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, 2001     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 April 12, 2002: 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"). Salmon Creek's wholly owned subsidiary is Lakepointe Assets
Holdings LLC ("LAKEPOINTE ASSETS"). Lakepointe Assets is engaged in commercial
real estate ownership and leasing. As used herein, the terms "Company," "MGHI,"
"MGI," "Pacific Lumber," "Kaiser" (as defined below) 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 34.6% interest in Kaiser. In addition,
MAXXAM has a direct interest in Kaiser of 27.3%. Kaiser is a publicly traded
company (OTC Bulletin Board trading symbol "KLUCQ") 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. On
February 12, 2002, Kaiser, its wholly owned operating subsidiary, Kaiser
Aluminum and Chemical Corporation ("KACC") and 13 of KACC's wholly owned
subsidiaries, filed separate voluntary petitions under Chapter 11 of the United
States Bankruptcy Code (the "CODE") in the United States Bankruptcy Court for
the District of Delaware (the "COURT"). On March 15, 2002, two additional wholly
owned subsidiaries of KACC filed petitions in the Court. Kaiser, KACC and the 15
subsidiaries of KACC that have filed petitions are collectively referred to
herein as the "DEBTORS" and the Chapter 11 proceedings of these entities are
collectively referred to herein as the "CASES." For purposes hereof, the term
"FILING DATE" shall mean, with respect to any particular Debtor, the date on
which such Debtor filed its Case. See "--Aluminum Operations--Reorganization
Proceedings" and Notes 1, 2 and 7 to the Consolidated Financial Statements.

      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" "--Reorganization
Proceedings," "--Business Operations," "--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 "--Critical Accounting Policies"). 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

   OPERATIONS

      Timber and Timberlands
      Pacific Lumber owns and manages approximately 218,000 acres of virtually
contiguous commercial timberlands located in Humboldt County along the northern
California coast, an area which has very favorable soil and climate conditions
for growing timber. These timberlands contain approximately 71% redwood, 23%
Douglas-fir and 6% other timber, are located in close proximity to Pacific
Lumber's and Britt's sawmills and contain an extensive network of roads.
Approximately 205,000 acres of Pacific Lumber's timberlands are owned by Scotia
LLC (the "SCOTIA LLC TIMBERLANDS"), and Scotia LLC has the exclusive right to
harvest (the "SCOTIA LLC TIMBER RIGHTS") approximately 12,200 acres of Pacific
Lumber's timberlands. The timber in respect of the Scotia LLC Timberlands and
the Scotia LLC Timber Rights is collectively referred to as the "SCOTIA LLC
TIMBER." Substantially all of Scotia LLC's assets are pledged as security for
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 the
agreement, approximately 5,600 acres of timberlands owned by the Palco Companies
known as the Headwaters Forest and the Elk Head Springs Forest (the "HEADWATERS
TIMBERLANDS") were transferred to the United States. In exchange, Salmon Creek
was paid $299.9 million, Scotia LLC was paid $150,000 and approximately 7,700
acres of timberlands known as the Elk River Timberlands (the "ELK RIVER
TIMBERLANDS") were transferred to Pacific Lumber and subsequently transferred to
Scotia LLC. In addition, habitat conservation and sustained yield plans (the
"ENVIRONMENTAL PLANS") were approved covering the Scotia LLC Timberlands and
California agreed to purchase a portion of Pacific Lumber's Grizzly Creek grove,
as well as Scotia LLC's Owl Creek grove. In December 2000, California purchased
the Owl Creek grove for $67.0 million in cash, and on November 15, 2001,
purchased a portion of the Grizzly Creek grove for $19.8 million in cash. Salmon
Creek placed $169.0 million of the proceeds from the sale of the Headwaters
Timberlands into a Scheduled Amortization Reserve Account ("SAR ACCOUNT") in
order to support principal payments on Scotia LLC's Timber Notes. See
"--Regulatory and Environmental Factors" and Note 4 to the Consolidated
Financial Statements.

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

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

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

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

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

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

      The ability of Pacific Lumber to harvest timber 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. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Background" for information regarding developments in the rate of
THP approvals.

      Pacific Lumber maintains a detailed geographical information system
covering its timberlands (the "GIS"). The GIS covers numerous aspects of Pacific
Lumber's properties, including timber type, tree class, wildlife data, roads,
rivers and streams. Pursuant to the 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, but are supplemented from time to time by logs purchased from third
parties. Since 1986, Pacific Lumber has implemented numerous technological
advances that have increased the operating efficiency of its production
facilities and the recovery of finished products from its timber. Pacific Lumber
produced approximately 160, 205 and 155 million board feet of lumber in 2001,
2000 and 1999, respectively. The Fortuna sawmill produces primarily common grade
lumber and during 2001 produced approximately 98 million board feet of lumber.
The Carlotta sawmill produces both common and upper grade redwood lumber and
during 2001, produced approximately 37 million board feet of lumber. Although
partially curtailed during July through November of 2001, Carlotta restarted in
December 2001. As part of Pacific Lumber's strategic review of its operations,
Sawmills "A" and "B" were indefinitely idled in 2001. Sawmill "A" formerly
processed Douglas-fir logs and Sawmill "B" formerly processed primarily large
diameter redwood logs. During 2001, Sawmills "A" and "B" processed approximately
17 million and 6 million board feet of lumber, respectively. Sawmills "A" and
"B" are both located in Scotia. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Background--Results
of Operations."

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

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

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

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

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


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

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

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

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

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

      Upper grade redwood lumber, which is derived primarily from large diameter
logs and is characterized by an absence of knots and other defects, is used
primarily in distinctive interior and exterior applications. The overall supply
of upper grade lumber has been diminishing due to increasing environmental and
regulatory restrictions and other factors. See Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations--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 2001, MGI purchased
approximately 25 million board feet of logs from third parties.

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

      Backlog and Seasonality

      MGI's backlog of sales orders at each of December 31, 2001 and 2000 was
approximately $15.7 million, the substantial portion of which was delivered in
the first quarter of the next fiscal year. 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 75% of these
sales in 2001. Common grades of Douglas-fir lumber are sold primarily in
California. In 2001, MGI had three customers which accounted for approximately
15%, 3% and 3%, respectively, of MGI's total net lumber sales. Exports of lumber
accounted for approximately 4% of MGI's total revenues in 2001. MGI markets its
products through its own sales staff which focuses primarily on domestic sales.

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

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

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

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

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

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

   REGULATORY AND ENVIRONMENTAL FACTORS

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

      General
      Pacific Lumber's business is subject to the Environmental Plans and a
variety of California and federal laws and regulations dealing with timber
harvesting, threatened and endangered species and habitat for such species, and
air and water quality. Compliance with such laws and regulations also plays a
significant role in Pacific Lumber's business. The California Forest Practice
Act (the "FOREST PRACTICE ACT") and related regulations adopted by the
California Board of Forestry and Fire Protection (the "BOF") set forth detailed
requirements for the conduct of timber harvesting operations in California.
These requirements include the obligation of timber companies to obtain
regulatory approval of detailed THPs containing information with respect to
areas proposed to be harvested (see "--Harvesting Practices" above). California
law also requires large timber companies submitting THPs to demonstrate that
their proposed timber operations will not decrease the sustainable productivity
of their timberlands. See "--Timber and Timberlands" above. The federal
Endangered Species Act (the "ESA") and California Endangered Species Act (the
"CESA") provide in general for the protection and conservation of specifically
listed wildlife and plants which have been declared to be endangered or
threatened. These laws generally prohibit the take of certain species, except
for incidental takes pursuant to otherwise lawful activities which do not
jeopardize the continued existence of the affected species and which are made in
accordance with an approved habitat conservation plan and related incidental
take permits. A habitat conservation plan, among other things, analyzes the
potential impact of the incidental take of species and specifies measures to
monitor, minimize and mitigate such impact. The operations of Pacific Lumber are
also subject to the California Environmental Quality Act (the "CEQA"), which
provides for protection of the state's air and water quality and wildlife, and
the California Water Quality Act and federal Clean Water Act, which require that
Pacific Lumber conduct its operations so as to reasonably protect the water
quality of nearby rivers and streams. Compliance with such laws, regulations and
judicial and administrative interpretations, together with other regulatory and
environmental matters, have resulted in restrictions on the scope and timing of
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. Streamside buffers and
retrictions related to potential landslide prone acres may be adjusted up or
down, subject to certain minimum and maximum buffers, based upon an ongoing
watershed analysis process, which the HCP requires be completed within five
years of its effective date. The first analysis by the Company of a watershed,
Freshwater, was released in June 2001. This analysis was used by the Company to
develop proposed harvesting prescriptions. Because the Company and the
government agencies were unable to reach agreement on the appropriate
prescriptions, the matter is being reviewed by an independent panel of
scientists. Analyses for two additional watersheds are currently undergoing
agency review. Pacific Lumber and the agencies are working to streamline the
watershed analysis process prior to beginning up to two more watershed studies
in 2002.

