1             -
   Stock redemption                     (2.0)         (.8)           (1.6)           -           (8.7)            -
   Reclassification (see below)        (17.5)           -              -             -             -              -
Minority interests                          -         3.7              -          (5.2)            -           3.4
                                   ----------   ----------     -----------  -----------    -----------   ----------
End of period balance              $        -   $   101.1      $     19.5   $     98.2     $     20.1    $   103.4
                                   ==========   ==========     ===========  ===========    ===========   ==========

In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and its
Cumulative (1985 Series B) Preference Stock (together, the "Redeemable
Preference Stock") each of which has a par value of $1 per share and a
liquidation and redemption value of $50 per share plus accrued dividends, if
any. No additional Redeemable Preference Stock is expected to be issued. In
connection with the USWA settlement agreement (see Note 5), during March 2001,
KACC redeemed all of the Redeemable Preference Stock (350,872 shares outstanding
at December 31, 2000). The amount applicable to the unredeemed shares at
December 31, 2000 ($17.5), was included in Other accrued liabilities. The net
cash impact of the redemption on KACC was only approximately $5.5 because
approximately $12.0 of the redemption amount had previously been funded into
redemption funds (included in Prepaid expenses).

KACC has four series of $100 par value Cumulative Convertible Preference Stock
("$100 Preference Stock") outstanding with annual dividend requirements of
between 41/8% and 4 3/4% (included in "Other" in the above table). KACC has the
option to redeem the $100 Preference Stock at par value plus accrued dividends.
KACC does not intend to issue any additional shares of the $100 Preference
Stock. The $100 Preference Stock can be exchanged for per share cash amounts
between $69 - $80. KACC records the $100 Preference Stock at their exchange
amounts for financial statement presentation and the Company includes such
amounts in minority interests. At December 31, 2000 and 1999, outstanding shares
of $100 Preference Stock were 9,250 and 19,538, respectively.

Pledged Shares. From time to time MAXXAM or certain of its subsidiaries which
own the Company's Common Stock may use such stock as collateral under various
financing arrangements. At December 31, 2000, 26,737,443 shares of the Company's
Common Stock beneficially owned by MAXXAM Group Holdings Inc. ("MGHI"), a wholly
owned subsidiary of MAXXAM, were pledged as security for $130.0 principal amount
of 12% Senior Secured Notes due 2003 issued in December 1996 by MGHI. An
additional 7,915,000 shares of the Company's Common Stock were pledged by MAXXAM
under a separate agreement under which $13.4 had been borrowed by MAXXAM at
December 31, 2000.

12.  COMMITMENTS AND CONTINGENCIES

Commitments. KACC has a variety of financial commitments, including purchase
agreements, tolling arrangements, forward foreign exchange and forward sales
contracts (see Note 13), letters of credit, and guarantees. Such purchase
agreements and tolling arrangements include long-term agreements for the
purchase and tolling of bauxite into alumina in Australia by QAL. These
obligations are scheduled to expire in 2008. Under the agreements, KACC is
unconditionally obligated to pay its proportional share of debt, operating
costs, and certain other costs of QAL. KACC's share of the aggregate minimum
amount of required future principal payments at December 31, 2000, is $101.5
which matures as follows: $14.1 in 2001, $43.0 in 2002 and $44.4 in 2003. KACC's
share of payments, including operating costs and certain other expenses under
the agreements, has ranged between $92.0 - $96.0 over the past three years. KACC
also has agreements to supply alumina to and to purchase aluminum from Anglesey.

Minimum rental commitments under operating leases at December 31, 2000, are as
follows: years ending December 31, 2001 - $36.5; 2002 - $32.3; 2003 - $29.4;
2004 - $26.9; 2005 - $26.4; thereafter - $78.0. The future minimum rentals
receivable under noncancelable subleases was $132.3 at December 31, 2000.

Rental expenses were $42.5, $41.1 and $34.5, for the years ended December 31,
2000, 1999 and 1998, respectively.