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

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

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

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

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

ALUMINUM OPERATIONS

   GENERAL

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

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

   REORGANIZATION PROCEEDINGS

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

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

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

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


                                                                                      Consolidation/
                                                                                       Elimination
                                                         Debtors       non-Debtors       Entries      Consolidated
                                                      -------------  ---------------  -------------  --------------
                                                                              (In millions)
                                                                     ---------------  -------------  --------------

Net sales...........................................  $    1,252.8   $        592.7   $     (112.8)  $     1,732.7
Operating income....................................          66.0             11.3          (12.4)           64.9
Net income (loss)...................................        (445.9)            11.7          (25.2)         (459.4)

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

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

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

   SUMMARY OF BUSINESS OPERATIONS

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


                                                       Sources(1)                    Uses(1)
                                              ---------------------------- --------------------------

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

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

   BUSINESS OPERATIONS

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

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

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


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

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

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

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



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

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

      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. Construction at the facility was
substantially completed during the third quarter of 2001. During the first nine
months of 2001, the plant operated at approximately 68% of its newly rated
estimated annual capacity of 1,250,000 tons. During the fourth quarter of 2001,
the plant operated at approximately 90% of its newly-rated capacity. By the end
of February 2002, the plant was operating at just below 100% of its newly-rated
capacity. The facility is now focusing its efforts on achieving its full
operating efficiency. 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, 2001:


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

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

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

(1)  Production was completely curtailed during 2001.

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

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

      Also, during October 2000, Kaiser signed a new power contract with the BPA
under which the BPA will provide Kaiser's operations in the State of Washington
with up to approximately 290 megawatts of power through September 2006. The
contract provides Kaiser with sufficient power to fully operate the Flat-Rolled
Products Business Unit's Trentwood facility (which requires up to an approximate
40 megawatts) as well as approximately 40% of the combined capacity of Kaiser's
Mead and Tacoma smelting operations. The BPA has announced that it currently
intends to set rates under the contract in six month increments. The rate for
the initial period (from October 1, 2001 through March 31, 2002) was
approximately 46% higher than power costs under the prior contract. Power prices
for the April 2002 through the September 2002 period are essentially unchanged
from the prior six-month period. Kaiser cannot predict what rates will be
charged in future periods. 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 began (starting with the year ended December 31, 2000)
reporting its primary aluminum-related hedging activities as a separate segment.
Primary aluminum-related hedging activities are managed centrally on behalf of
all of Kaiser's business segments to minimize transaction costs, monitor
consolidated net exposures and to allow for increased responsiveness to changes
in market factors. Because the agreements underlying Kaiser's hedging positions
provided that the counterparties to the hedging contracts could liquidate
Kaiser's hedging positions if Kaiser filed for reorganization, Kaiser chose to
liquidate these positions in advance of the Filing Date. Gains or losses
associated with these liquidated positions have been deferred and are being
recognized over the original hedging periods as the underlying purchases/sales
are still expected to occur. Kaiser anticipates that, subject to the approval of
the Court and prevailing economic conditions, it may, reinstitute an active
hedging program to protect the interests of its constituents. However, no
assurance can be given as to when or if the appropriate Court approval will be
obtained or when or if such hedging activities will restart. 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.

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

      During 2000, KACC shifted the product mix of its Trentwood rolling mill
toward higher value-added product lines, and exited beverage can body stock,
wheel and common alloy products in an effort to enhance its profitability.
Kaiser continues to reassess the product mix of its Trentwood rolling mill, and
has concluded that the business unit's profitability can be enhanced by further
focusing resources on its core, heat-treat business and by exiting lid and tab
stock product lines used in the beverage container market and brazing sheet for
the automotive market.

      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 facilities in Chandler, Arizona, and Richmond, Virginia.

      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
markets fabricated aluminum products it manufactures in the United States and
abroad. Sales are made directly and through distributors to a large number of
customers. Competition in the sale of fabricated products is based upon quality,
availability, price and service, including delivery performance. Kaiser
concentrates its fabricating operations on selected products in which it
believes it has production expertise, high-quality capability, and geographic
and other competitive advantages. Kaiser believes that, assuming the current
relationship between worldwide supply and demand for alumina and primary
aluminum does not change materially, the loss of any one of Kaiser's customers,
including intermediaries, would not have a material adverse effect on its
financial condition or results of operations. 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, 2001, a total of
approximately $116.6 million of asbestos-related settlements and defense costs
were paid and partial insurance reimbursements for asbestos-related matters
totaling approximately $90.3 million were received. 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, 2001. 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. On September 26, 2001, the plaintiffs sent
Pacific Lumber a 60 day notice alleging that Pacific Lumber continues to violate
the CWA by discharging pollutants into certain waterways. Pacific Lumber has
taken certain remedial actions since its receipt of the notice. The Company
believes that it has strong factual and legal defenses with respect to the ERF
lawsuit; however, there can be no assurance that it will not have a material
adverse effect on its financial position, results of operations or liquidity.

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

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

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

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 Liability 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, 23,443,953
shares of the common stock of Kaiser owned by the Company 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 8 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 primarily in forest products
operations. In addition, the Company added real estate operations to its
business with the June 2001 acquisition of Lake Pointe Plaza, an office complex
located in Sugar Land, Texas. The Company's forest products business is somewhat
seasonal, and its net sales have been historically higher in the months of April
through November than in the months of December through March. Management
expects that this segment's revenues and cash flows will continue to be somewhat
seasonal. Accordingly, the segment's results for any one quarter are not
necessarily indicative of results to be expected for the full year. Real estate
operations do not have any seasonality elements impacting the quarterly results.

      Regulatory and environmental matters play a significant role in the
Company's forest products operations. See Item 1. "Business--Forest Products
Operations--Regulatory and Environmental Factors" and Note 12 to the
Consolidated Financial Statements for a discussion of these matters. Regulatory
compliance and related litigation have caused delays in obtaining approvals of
THPs and delays in harvesting on THPs once they are approved. This has resulted
in a decline in harvest, an increase in the cost of logging operations, and
lower net sales.

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

      While the Company has experienced recent improvements in the THP approval
process, there can be no assurance that Pacific Lumber will not in the future
have difficulties in receiving approvals of its THPs similar to those
experienced in the past. Furthermore, there can be no assurance that certain
pending legal, regulatory and environmental matters or future governmental
regulations, legislation or judicial or administrative decisions, adverse
weather conditions or low selling prices, would not have a material adverse
effect on the Company's financial position, results of operations or liquidity.
See Item 3. "Legal Proceedings" and Note 12 to the Consolidated Financial
Statements for further information regarding regulatory and legal proceedings
affecting the Company's operations.

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

      The Company owns 27,938,250 shares of Kaiser common stock (the "KAISER
SHARES") representing a 34.6% interest in Kaiser on a fully diluted basis as of
December 31, 2001. The Company follows the equity method of accounting for its
investment in Kaiser. As a result of losses reported by Kaiser in 2001, the
Company's investment in Kaiser was zero as of December 31, 2001. On February 12,
2002, Kaiser filed a voluntary petition for reorganization under Chapter 11 of
the Code in the Court. As a result of such filing, the Company will account for
its investment in Kaiser under the cost method beginning in the first quarter of
2002 with no further recognition of equity in earnings or losses until such time
as the shares are disposed of or a plan of reorganization is implemented. See
Notes 2 and 7 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, 2001, 2000 and 1999:


                                                       YEARS ENDED DECEMBER 31,
                                                    ------------------------------
                                                      2001      2000       1999
                                                    --------- ---------  ---------
                                                       (IN MILLIONS OF DOLLARS,
                                                     EXCEPT SHIPMENTS AND PRICES)
                                                    --------- ---------  ---------
Shipments:
   Lumber: (1)
      Redwood upper grades........................      16.2      15.8       24.6
      Redwood common grades.......................     165.0     143.8      137.4
      Douglas-fir upper grades....................       8.8      11.5       10.4
      Douglas-fir common grades...................      50.5      76.1       61.5
      Other.......................................       3.9       5.9        8.7
                                                    --------- ---------  ---------
        Total lumber..............................     244.4     253.1      242.6
                                                    ========= =========  =========
   Wood chips (2).................................     104.9     169.5      163.7
                                                    ========= =========  =========

Average sales price:
   Lumber: (3)
      Redwood upper grades........................  $  1,770  $  1,798   $  1,531
      Redwood common grades.......................       577       712        629
      Douglas-fir upper grades....................     1,323     1,352      1,290
      Douglas-fir common grades...................       337       376        430
   Wood chips (4).................................        64        67         77

Net sales:
   Lumber, net of discount........................  $  152.2  $  175.3   $  165.3
   Logs...........................................      10.6       3.5        0.3
   Wood chips.....................................       6.8      11.3       12.5
   Cogeneration power.............................      11.7       6.0        3.8
   Other..........................................       4.0       4.0        5.9
                                                    --------- ---------  ---------
      Total forest products.......................     185.3     200.1      187.8
   Real estate....................................       4.4         -          -
                                                    --------- ---------  ---------
      Total net sales.............................  $  189.7  $  200.1   $  187.8
                                                    ========= =========  =========
Operating income (loss) (6).......................  $  (26.5) $    7.3   $   (4.4)
                                                    ========= =========  =========
Operating cash flow (5)...........................  $   (2.3) $   27.0   $   12.6
                                                    ========= =========  =========
Income (loss) before income taxes(7)..............  $  (80.9) $   39.3   $  177.9
                                                    ========= =========  =========
Net income (loss)(8)..............................  $  (72.9) $   30.1   $  100.0
                                                    ========= =========  =========
- --------------------

(1)   Lumber shipments are expressed in millions of board feet.
(2)   Wood chip shipments are expressed in thousands of bone dry units of 2,400
      pounds.
(3)   Dollars per thousand board feet.
(4)   Dollars per bone dry unit.
(5)   Operating income before depletion and depreciation and asset impairment
      charges, also referred to as "EBITDA."
(6)   Operating loss for 2001 includes unusual charges totalling $8.2 million.
      See Note 2 to the Consolidated Financial Statements for further discussion.
(7)   In addition to the special charges referred to in (6), 2001 results
      include a $16.7 million gain on the sale of the Grizzly Creek grove; 2000
      results include a $60.0 million gain on the sale of the Owl Creek grove;
      1999 results include a $239.8 million gain on the sale of the Headwaters
      Timberlands.
(8)   2001 and 2000 results include extraordinary gains of $3.6 million and
      $4.2 million, respectively, net of tax, on the repurchases of debt.

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

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

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

      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.

      Income (Loss) Before Income Taxes
      In addition to the operating income (loss) discussed above, results for
2001, 2000 and 1999 were impacted by gains on sales of timberlands and equity in
earnings (losses) from Kaiser.


                                                            YEARS ENDED DECEMBER 31,
                                                         ------------------------------
                                                           2001      2000       1999
                                                         --------- ---------  ---------
                                                             IN MILLIONS OF DOLLARS
Operating income (loss)................................  $  (26.5) $    7.3   $   (4.4)
Gains on sales of timberlands..........................      16.7      60.0      239.8
Equity in earnings (losses) of Kaiser..................     (27.6)      5.9      (19.2)
Interest expense and other income (expense), net.......     (43.5)    (33.9)     (38.3)
                                                         --------- ---------  ---------
Income (loss) before income taxes......................  $  (80.9) $   39.3   $  177.9
                                                         ========= =========  =========

      2001 included a $16.7 million gain on the sale of a portion of the Grizzly
Creek grove ($9.9 million net of deferred taxes), 2000 included a gain on the
sale of the Owl Creek grove of $60.0 million ($35.6 million net of deferred
taxes), and 1999 included a gain on the sale of the Headwaters Timberlands of
$239.8 million ($142.1 million net of deferred taxes). The loss from Kaiser in
2001 was in large part due to valuation allowances on Kaiser's deferred tax
assets. See Notes 2 and 7 to the Consolidated Financial Statements for further
discussion of the Company's investment in Kaiser.

      Benefit in Lieu of Income Taxes
      The effective benefit in lieu of income taxes differs from the statutory
rate primarily due to changes in valuation allowances on deferred tax assets,
the exclusion of equity in earnings (loss) of Kaiser from taxable income,
and the disallowance of a portion of the Company's net operating loss
carryforwards for state tax purposes.

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 8 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.



                                                                                   MGI,
                                                                                 akepointe
                                                         Scotia      Pacific    Lssets and     MGHI
                                                          LLC        Lumber     A 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, 2001 (1).............................  $    14.9   $     17.8   $     2.8   $       -   $     35.5
   December 31, 2000.................................       14.2         37.1           -           -         51.3

Long-term debt, excluding current maturities:
   December 31, 2001(1)..............................  $   754.5   $      0.5   $   119.5   $    88.2   $    962.7
   December 31, 2000.................................      769.4          0.6           -       118.8        888.8

Revolving credit facilities:
   Facility amounts..................................  $    60.9   $     50.0   $     2.5   $       -   $    113.4
   December 31, 2001:
      Borrowings.....................................          -         17.7         0.6           -         18.3
      Letters of credit..............................          -         11.5           -           -         11.5
      Unused and available credit....................       60.9         12.2         1.9           -         75.0

Cash, cash equivalents, marketable securities and
   other investments
December 31, 2001:
   Current amounts restricted for debt service.......  $    35.3   $       -    $     0.1   $       -   $     35.4
   Other current amounts.............................       19.6          2.3        26.6        35.7         84.2
                                                       ----------  -----------  ----------  ----------  -----------
                                                            54.9          2.3        26.7        35.7        119.6
                                                       ----------  -----------  ----------  ----------  -----------

   Long-term amounts restricted for debt service.....       87.6            -           -           -         87.6
   Other long-term restricted amounts................         -             -         2.2           -          2.2
                                                       ----------  -----------  ----------  ----------  -----------
                                                            87.6            -         2.2           -         89.8
                                                       ----------  -----------  ----------------------  -----------
                                                       $   142.5   $      2.3   $    28.9   $    35.7   $    209.4
                                                       ==========  ===========  ==========  ==========  ===========

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.....       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
                                                       ==========  ===========  ==========  ==========  ===========