KACC has a long-term liability, net of estimated subleases income (included in
Long-term liabilities), on a building in which KACC has not maintained offices
for a number of years, but for which it is responsible for lease payments as
master tenant through 2008 under a sale-and-leaseback agreement. During 2000,
KACC reduced its net lease obligation by $17.0 (see Note 1) to reflect new
third-party sublease agreements which resulted in occupancy and lease rates
above those previously projected.

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

Based on the Company's evaluation of these and other environmental matters, the
Company has established environmental accruals, primarily related to potential
solid waste disposal and soil and groundwater remediation matters. The following
table presents the changes in such accruals, which are primarily included in
Long-term liabilities, for the years ended December 31, 2000, 1999 and 1998:


                                                  2000        1999       1998
- -----------------------------------------------------------------------------
Balance at beginning of period                 $ 48.9      $ 50.7     $ 29.7
Additional accruals                               2.6         1.6       24.5
Less expenditures                                (5.4)       (3.4)      (3.5)
                                               -------     -------    -------
Balance at end of period                       $ 46.1      $ 48.9     $ 50.7
                                               =======     =======    =======

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

As additional facts are developed and definitive remediation plans and necessary
regulatory approvals for implementation of remediation are established or
alternative technologies are developed, changes in these and other factors may
result in actual costs exceeding the current environmental accruals. The Company
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $35.0. As the resolution of these matters
is subject to further regulatory review and approval, no specific assurance can
be given as to when the factors upon which a substantial portion of this
estimate is based can be expected to be resolved. However, the Company is
currently working to resolve certain of these matters.

The Company believes that KACC has insurance coverage available to recover
certain incurred and future environmental costs and is pursuing claims in this
regard. During December 1998, KACC received recoveries totaling approximately
$35.0 from certain of its insurers related to current and future claims. Based
on the Company's analysis, a total of $12.0 of such recoveries was allocable to
previously accrued (expensed) items and, therefore, was reflected in earnings
during 1998 (see Note 1 - Other Income (Expense)). The remaining recoveries were
offset against increases in the total amount of environmental reserves. No
assurances can be given that the Company will be successful in other attempts to
recover incurred or future costs from other insurers or that the amount of
recoveries received will ultimately be adequate to cover costs incurred.

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

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

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

                                                                         2000         1999         1998
- --------------------------------------------------------------------------------------------------------
Number of claims at beginning of period                               100,000       86,400       77,400
Claims received                                                        30,600       29,300       22,900
Claims settled or dismissed                                           (19,800)     (15,700)     (13,900)
                                                                    ----------    ---------    ---------

Number of claims at end of period                                     110,800      100,000       86,400
                                                                    ==========    =========    =========
Number of claims at end of period (included above) covered by
     agreements under which KACC expects to settle over an
     extended period                                                   66,900       31,900       30,000
                                                                    ==========    =========    =========

The Company maintains a liability for estimated asbestos-related costs for
claims filed to date and an estimate of claims to be filed over a 10 year period
(i.e., through 2010). The Company's estimate is based on the Company's view, at
each balance sheet date, of the current and anticipated number of
asbestos-related claims, the timing and amounts of asbestos-related payments,
the status of ongoing litigation and settlement initiatives, and the advice of
Wharton Levin Ehrmantraut Klein & Nash, P.A., with respect to the current state
of the law related to asbestos claims. However, there are inherent uncertainties
involved in estimating asbestos- related costs and the Company's actual costs
could exceed the Company's estimates due to changes in facts and circumstances
after the date of each estimate. Further, while the Company does not presently
believe there is a reasonable basis for estimating asbestos-related costs beyond
2010 and, accordingly, no accrual has been recorded for any costs which may be
incurred beyond 2010, the Company expects that such costs are likely to continue
beyond 2010, and that such costs could be substantial.