                                                                                   MGI,
                                                                                Lakepointe
                                                         Scotia     Pacific     Assets and     MGHI
                                                          LLC        Lumber       Other       PARENT       TOTAL
                                                       ----------  ----------   ----------  ----------- -----------
                                                                             (IN MILLIONS)
Changes in cash and cash equivalents Capital
   expenditures:
   December 31, 2001(1)..............................  $     6.2   $     5.9    $   132.6   $        -  $    144.7
   December 31, 2000.................................        8.2         4.1          1.7            -        14.0
   December 31, 1999.................................       19.2         2.6          1.3            -        23.1

Proceeds from dispositions of property and
   investments:
   December 31, 2001 (2).............................  $     1.3   $    18.5    $       -   $        -  $     19.8
   December 31, 2000(2)..............................       67.0         0.3            -            -        67.3

Borrowings (repayments)of debt and credit
   facilities, net of financing costs:
   December 31, 2001(1)..............................  $   (14.2)  $   (19.5)   $   117.1   $    (25.1) $     58.3
   December 31, 2000(1)..............................      (16.0)       37.0            -         (5.8)       15.2
   December 31, 1999(1)..............................       (9.0)       (0.1)        (4.7)           -       (13.8)

Dividends and advances received (paid):
   December 31, 2001(3)..............................  $   (79.9)  $    89.2    $   (26.4)  $     17.1  $        -
   December 31, 2000(3)..............................          -        23.7       (132.1)        63.4       (45.0)
   December 31, 1999.................................          -           -        (18.7)        18.7           -

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

(1)     The increase in debt and capital expenditures for MGI and other
        subsidiaries is attributable to the Lake Pointe Plaza acquisition and
        related borrowings described in Note 3 to the Consolidated Financial
        Statements. The decrease in Scotia LLC's long-term debt between December
        31, 2000, and December 31, 2001, was the result of principal payments on
        the Timber Notes of $14.2 million during the year ended December 31,
        2001. The increase in long-term debt for MGI, Lakepointe Assets and
        Other between 2000 and 2001 was due primarily to borrowings made in
        connection with the purchase of the Lake Pointe Plaza complex. The
        decrease in MGHI Parent's long-term debt between December 31, 2000 and
        December 31, 2001, and the repayments reflected in 2001 and 2000 are the
        result of repurchases of debt. 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)     Proceeds from dispositions of property and investments include $19.8
        million in 2001 for Pacific Lumber's sale of a portion of the Grizzly
        Creek grove, $67.0 million in 2000 for Scotia LLC's sale of the Owl
        Creek grove, and $299.9 million in 1999 for Pacific Lumber's sale of the
        Headwaters Timberlands.
(3)     For the year ended December 31, 2001, $79.9 million of dividends were
        paid by Scotia LLC to Pacific Lumber, $63.9 million of which was made
        using proceeds from the sale of Scotia LLC's Owl Creek grove. In
        addition to the $79.9 million of dividends from Scotia LLC, Pacific
        Lumber received $9.3 million from MGI related to repayment of
        intercompany debt. For the year ended December 31, 2000, $90.0 million
        of the dividends paid from MGI to MGHI were made using proceeds from the
        sale of the Headwaters Timberlands. MGHI in turn paid a $45.0 million
        dividend to MAXXAM Parent.

      Subsequent to December 31, 2001, the Company repurchased $16.9 million of
the MGHI Notes, resulting in an extraordinary gain of $1.9 million (net of tax).
The Company expects that interest payments on the remaining $71.3 million of
MGHI Notes will be paid with its existing cash and/or payments on the MAXXAM
Note.

      The Company owns 27,938,250 shares of the common stock of Kaiser,
representing a 34.6% interest. As a result of Kaiser filing for bankruptcy on
February 12, 2002, the value of Kaiser common stock has declined since December
31, 2001, and the market value of the Kaiser shares owned by the Company based
on the price per share quoted at the close of business on April 10, 2002, was
$3.9 million. There can be no assurance that such value would be realized should
the Company dispose of its investment in these shares, and it is possible that
all or a portion of the Company's interest may be diluted or cancelled as a part
of a plan of reorganization.

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

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

      Scotia LLC has an agreement with a group of banks which allows it to
borrow up to one year's interest on the Timber Notes (the "SCOTIA LLC LINE OF
CREDIT"). On June 1, 2001, this facility was extended for an additional year
to July 12, 2002. At December 31, 2001, Scotia LLC could have borrowed a maximum
of $60.9 million under the Line of Credit, and there were no borrowings
outstanding under the Line of Credit. Annually, Scotia LLC will request that the
Scotia LLC Line of Credit be extended for a period of not less than 364 days. If
not extended, Scotia LLC may draw upon the full amount available. The amount
drawn would be repayable in 12 semiannual installments on each note payment date
(after the payment of certain other items, including the Aggregate Minimum
Principal Amortization Amount, as defined, then due), commencing approximately
two and one-half years following the date of the draw.

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

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

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

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

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

      Other capital expenditures were made during the past three years to
improve production efficiency, reduce operating costs and acquire additional
timberlands. Capital expenditures, excluding expenditures for timberlands and
real estate, are estimated to be between $8.0 million and $9.0 million per year
for the 2003 - 2005 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 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 payments by MAXXAM on the MAXXAM Note, should
be sufficient to meet its debt service and working capital requirements,
although there can be no assurance that this will be the case. MGHI Parent
expects MAXXAM to pay the amount of the MAXXAM Note necessary to retire the MGHI
Notes which are due in 2003. The regulatory and environmental matters described
under "--Background" above have adversely affected cash available from
subsidiaries and therefore the distributions to MGHI Parent. Distributions from
subsidiaries may continue to be minimal, if any, over the next one to two years.

      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
"--Background" above and Note 12 to the Consolidated Financial Statements),
increased competition from other lumber producers or alternative building
products and general economic conditions.

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

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

CRITICAL ACCOUNTING POLICIES

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

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

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

      Loss Contingencies
      The Company is involved in various claims, lawsuits and other proceedings
discussed in Note 12 to the financial statements. Such litigation involves
uncertainty as to possible losses to the Company that will ultimately be
realized when one or more future events occur or fail to occur. The Company
accrues and charges to income estimated losses from contingencies when it is
probable (at the balance sheet date) that an asset has been impaired or
liability incurred and the amount of loss can be reasonably estimated.
Differences between estimates recorded and actual amounts determined in
subsequent periods are treated as changes in accounting estimates (i.e., they
are reflected in the financial statements in the period in which they are
determined to be losses, with no retroactive restatement).

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

      Impairment of Noncurrent Assets
      The Company recorded charges of $2.2 million in 2001 to write-down the
carrying amount of certain mills, machinery and equipment to estimated fair
value (see Note 2 to the Consolidated Financial Statements). The Company reviews
noncurrent assets for impairment when circumstances indicate that the carrying
amount of such assets may not be recoverable. Impairment is indicated if the
expected total undiscounted future cash flows are less than the carrying amount
of the assets. Assets are written down to fair value and a loss is recognized
upon impairment. Fair value increases on assets previously written down for
impairment losses are not recognized.

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

      Deferred Tax Asset Valuation Allowances
      As of December 31, 2001, the Company had $13.9 million of net deferred tax
liabilities. The deferred tax assets and liabilities reported in the Company's
balance sheet reflect the amount of taxes that the Company has prepaid or
received a tax benefit for (an asset) or will have to pay in the future (a
liability) because of temporary differences that result from differences in
timing of revenue recognition or expense deductibility between generally
accepted accounting principles and the Internal Revenue Code. Accounting rules
require that a deferred tax asset be reduced by a valuation allowance if, based
on the weight of available evidence, it is more likely than not (a likelihood of
more than 50%) that some portion or all of the deferred tax asset will not be
realized. The Company considers all available evidence, both positive and
negative, to determine whether a valuation allowance is needed. The need for a
valuation allowance ultimately depends on the existence of sufficient taxable
income necessary to receive the benefit of a future deductible amount.