The Company believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Although the Company has
settled asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements and disputes with
certain carriers exist. The timing and amount of future recoveries from these
and other insurance carriers will depend on the pace of claims review and
processing by such carriers and on the resolution of any disputes regarding
coverage under such policies. The Company believes that substantial recoveries
from the insurance carriers are probable. The Company reached this conclusion
after considering its prior insurance-related recoveries in respect of asbestos-
related claims, existing insurance policies, and the advice of Heller Ehrman
White & McAuliffe LLP with respect to applicable insurance coverage law relating
to the terms and conditions of those policies. During 2000, KACC filed suit
against a group of its insurers, after negotiations with certain of the insurers
regarding an agreement covering both reimbursement amounts and the timing of
reimbursement payments were unsuccessful. The litigation is intended, among
other things, to: (1) ensure that the insurers provide KACC with timely and
appropriate reimbursement payments for asbestos-related settlements and related
legal costs incurred; and (2) to resolve certain issues between the parties with
respect to how specific provisions of the applicable insurance policies are to
be applied. Given the significance of expected asbestos-related payments in 2001
and 2002 based on settlement agreements in place at December 31, 2000, the
receipt of timely and appropriate reimbursements from such insurers is critical
to KACC's liquidity. The court is not expected to try the case until late 2001
or 2002. KACC is continuing to receive cash payments from the insurers.

The following tables present historical information regarding KACC's
asbestos-related balances and cash flows:

                                                                             December 31,
                                                                   ----------------------------
                                                                        2000            1999
- -----------------------------------------------------------------------------------------------
Liability (current portion of $130.0 and $53.0)                    $     492.4     $     387.8
Receivable (included in Other assets)(1)                                 406.3           315.5
                                                                   ------------    ------------
                                                                   $      86.1     $      72.3
                                                                   ============    ============

(1)  The asbestos-related receivable was determined on the same basis as the
     asbestos-related cost accrual. However, no assurances can be given that
     KACC will be able to project similar recovery percentages for future
     asbestos-related claims or that the amounts related to future
     asbestos-related claims will not exceed KACC's aggregate insurance
     coverage. As of December 31, 2000 and 1999, $36.9 and $25.0, respectively,
     of the receivable amounts relate to costs paid. The remaining receivable
     amounts relate to costs that are expected to be paid by KACC in the future.


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

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


Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. This process resulted in the Company
reflecting charges of $43.0, $53.2 and $12.7 (included in Other income(expense)
- - see Note 1) in the years ended December 31, 2000, 1999 and 1998, respectively,
for asbestos-related claims, net of expected insurance recoveries, based on
recent cost and other trends experienced by KACC and other companies. While
uncertainties are inherent in the final outcome of these asbestos matters and it
is presently impossible to determine the actual costs that ultimately may be
incurred and insurance recoveries that will be received, management currently
believes that, based on the factors discussed in the preceding paragraphs, the
resolution of asbestos-related uncertainties and the incurrence of
asbestos-related costs net of related insurance recoveries should not have a
material adverse effect on the Company's consolidated financial position or
liquidity. However, as the Company's estimates are periodically re-evaluated,
additional charges may be necessary and such charges could be material to the
results of the period in which they are recorded.

Labor Matters. In connection with the USWA strike and subsequent lock-out by
KACC, which was settled in September 2000, certain allegations of unfair labor
practices ("ULPs") were filed with the National Labor Relations Board ("NLRB")
by the USWA. As previously disclosed, KACC responded to all such allegations and
believes that they were without merit. Twenty-two of twenty-four allegations of
ULPs previously brought against KACC by the USWA have been dismissed. A trial
before an administrative law judge for the two remaining allegations commenced
in November 2000 and is continuing. The Company is unable to estimate when the
trial will be completed. Any outcome from the trial before the administrative
law judge would be subject to additional appeals by the general counsel of the
NLRB, the USWA or KACC. This process could take months or years. If these
proceedings eventually resulted in a final ruling against KACC with respect to
either allegation, it could be obligated to provide back pay to USWA members at
the five plants and such amount could be significant. The Company continues to
believe that the charges are without merit. While uncertainties are inherent in
matters such as this and it is presently impossible to determine the actual
costs, if any, that may ultimately arise in connection with this matter, the
Company does not believe that the ultimate outcome of this matter will have a
material adverse impact on the Company's liquidity or financial position.
However, amounts paid, if any, in satisfaction of this matter could be
significant to the results of the period in which they are recorded.

Other Contingencies. The Company or KACC is involved in various other claims,
lawsuits, and other proceedings relating to a wide variety of matters related to
past or present operations. 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 currently 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.

13.   DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

In conducting its business, KACC uses various instruments, including forward
contracts and options, to manage the risks arising from fluctuations in aluminum
prices, energy prices and exchange rates. KACC enters into hedging transactions
to limit its exposure resulting from (1) its anticipated sales of alumina,
primary aluminum, and fabricated aluminum products, net of expected purchase
costs for items that fluctuate with aluminum prices, (2) the energy price risk
from fluctuating prices for natural gas, fuel oil and diesel oil used in its
production process, and (3) foreign currency requirements with respect to its
cash commitments with foreign subsidiaries and affiliates.

As KACC's hedging activities are generally designed to lock-in a specified price
or range of prices, gains or losses on the derivative contracts utilized in
these hedging activities (except the impact of those contracts discussed below
which have been marked to market) will generally offset at least a portion of
any losses or gains, respectively, on the transactions being hedged. See Note 1
for a discussion of the effects of the new accounting requirements under SFAS
No. 133, which will be used for reporting results beginning with the first
quarter of 2001. The following table summarizes KACC's derivative hedging
positions at December 31, 2000:

                                                                             Estimated %
                                                                              of Annual
                                                             Notional      Sales/Purchases     Carrying         Market
               Commodity                     Period           Amount           Hedged            Value           Value
- --------------------------------------  ----------------   -------------  ----------------   ------------    ------------
Aluminum (in tons) -
       Option contracts                       2001               362,000       82%(1)        $       18.2    $       3.1
       Option contracts                       2002               262,000       52%(1)                10.9           13.4
       Option contracts                       2003                42,000        9%(1)                 1.8            1.7

Natural gas (in MMBtus per day) -
       Option contracts and swaps         1/01 to 6/01            27,900         24%                  1.3           21.8

Australian dollars (A$ per year) -
       Forwards and option contracts          2001              A$ 160.0         80%                  1.4           (5.2)
       Option contracts                   2002 to 2005          A$  90.0         56%                 12.2           13.3

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

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

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

14.  SEGMENT AND GEOGRAPHICAL AREA INFORMATION

The Company's operations are located in many foreign countries, including
Australia, Canada, Ghana, Jamaica, and the United Kingdom. Foreign operations in
general may be more vulnerable than domestic operations due to a variety of
political and other risks. Sales and transfers among geographic areas are made
on a basis intended to reflect the market value of products.

The Company's operations are organized and managed by product type. The Company
operations include four operating segments of the aluminum industry and its
commodities marketing and corporate segments. The aluminum industry segments
include: Alumina and bauxite, Primary aluminum, Flat-rolled products and
Engineered products. The Alumina and bauxite business unit's principal products
are smelter grade alumina and chemical grade alumina hydrate, a value-added
product, for which the Company receives a premium over smelter grade market
prices. The Primary aluminum business unit produces commodity grade products as
well as value-added products such as rod and billet, for which the Company
receives a premium over normal commodity market prices. The Flat-rolled products
group sells value-added products such as heat treat aluminum sheet and plate
which are used in the aerospace and general engineering markets as well as
selling to the beverage container and specialty coil markets. The Engineered
products business unit serves a wide range of industrial segments including the
automotive, distribution, aerospace and general engineering markets. The Company
uses a portion of its bauxite, alumina and primary aluminum production for
additional processing at its downstream facilities. Transfers between business
units are made at estimated market prices. The Commodities marketing segment
includes the results of KACC's alumina and aluminum hedging activities (see Note
13). The accounting policies of the segments are the same as those described in
Note 1. Business unit results are evaluated internally by management before any
allocation of corporate overhead and without any charge for income taxes,
interest expense or non- recurring charges.