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

      Uncertainties that might exist with respect to the realization of the
Company's deferred tax assets relate to future taxable income. See Note 9 to the
Consolidated Financial Statements for further discussion of the Company's
valuation allowances on deferred tax assets.

NEW ACCOUNTING PRONOUNCEMENTS

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


ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

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

                                                          ARTHUR ANDERSEN LLP


San Francisco, California
March 28, 2002


                   MAXXAM GROUP HOLDINGS INC. AND SUBSIDIARIES

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


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

Current assets:
   Cash, cash equivalents and restricted cash.............................................  $    66.0   $    201.7
   Marketable securities..................................................................       53.6         28.9
   Receivables:
      Trade...............................................................................       12.5         10.4
      Receivables from MAXXAM Inc.........................................................        8.5          6.6
      Other...............................................................................        2.1          4.0
   Inventories............................................................................       51.4         55.1
   Prepaid expenses and other current assets..............................................       17.5         14.2
                                                                                            ----------  -----------
        Total current assets..............................................................      211.6        320.9
Property, plant and equipment, net of accumulated depreciation of $100.1 and
   $102.9, respectively...................................................................      224.9        100.0
Timber and timberlands, net of accumulated depletion of $193.7 and $183.8,
   respectively...........................................................................      235.0        244.3
Note receivable from MAXXAM...............................................................      183.1        164.5
Investment in Kaiser......................................................................          -         27.6
Deferred financing costs, net.............................................................       22.8         19.8
Deferred income taxes.....................................................................       13.4         27.3
Restricted cash, marketable securities and other investments..............................       89.8         96.6
Other assets..............................................................................        6.8          7.9
                                                                                            ----------  -----------
                                                                                            $   987.4   $  1,008.9
                                                                                            ==========  ===========

LIABILITIES AND STOCKHOLDER'S DEFICIT:

Current liabilities:
   Accounts payable.......................................................................  $     5.7   $      6.2
   Accrued interest.......................................................................       30.5         32.4
   Accrued compensation and related benefits..............................................       12.4          8.2
   Deferred income taxes..................................................................        6.8         10.0
   Other accrued liabilities..............................................................        8.0          3.6
   Short-term borrowings and current maturities of long-term debt, excluding $2.3 and
      $2.2, respectively, of repurchased Timber Notes held in the SAR Account.............       35.5         51.3
                                                                                            ----------  -----------
        Total current liabilities.........................................................       98.9        111.7
Long-term debt, less current maturities and excluding $55.4 and $57.7, respectively, of
   repurchased Timber Notes held in the SAR Account.......................................      962.7        888.8
Deferred income taxes.....................................................................       19.5         31.2
Other noncurrent liabilities..............................................................       28.3         26.6
                                                                                            ----------  -----------
        Total liabilities.................................................................    1,109.4      1,058.3
                                                                                            ----------  -----------

Contingencies (See Note 12)

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....................................................................     (245.5)      (172.6)
   Accumulated other comprehensive income.................................................        0.3            -
                                                                                            ----------  -----------
        Total stockholder's deficit.......................................................     (122.0)       (49.4)
                                                                                            ----------  -----------
                                                                                            $   987.4   $  1,008.9
                                                                                            ==========  ===========
   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,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Net sales:
   Lumber and logs............................................................  $   162.8   $   178.8   $    165.5
   Other......................................................................       26.9        21.3         22.3
                                                                                ----------  ----------  -----------
                                                                                    189.7       200.1        187.8
                                                                                ----------  ----------  -----------

Operating expenses:
   Cost of goods sold.........................................................      164.3       157.4        159.5
   Selling, general and administrative expenses...............................       21.7        15.7         15.7
   Special charges............................................................        8.2          -             -
   Depletion and depreciation.................................................       22.0        19.7         17.0
                                                                                ----------  ----------  -----------
                                                                                    216.2       192.8        192.2
                                                                                ----------  ----------  -----------

Operating income (loss).......................................................      (26.5)        7.3         (4.4)

Other income (expense):
   Gains on sales of timberlands..............................................       16.7        60.0        239.8
   Equity in earnings (loss) of Kaiser........................................      (27.6)        5.9        (19.2)
   Investment, interest and other income (expense), net.......................       33.5        45.6         44.5
   Interest expense...........................................................      (77.0)      (79.5)       (82.8)
                                                                                ----------  ----------  -----------
Income (loss) before income taxes.............................................      (80.9)       39.3        177.9
Benefit (provision) in lieu of income taxes...................................        4.4       (13.4)       (77.9)
                                                                                ----------  ----------  -----------

Income (loss) before extraordinary items......................................      (76.5)       25.9        100.0
Extraordinary items:
   Gains on repurchases of debt, net of provision in lieu of income
      taxes of $2.0 and $2.4, respectively....................................        3.6         4.2            -
                                                                                ----------  ----------  -----------
Net income (loss).............................................................  $   (72.9)  $    30.1   $    100.0
                                                                                ==========  ==========  ===========

   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, 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)
   Net loss...................................          -          -      (72.9)          -      (72.9)  $   (72.9)
   Change in value of available-for-sale
      investments.............................          -          -          -         0.3        0.3         0.3
                                                                                                         ----------
   Comprehensive loss.........................                                                           $   (72.6)
                                                ---------- ----------  ---------  ----------  ---------  ==========
Balance, December 31, 2001....................  $       -  $   123.2   $ (245.5)  $     0.3   $ (122.0)
                                                ========== ==========  =========  ==========  =========

   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)


                                                                                         YEARS ENDED DECEMBER 31,
                                                                                       ----------------------------
                                                                                         2001      2000      1999
                                                                                       --------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss).................................................................. $  (72.9)     30.1  $ 100.0
   Adjustments to reconcile net income (loss) to net cash provided by (used for)
      operating activities:
      Depletion and depreciation......................................................     22.0      19.7     17.0
      Non-cash special charges........................................................      7.6         -        -
      Gains on sales of timberlands...................................................    (16.7)    (60.0)  (239.8)
      Extraordinary gains on repurchases of debt......................................     (3.6)     (4.2)       -
      Equity in undistributed loss (earnings) of Kaiser...............................     27.6      (5.9)    19.2
      Amortization of deferred financing costs........................................      2.4       2.3      2.4
      Net gains on marketable securities..............................................     (2.1)    (15.1)   (11.5)
      Deferral of interest payment on note receivable from MAXXAM.....................    (18.6)    (16.7)   (15.0)
      other...........................................................................      7.0         -        -
   Increase (decrease) in cash resulting from changes in:
      Receivables.....................................................................     (1.5)     (1.5)    (2.8)
      Inventories, net of depletion...................................................      3.1     (12.2)    (2.1)
      Prepaid expenses and other assets...............................................     (2.3)     (3.3)    (2.8)
      Accounts payable................................................................     (0.7)      0.1      2.7
      Accrued interest................................................................     (1.9)     (2.1)    (0.3)
      Accrued and deferred income taxes...............................................     (5.7)     13.9     76.3
      Other liabilities...............................................................      1.3       0.1     (0.7)
      Long-term assets and long-term liabilities......................................      1.2       2.1     (2.1)
                                                                                       --------- --------- --------
        Net cash used for operating activities........................................    (53.8)    (52.7)   (59.5)
                                                                                       --------- --------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from dispositions of property and investments.............................     19.8      67.3    298.3
   Net sales (purchases) of marketable securities.....................................    (21.8)     30.5     (4.7)
   Capital expenditures...............................................................   (144.7)    (14.0)   (23.1)
   Restricted cash withdrawals used to acquire timberlands............................        -       0.8     12.9
                                                                                       --------- --------- --------
        Net cash provided by (used for) investing activities..........................   (146.7)     84.6    283.4
                                                                                       --------- --------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuances of long-term debt..........................................    122.5          -       -
   Borrowings (repayments) under revolving credit agreements..........................    (18.7)     37.0        -
   Redemptions, repurchases of and principal payments on long-term debt...............    (40.2)    (21.8)   (13.1)
   Incurrence of deferred financing costs.............................................     (5.3)        -     (0.7)
   Restricted cash withdrawals (deposits), net........................................      6.5       9.8   (171.1)
   Dividends paid to stockholder......................................................        -     (45.0)       -
                                                                                       --------- --------- --------
        Net cash provided by (used for) financing activities..........................     64.8     (20.0)  (184.9)
                                                                                       --------- --------- --------