Financial information by operating segment at December 31, 2000, 1999 and 1998
is as follows:

                                                                             Year Ended December 31,
                                                                    ----------------------------------------
                                                                       2000           1999           1998
- ------------------------------------------------------------------------------------------------------------
Net Sales:(3)
   Bauxite and Alumina:(1)(4)
     Net sales to unaffiliated customers                            $   442.2     $    395.8     $    445.2
     Intersegment sales                                                 148.3          129.0          135.8
                                                                    ----------    -----------    -----------
                                                                        590.5          524.8          581.0
                                                                    ----------    -----------    -----------
   Primary Aluminum:(2)(4)
     Net sales to unaffiliated customers                                563.7          432.9          390.7
     Intersegment sales                                                 242.3          240.6          233.5
                                                                    ----------    -----------    -----------
                                                                        806.0          673.5          624.2
                                                                    ----------    -----------    -----------
   Flat-Rolled Products                                                 521.0          591.3          732.7
   Engineered Products                                                  564.9          556.8          595.3
   Commodities Marketing(4)                                             (25.4)          18.3           60.5
   Minority Interests                                                   103.4           88.5           78.0
   Eliminations                                                        (390.6)        (369.6)        (369.3)
                                                                    ----------    -----------    -----------
                                                                    $ 2,169.8     $  2,083.6     $  2,302.4
                                                                    ==========    ===========    ===========
Equity in income (loss) of unconsolidated affiliates:
   Bauxite and Alumina                                              $    (8.4)    $      3.4     $     (3.2)
   Primary Aluminum                                                       3.6           (1.0)           1.2
   Engineered Products and Other                                            -            2.5            7.4
                                                                    ----------    -----------    -----------
                                                                    $    (4.8)    $      4.9     $      5.4
                                                                    ==========    ===========    ===========
Operating income (loss):(4)(6)
   Bauxite and Alumina - Note 2                                     $    57.2     $    (10.5)    $      5.5
   Primary Aluminum (5)                                                 100.1           (4.8)          28.3
   Flat-Rolled Products                                                  16.6           17.1           86.8
   Engineered Products                                                   34.1           38.6           51.5
   Commodities Marketing(4)                                             (48.7)          21.3           98.1
   Micromill                                                              (.6)         (11.6)         (18.4)
   Eliminations                                                            .1            6.9            8.9
   Corporate and Other                                                  (61.4)         (61.8)         (65.1)
   Labor Settlement and Other Non-Recurring Operating Items,
        Net - Notes 5 and 6                                              41.9          (24.1)        (105.0)
                                                                    ----------    -----------    -----------
                                                                    $   139.3     $    (28.9)    $     90.6
                                                                    ==========    ===========    ===========


                                                                            Year Ended December 31,
                                                                   ----------------------------------------
                                                                      2000          1999           1998
- -----------------------------------------------------------------------------------------------------------
Depreciation and amortization:
   Bauxite and Alumina - Note 2                                    $    22.2     $     29.7     $     36.4
   Primary Aluminum                                                     24.8           27.8           29.9
   Flat-Rolled Products                                                 16.7           16.2           16.1
   Engineered Products                                                  11.5           10.7           10.8
   Corporate and Other (includes Micromill in 1999 and 1998)             1.7            5.1            5.9
                                                                   ----------    -----------    -----------
                                                                   $    76.9     $     89.5     $     99.1
                                                                   ==========    ===========    ===========
Capital expenditures:
   Bauxite and Alumina - Note 2                                    $   254.6     $     30.4     $     26.9
   Primary Aluminum                                                      9.6           12.8           20.7
   Flat-Rolled Products                                                  7.6           16.6           20.4
   Engineered Products - Note 4                                         23.6            7.8            8.4
   Corporate and Other                                                   1.1             .8            1.2
                                                                   ----------    -----------    -----------
                                                                   $   296.5     $     68.4     $     77.6
                                                                   ==========    ===========    ===========