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH.................   (135.7)     11.9     39.0
CASH, CASH EQUIVALENTS AND RESTRICTED CASH  AT BEGINNING OF YEAR......................    201.7     189.8    150.8
                                                                                       --------- --------- --------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR............................. $   66.0  $  201.7  $ 189.8
                                                                                       ========= ========= ========


   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.

      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"). Salmon Creek's wholly
owned subsidiary is Lakepointe Assets Holdings LLC ("LAKEPOINTE ASSETS"). MGI's
core business is 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, MGI is engaged in commercial real estate ownership
and leasing through Lakepointe Assets.

      In addition, the Company has 27,938,250 shares of the common stock of
Kaiser Aluminum Corporation ("KAISER") which represented a 34.6% equity interest
in Kaiser at December 31, 2001.

      Liquidity and Cash Resources
      Pacific Lumber's 2001 cash flows from operations were adversely affected
by operating inefficiencies, lower lumber prices, an inadequate supply of logs
and a related slowdown in lumber production. During 2001, comprehensive external
and internal reviews were conducted of Pacific Lumber's business operations.
These reviews were an effort to identify ways in which Pacific Lumber could
operate on a more efficient and cost effective basis. Based upon the results of
these reviews, Pacific Lumber, among other things, indefinitely idled two of its
four sawmills, eliminated certain of its operations, including its soil
amendment and concrete block activities, has began utilizing more efficient
harvesting methods and adopted certain other cost saving measures. Most of these
changes were implemented by Pacific Lumber in the last quarter of 2001, or the
first quarter of 2002. Pacific Lumber also ended its internal logging operations
as of April 1, 2002, and intends to rely exclusively on third party contract
loggers to conduct these activities in the future. The adverse impact on
liquidity of its poor operating results was offset by $79.9 million in
distributions made by Scotia LLC to Pacific Lumber (principally from the sale of
the Owl Creek grove), $9.3 million in repayments on an intercompany loan by MGI,
and $18.5 million of proceeds received from the sale of a portion of the Grizzly
Creek grove. The $29.4 million release from the SAR Account discussed in Note 4
will also improve Pacific Lumber's liquidity. However, Pacific Lumber may
require funds available under the Pacific Lumber Credit Agreement, additional
repayments by MGI of an intercompany loan and/or capital contributions from MGI
to enable it to meet its working capital and capital expenditure requirements
for the next year.

      With respect to long-term liquidity, although the Company and its
subsidiaries expect that their existing cash and cash equivalents, lines of
credit and ability to generate cash flows from operations should provide
sufficient funds to meet their debt service 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.

   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
12 could differ materially from current estimates. The results of an adverse
resolution of such uncertainties could have a material effect on the Company's
consolidated financial position, results of operations or liquidity.

   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      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 quantities. Periodically, the Company will reassess its
depletion rates considering currently estimated merchantable timber and will
adjust depletion rates prospectively.

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

      The Company had three customers which accounted for 15%, 3% and 3%,
respectively, of total net lumber sales for the year ended December 31, 2001.
Trade receivables from these customers totaled $1.3 million as of December 31,
2001.

      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. Rental revenue on operating leases
is recognized on a straight-line basis over the term of the lease.

      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
      Effective January 1, 2001, Kaiser began reporting derivative activities
pursuant to Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities" ("SFAS NO. 133"), which
requires companies to recognize all derivative instruments as assets or
liabilities in the balance sheet and to measure those instruments at fair value.
Kaiser, the Company's equity investee, utilizes derivative financial instruments
primarily to mitigate its exposure to changes in prices for certain of the
products which Kaiser sells and consumes and, to a lesser extent, to mitigate
its exposure to changes in foreign currency exchange rates. Changes in the
market value of Kaiser's derivative instruments represent unrealized gains or
losses. Such unrealized gains or losses will fluctuate, based on prevailing
market prices at each subsequent balance sheet date, until the transaction
occurs. Under SFAS No. 133, these changes are recorded as an increase or
reduction in stockholders' equity through either other comprehensive income or
net income, depending on the facts and circumstances with respect to the hedge
and its documentation. To the extent that changes in the market values of
Kaiser's hedging positions are initially recorded in other comprehensive income,
such changes are reversed from other comprehensive income (offset by any
fluctuations in other "open" positions) and are recorded in 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 net income, as appropriate.

      SFAS No. 133 requires that, as of the date of 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 was reflected in Kaiser's first quarter 2001 financial
statements, and in turn the Company's equity share of the impact was recorded in
its first quarter 2001 financial statements. Because the losses in 2001
attributable to Kaiser reduced the Company's investment to zero, no additional
amounts relating to Kaiser's derivative activities were recorded by the Company
in 2001.

      Investment in Kaiser
      The Company's investment in Kaiser consists of a 34.6% equity interest at
December 31, 2001. As of December 31, 2001, the Company's investment in Kaiser
was accounted for under the equity method. On February 12, 2002, Kaiser filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code. As a
result of such filing, the Company will account for its investment in Kaiser
under the cost method beginning in the first quarter of 2002. See Notes 2 and 7
for further discussion of the Company's investment in Kaiser.

      NEW ACCOUNTING STANDARDS
      In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS NO. 143") which
addresses accounting and reporting standards for obligations associated with the
retirement of tangible long-lived assets and the related asset retirement costs.
The Company is required to adopt SFAS No. 143 beginning on January 1, 2003. In
general, SFAS No. 143 requires the recognition of a liability resulting from
anticipated asset retirement obligations, offset by an increase in the value of
the associated productive asset for such anticipated costs. Over the life of the
asset, depreciation expense is to include the ratable expensing of the
retirement cost included with the asset value. The statement applies to all
legal obligations associated with the retirement of a tangible long-lived asset
that results from the acquisition, construction, or development and (or) the
normal operation of a long-lived asset, except for certain lease obligations.
Excluded from this statement are obligations arising solely from a plan to
dispose of a long-lived asset and obligations that result from the improper
operation of an asset (e.g. environmental obligations). The Company is
continuing its evaluation of SFAS No. 143. However, the Company does not
currently expect the adoption of SFAS No. 143 to have a material impact on its
future financial statements.

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

2.    SEGMENT INFORMATION AND SPECIAL CHARGES

      As a result of the acquisition of certain real estate in June 2001 which
is described in Note 3 below, and beginning with the second quarter 2001
financial statements, the Company's financial results are reported in two
business segments: forest products and real estate. The column corporate and
other includes the results of the parent company and the investment in Kaiser,
and also serves to reconcile the total of the reportable segments' amounts to
the total in the Company's consolidated financial statements. The following
table presents such financial information, consistent with the manner in which
management reviews and evaluates the Company's business activities (in
millions).