(1)  Net sales for 2000 and 1999, included approximately 267,000 tons and
     264,000 tons, respectively of alumina purchased from third parties and
     resold to certain unaffiliated customers of the Gramercy facility and
     55,000 tons and 131,000 tons, respectively, of alumina purchased from third
     parties and transferred to the Company's Primary aluminum business unit.
(2)  Net sales for 2000, 1999 and 1998 included approximately 206,500 tons,
     260,100 tons and 251,300 tons, respectively, of primary aluminum purchased
     from third parties to meet third-party and internal commitments.
(3)  Net sales for 1999 and 1998 for all segments have been restated to conform
     to a new accounting requirement which states that freight charges should be
     included in cost of products sold rather than netted against net sales as
     was the Company's prior policy.
(4)  Net sales and operating income (loss) for Bauxite and alumina and Primary
     aluminum segments for 1999 and 1998 have been restated to reflect a change
     in the Company's segment reporting. The results of the Company's metal
     hedging activities in the Commodities marketing segment are now set out
     separately rather than being allocated between the two commodity business
     units.
(5)  Operating income (loss) for 1999 included potline preparation and restart
     costs of $12.8.
(6)  The allocation of the labor settlement charge to the Company's business
     units for the year ended December 31, 2000, is as follows: Bauxite and
     Alumina - $2.1, Primary aluminum - $15.9, Flat-rolled products - $18.2 and
     Engineered products - $2.3.

                                                                                 December 31,
                                                                          -------------------------
                                                                               2000         1999
- ---------------------------------------------------------------------------------------------------
Investments in and advances to unconsolidated affiliates:
   Bauxite and Alumina                                                    $     56.0     $     71.6
   Primary Aluminum                                                             19.0           25.3
   Corporate and Other                                                           2.8            -
                                                                          ----------     ----------
                                                                          $     77.8     $     96.9
                                                                          ==========     ==========

                                                                            December 31,
                                                                  --------------------------
                                                                       2000            1999
- --------------------------------------------------------------------------------------------
Segment assets:
   Bauxite and Alumina                                            $     957.0     $    777.7
   Primary Aluminum                                                     623.3          560.8
   Flat-Rolled Products                                                 337.7          423.2
   Engineered Products                                                  232.9          253.1
   Commodities Marketing                                                 62.1           99.0
   Corporate and Other (includes Micromill in 1999)                   1,130.1        1,085.0
                                                                  -----------     ----------
                                                                  $   3,343.1     $  3,198.8
                                                                  ===========     ==========

Geographical information for net sales, based on country of origin, and
long-lived assets follows:

                                                               Year Ended December 31,
                                                    ---------------------------------------------
                                                        2000            1999             1998
- -------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers:
     United  States                                 $    1,350.1    $     1,439.6    $    1,744.0
     Jamaica                                               298.5            233.1           237.0
     Ghana                                                 237.5            153.2            89.8
     Other Foreign                                         283.7            257.7           231.6
                                                    ------------    -------------    ------------
                                                    $    2,169.8    $     2,083.6    $    2,302.4
                                                    ============    =============    ============

                                                      December 31,
                                              -----------------------------
                                                  2000             1999
- ---------------------------------------------------------------------------
Long-lived assets: (1)
     United States                            $       809.0    $      688.1
     Jamaica                                          290.3           288.2
     Ghana                                             80.8            84.1
     Other Foreign                                     73.8            90.2
                                              -------------    ------------
                                              $     1,253.9    $    1,150.6
                                              =============    ============

(1) Long-lived assets include Property, plant, and equipment, net and
    Investments in and advances to unconsolidated affiliates.