                                                            FOREST       REAL     Corporate    CONSOLIDATED
                                             DECEMBER 31,  PRODUCTS     ESTATE    AND OTHER        TOTAL
                                             ------------ -----------  --------- ------------ --------------
Net sales                                        2001     $    185.3   $    4.4  $         -         $189.7
                                                 2000          200.1          -            -          200.1
                                                 1999          187.8          -            -          187.8

Operating income (loss)                          2001          (27.5)       1.6         (0.6)         (26.5)
                                                 2000            7.6          -         (0.3)           7.3
                                                 1999           (4.1)         -         (0.3)          (4.4)

Investment, interest and
   other income (expense), net                   2001           11.3          -         22.2           33.5
                                                 2000           20.5          -         25.1           45.6
                                                 1999           26.9          -         17.6           44.5

Interest expense                                 2001           60.1        4.9         12.0           77.0
                                                 2000           64.2          -         15.3           79.5
                                                 1999           66.5          -         16.3           82.8

Depletion and depreciation                       2001           19.4        2.6            -           22.0
                                                 2000           19.7          -            -           19.7
                                                 1999           17.0          -            -           17.0

Income (loss) before income taxes                2001          (59.6)      (3.3)       (18.0)         (80.9)
                                                 2000           23.9          -         15.4           39.3
                                                 1999          196.1          -        (18.2)         177.9

Capital expenditures                             2001           13.4      131.3            -          144.7
                                                 2000           14.0          -            -           14.0
                                                 1999           23.1          -            -           23.1

Investment in Kaiser                             2001              -          -            -              -
                                                 2000              -          -         27.6           27.6

Total assets                                     2001          610.8      133.7        242.9          987.4
                                                 2000          726.2          -        282.7        1,008.9

   SPECIAL CHARGES

      The strategic reviews of the Company's operations discussed in Note 1
resulted in impairment charges, restructuring charges and accruals for
environmental remediation costs.

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

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

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

      Other unusual items include pre-tax gains on the sale of a portion of the
Grizzly Creek grove of $16.7 million in November 2001, $60.0 million on the sale
of the Owl Creek grove in December 2000, and $239.8 million on the sale of the
Headwaters Timberlands in March 1999. See Note 3.

      On February 12, 2002, Kaiser filed a voluntary petition for reorganization
under Chapter 11 of the United States Federal Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware. As a result of such
filing, the Company will account for its investment in Kaiser under the cost
method beginning in the first quarter of 2002 with no further recognition of
equity in earnings or losses until such time as the shares are disposed of or a
plan of reorganization is implemented. See Note 7 for further information,
including summarized financial information of Kaiser.

3.    SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

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

      Headwaters Transactions
      In March 1999, the United States and California acquired approximately
5,600 acres of timberlands containing a significant amount of virgin old growth
timber, from Salmon Creek and Pacific Lumber (the "HEADWATERS TIMBERLANDS").
Salmon Creek received $299.9 million for its 4,900 acres, and for its 700 acres
Pacific Lumber received the 7,700 acre Elk River Timberlands, which Pacific
Lumber contributed to Scotia LLC in June 1999. See Note 12 below for a
discussion of additional arrangements entered into at that time.

      As a result of the disposition of the Headwaters Timberlands, the Company
recognized a pre-tax gain of $239.8 million ($142.1 million net of deferred
taxes) 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.
On November 15, 2001, Pacific Lumber sold a portion of the Grizzly Creek grove
to California for $19.8 million, resulting in a pre-tax gain of $16.7 million.

4.    CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS

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

      Marketable securities consist primarily of investments in debt securities.
The Company determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Debt securities are classified as "held-to-maturity" when
the Company has the positive intent and ability to hold the securities to
maturity. Debt securities which the Company does not have the intent or ability
to hold to maturity are classified as "available-for- sale." "Held-to-maturity"
securities are stated at amortized cost. Debt securities classified as
"held-to-maturity" as of December 31, 2001 and 2000, totaled $11.9 million and
$18.9 million, respectively, and had a fair market value of $11.9 million and
$18.9 million, respectively. "Available-for-sale" securities are carried at fair
market value, with the unrealized gains and losses included in other
comprehensive income and reported in 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, 2001 were: 2001
- - net realized losses of $0.5 million and net unrealized gains of $3.3 million;
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.

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


                                                                                               December 31,
                                                                                       ----------------------------
                                                                                           2001           2000
                                                                                       ------------- --------------
Current assets:
   Cash and cash equivalents:
      Amounts held as security for short positions in marketable securities..........  $          -  $         9.2
      Other restricted cash and cash equivalents.....................................          35.4           29.2
                                                                                       ------------- --------------
                                                                                               35.4           38.4
                                                                                       ------------- --------------
   Marketable securities, restricted:
      Amounts held in SAR Account....................................................          17.1           16.3
                                                                                       ------------- --------------

Long-term restricted cash, marketable securities and other investments:
   Amounts held in SAR Account.......................................................         137.8          144.4
   Other amounts restricted under the Timber Notes Indenture.........................           2.8            2.9
   Other long-term restricted cash...................................................           2.2            2.0
   Less:  Amounts attributable to Timber Notes held in SAR Account...................         (53.0)         (52.7)
                                                                                       ------------- --------------
                                                                                               89.8           96.6
                                                                                       ------------- --------------

Total restricted cash, marketable securities and other investments...................  $      142.3  $       151.3
                                                                                       ============= ==============

       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 8 for
further discussion on the SAR Account. The current portion of the SAR Account is
determined based on the liquidity needs of Scotia LLC which corresponds directly
with the current portion of Scheduled Amortization.

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

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


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

Investment in Equity Fund Partnership:
   Restricted.............................................   $       10.6    $        10.1
   Unrestricted...........................................           36.5               -
                                                             -------------   --------------
                                                             $       47.1    $        10.1
                                                             =============   ==============

Percentage of ownership held..............................           13.7%            10.8%
                                                             =============   ==============

       As of December 31, 2001, long-term restricted cash, marketable
securities, and other investments also included $5.1 million related to an
investment in a limited partnership which invests in debt and equity securities
associated with developed and emerging markets.

5.    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,
                                                 --------------------
                                                   2001       2000
                                                 ---------  ---------
Lumber.......................................... $   29.3   $   34.0
Logs............................................     22.1       21.1
                                                 ---------  ---------
                                                 $   51.4   $   55.1
                                                 =========  =========

      Inventories at December 31, 2001 have been reduced by a $1.6 charge (in
cost of goods sold) due to a decline in current market prices below the cost of
such inventory.

6.    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment, including capitalized interest, is stated
at cost, net of accumulated depreciation. Depreciation is computed principally
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets. The carrying value of property, plant
and equipment is assessed when events and circumstances indicate that an
impairment might exist. The existence of an impairment is determined by
comparing the net carrying value of the asset to its estimated undiscounted
future cash flows. If an impairment is present, the asset is reported at the
lower of carrying value or fair value. As discussed in Note 2, the Company
recorded $2.2 million for asset impairments in 2001. The major classes of
property, plant and equipment are as follows (dollar amounts in millions):


                                                            ESTIMATED         DECEMBER 31,
                                                                         -----------------------
                                                          USEFUL LIVES      2001        2000
                                                          -------------  ----------  -----------
Logging roads, land and improvements....................       15 years  $    61.2   $     41.6
Buildings...............................................       33 years      157.4         50.2
Machinery and equipment.................................   3 - 15 years      102.9        108.3
Construction in progress................................                       3.5          2.8
                                                                         ----------  -----------
                                                                             325.0        202.9
Less:  accumulated depreciation.........................                    (100.1)      (102.9)
                                                                         ----------  -----------
                                                                         $   224.9   $    100.0
                                                                         ==========  ===========

      Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $12.8 million, $10.4 million and $10.1 million, respectively.