The aggregate foreign currency gain included in determining net income was
immaterial for the years ended December 31, 2000, 1999 and 1998. No single
customer accounted for sales in excess of 10% of total revenue in 2000, 1999 and
1998. Export sales were less than 10% of total revenue during the years ended
December 31, 2000, 1999 and 1998.

QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------


                                                                           Quarter Ended
                                                     ------------------------------------------------------------
(In millions of dollars, except share amounts)        March 31,     June 30,    September 30,     December 31,
- -----------------------------------------------------------------------------------------------------------------

2000
   Net sales                                         $   575.7 (8)  $  552.8 (8)    $ 545.2 (8)      $ 496.1
   Operating income                                       36.9          51.5            2.8             48.1
   Net income (loss)                                      11.7 (1)      11.0 (2)      (16.8)(3)         10.9 (4)
   Basic/Diluted Earnings (loss) per share                 .15 (1)       .14 (2)       (.21)(3)          .14 (4)
   Common stock market price:
      High                                                8.88          5.13           6.06             5.94
      Low                                                 4.13          2.94           3.50             3.50
1999
   Net sales                                         $   490.3 (8)  $  536.2 (8)    $ 528.7 (8)      $ 528.4 (8)
   Operating income (loss)                               (33.0)           .7          (12.1)            15.5
   Net income (loss)                                     (38.2)        (15.7)         (39.2)(5)         39.0 (6)
   Basic/Diluted Earnings (loss) per share                (.48)         (.20)          (.49)(5)          .49
   Common stock market price:
      High                                                6.94         10.13           9.69             8.25
      Low                                                 4.75          5.00           6.63             6.00
1998
   Net sales                                         $   609.6 (8)  $  626.8(8)    $  552.9 (8)      $  513.1(8)
   Operating income (loss)                                44.8          55.3           30.8            (40.3)
   Net income (loss)                                      12.0          16.7           10.8            (38.9)(7)
   Basic/Diluted Earnings (loss) per share                 .15           .21            .14             (.49)(7)
   Common stock market price:
      High                                               11.00         11.63           9.63             7.75
      Low                                                 8.13          8.88           5.63             4.63

(1)   Includes a pre-tax gain of $14.4 to reflect a mark-to-market adjustment on
      certain primary aluminum hedging transactions. Excluding this item, basic
      income per share would have been approximately $.04.
(2)   Includes a pre-tax gain of $15.8 from the sale of power offset by a
      pre-tax charge of $6.0 to reflect a mark-to-market adjustment on certain
      primary aluminum hedging transactions and a pre-tax charge of $2.0 for
      certain severance and relocation costs associated with Corporate
      restructuring initiatives and product line exit. Excluding these items,
      basic income per share would have been approximately $.09.
(3)   Includes a pre-tax labor settlement charge of $38.5, a non-cash pre-tax
      charge of $43.0 for asbestos-related claims, a pre-tax charge of $11.5 for
      incremental maintenance spending and pre-tax charges of $18.1 for
      non-recurring impairment and restructuring charges offset by a pre-tax
      gain of $40.5 from the sale of power, pre-tax gains of $39.0 related to
      real estate transactions and a pre-tax gain of $.9 to reflect a
      mark-to-market adjustment on certain primary aluminum hedging
      transactions. Excluding these items, basic income per share would have
      been approximately $.03.
(4)   Includes a pre-tax gain of $103.2 from the sale of power and a pre-tax
      gain of $1.4 to reflect a mark-to-market adjustment on certain primary
      aluminum hedging transactions offset by a non-cash impairment loss of
      approximately $33.0, a LIFO inventory charge of $7.0 and a pre-tax charge
      of $5.3 for other non-recurring impairment and restructuring charges.
      Excluding these items, but giving effect to operating profit foregone as a
      result of these power sales, basic loss per share would have been
      approximately $.19.
(5)   Includes a non-cash pre-tax charge of $19.1 to reduce the carrying value
      of the Company's Micromill assets, a non-cash pre-tax charge of $15.2 for
      asbestos-related claims and a pre-tax charge of $5.9 to reflect a
      mark-to-market adjustment on certain primary aluminum hedging
      transactions. Excluding these items, basic loss per share would have been
      approximately $.16.
(6)   Includes a pre-tax gain of $85.0 on involuntary conversion at Gramercy
      facility. See Note 2.  Excluding this item, basic loss per share would
      have been $.22.
(7)   Includes an unfavorable pre-tax strike-related gross profit impact of
      approximately $50.0, and a non-cash pre-tax charge of $45.0 related to
      impairment of the Company's Micromill assets. Excluding these items, basic
      earnings per share would have been approximately $.29.
(8)   Net sales for the quarterly periods prior to the quarter ended December
      31, 2000 have been restated to conform to a new accounting principle
      that requires freight charges to be included in cost of products sold.

EX-99.4

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This section contains forward-looking statements that involve risk and
uncertainties. Actual results could differ materially from those projected in
these forward-looking statements. The following disclosures are before
consideration of any impacts resulting from the application of Statement of
Financial Accounting Standards ("SFAS") No. 133 beginning January 1, 2001. See
Note 1 of Notes to Consolidated Financial Statements for a discussion of the
impacts of SFAS No. 133.

The Company's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold. As discussed
more fully in Notes 1 and 13 of Notes to Consolidated Financial Statements, KACC
utilizes hedging transactions to lock- in a specified price or range of prices
for certain products which it sells or consumes in its production process and to
mitigate KACC's exposure to changes in foreign currency exchange rates. The
following sets forth the impact on future earnings of adverse market changes
related to KACC's hedging positions with respect to commodity, foreign exchange
and energy contracts described more fully in Note 13 of Notes to Consolidated
Financial Statements.

Alumina and Primary Aluminum. Alumina and primary aluminum production in excess
of internal requirements is sold in domestic and international markets, exposing
the Company to commodity price opportunities and risks. KACC's hedging
transactions are intended to provide price risk management in respect of the net
exposure of earnings resulting from (i) anticipated sales of alumina, primary
aluminum and fabricated aluminum products, less (ii) expected purchases of
certain items, such as aluminum scrap, rolling ingot, and bauxite, whose prices
fluctuate with the price of primary aluminum. On average, before consideration
of hedging activities, any fixed price contracts with fabricated aluminum
products customers, variations in production and shipment levels, and timing
issues related to price changes, the Company estimates that each $.01 increase
(decrease) in the market price per price-equivalent pound of primary aluminum
increases (decreases) the Company's annual pre-tax earnings by approximately
$10.0 - $15.0 million, based on recent fluctuations in operating levels.

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

As stated in Note 13 of Notes to the Consolidated Financial Statements, KACC has
certain hedging positions which do not qualify for treatment as a "hedge" under
current accounting guidelines and thus must be marked-to-market each period.
Fluctuations in forward market prices for primary aluminum would likely result
in additional earnings volatility as a result of these positions. The Company
estimates that a hypothetical $.10 change in spot market prices from the
December 31, 2000, LME cash price of $.71 per pound would, depending on the
shape of the forward curve, result in additional aggregate mark-to-market
impacts of between $10.0-$30.0 million during any period through 2003.

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

Foreign Currency. KACC enters into forward exchange contracts to hedge material
cash commitments for foreign currencies. KACC's primary foreign exchange
exposure is related to KACC's Australian Dollar (A$) commitments in respect of
activities associated with its 28.3%-owned affiliate, Queensland Alumina
Limited. The Company estimates that, before consideration of any hedging
activities, a US $0.01 increase (decrease) in the value of the A$ results in an
approximate $2 million (decrease) increase in the Company's annual pre-tax
operating income.

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

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

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