7.    INVESTMENT IN KAISER

      As of April 10, 2002, the Company has 27,938,250 shares of the common
stock of Kaiser, of which 23,443,953 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. For 2001 and
prior years, the Company accounted for its investment in Kaiser using the equity
method. Kaiser's common stock is publicly traded on the OTC Bulletin Board under
the trading symbol "KLUCQ."

      On February 12, 2002, Kaiser filed a voluntary petition for reorganization
under Chapter 11 of the United States Bankruptcy Code. The necessity for
filing the Cases was attributable to the liquidity and cash flow problems of
Kaiser arising in late 2001 and early 2002. Kaiser was facing significant
near-term debt maturities at a time of unusually weak aluminum industry business
conditions, depressed aluminum prices and a broad economic slowdown that was
further exacerbated by the events of September 11, 2001. In addition, Kaiser had
become increasingly burdened by the asbestos litigation and growing legacy
obligations for retiree medical and pension costs. The confluence of these
factors created the prospect of continuing operating losses and negative cash
flow, resulting in lower credit ratings and an inability to access the capital
markets. As a result of Kaiser's Chapter 11 filing, the Company will account for
its investment in Kaiser under the cost method beginning in the first quarter of
2002 with no further recognition of equity in earnings or losses until such time
as the shares are disposed of or a plan of reorganization is implemented.

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

      The market value for the Kaiser Shares based on the price per share quoted
at the close of business on April 10, 2002 was $3.9 million. There can be no
assurance that such value would be realized should the Company dispose of its
investment in the Kaiser shares. The following tables contain summarized
financial information of Kaiser (in millions).


                                                                                       DECEMBER 31,
                                                                                  -----------------------
                                                                                     2001        2000
                                                                                  ----------  -----------
Current assets..................................................................  $   759.2   $  1,012.1
Property, plant and equipment, net..............................................    1,215.4      1,176.1
Other assets....................................................................      769.1      1,154.9
                                                                                  ----------  -----------
           Total assets.........................................................  $ 2,743.7   $  3,343.1
                                                                                  ==========  ===========

Current liabilities.............................................................  $   803.4   $    841.4
Long-term debt, less current maturities.........................................      700.8        957.8
Other liabilities...............................................................    1,562.1      1,360.6
Minority interests..............................................................      118.5        101.1
Stockholders' equity (deficit)..................................................     (441.1)        82.2
                                                                                  ----------  -----------
            Total liabilities and stockholders' equity (deficit)................  $ 2,743.7   $  3,343.1
                                                                                  ==========  ===========


                                                                           YEARS ENDED DECEMBER 31,
                                                                      -----------------------------------
                                                                         2001        2000        1999
                                                                      ----------  ----------  -----------
Net sales...........................................................  $ 1,732.7   $ 2,169.8   $  2,083.6
Costs and expenses..................................................   (1,667.8)   (2,030.5)    (2,112.5)
Other income (expenses)-net.........................................       21.8      (113.9)       (61.0)
                                                                      ----------  ----------  -----------
Income (loss) before income taxes and minority interests............       86.7        25.4        (89.9)
Credit (provision) for income taxes.................................     (550.2)      (11.6)        32.7
Minority interests..................................................        4.1         3.0          3.1
                                                                      ----------  ----------  -----------
Net income (loss)...................................................  $  (459.4)  $    16.8   $    (54.1)
                                                                      ==========  ==========  ===========
Equity in earnings (loss) of Kaiser.................................  $   (27.6)  $     5.9   $    (19.2)
                                                                      ==========  ==========  ===========

8.    DEBT

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


                                                                                        DECEMBER 31,
                                                                                   -----------------------
                                                                                      2001        2000
                                                                                   ----------  -----------
Pacific Lumber Credit Agreement..................................................  $    17.7   $     37.0
6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028.........      120.3        136.7
7.11% Scotia LLC Class A-2 Timber Collateralized Notes due July 20, 2028.........      243.2        243.2
7.71% Scotia LLC Class A-3 Timber Collateralized Notes due July 20, 2028.........      463.3        463.3
12% MGHI Senior Secured Notes due August 1, 2003.................................       88.2        118.8
7.56% Lakepointe Notes (see Note 3)..............................................      121.7            -
Other............................................................................        1.5          1.0
                                                                                   ----------  -----------
                                                                                     1,055.9      1,000.0
Less: current maturities.........................................................      (35.5)       (51.3)
   Timber Notes held in SAR Account..............................................      (57.7)       (59.9)
                                                                                   ----------  -----------
                                                                                   $   962.7   $    888.8
                                                                                   ==========  ===========

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

      Scotia LLC Timber Notes
      Scotia LLC issued $867.2 million aggregate principal amount of Timber
Notes on July 20, 1998. The Timber Notes and the Scotia LLC Line of Credit
(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 $120.3 million of Class A-1 Timber
Notes).

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

      Pursuant to certain liquidity requirements under the Timber Notes
Indenture, Scotia LLC has entered into an agreement (the "SCOTIA LLC LINE OF
CREDIT") with a group of banks pursuant to which Scotia LLC may borrow to pay
interest on the Timber Notes. The maximum amount Scotia LLC may borrow is equal
to one year's interest on the aggregate outstanding principal balance of the
Timber Notes (the "REQUIRED LIQUIDITY AMOUNT"). At December 31, 2001, the
Required Liquidity Amount was $60.9 million. On June 1, 2001, the Scotia LLC
Line of Credit was extended for an additional year to July 12, 2002. Annually,
Scotia LLC will request that the banks extend the Scotia LLC Line of Credit for
a period of not less than 364 days. If not extended, Scotia LLC may draw upon
the full amount available. The amount drawn would be repayable in 12 semiannual
installments on each note payment date (after the payment of certain other
items, including the Aggregate Minimum Principal Amortization Amount, as
defined, then due), commencing approximately two and one-half years following
the date of the draw. Borrowings under the Scotia LLC Line of Credit generally
bear interest at the Base Rate (as defined in the agreement) plus 0.25% or at a
one month or six month LIBOR rate plus 1.0% at any time the borrowings have not
been continually outstanding for more than six months. As of December 31, 2001,
Scotia LLC had no borrowings outstanding under the Scotia LLC Line of Credit.

      In connection with the sale of the Headwaters Timberlands, Salmon Creek
received proceeds of $299.9 million in cash. See Note 3. In November 1999,
$169.0 million of funds from the sale of the Headwaters Timberlands were
contributed to Scotia LLC and set aside in the SAR Account. Amounts in the SAR
Account are part of the collateral securing the Timber Notes and will be used to
make principal payments to the extent that other available amounts are
insufficient to pay Scheduled Amortization on the Class A-1 and Class A-2 Timber
Notes. In addition, during the six years beginning January 20, 2014, amounts in
the SAR Account will be used to amortize the Class A-3 Timber Notes as set forth
in the Timber Notes Indenture, as amended. Funds may from time to time be
released to Scotia LLC from the SAR Account if the amount in the account exceeds
the then Required Scheduled Amortization Reserve Balance (as defined in the
Timber Notes Indenture). If the balance in the SAR Account falls below the
Required Scheduled Amortization Reserve Balance, up to 50% of any Remaining
Funds (funds that could otherwise be released to Scotia LLC free of the lien
securing the Timber Notes) is required to be used on each monthly deposit date
to replenish the SAR Account. The amount attributable to Timber Notes held in
the SAR Account of $53.0 million reflected in Note 4 represents $57.7 million
principal amount of reacquired Timber Notes.

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

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

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

      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 December 31, 2001, the MGHI Notes are also secured by a
pledge of 23,443,953 shares of the Kaiser common stock owned by MGHI, the common
stock of MGI and the MAXXAM Note (defined below). Interest on the MGHI Notes is
payable semi-annually. During 2001, the Company purchased $30.6 million of the
MGHI Notes at a net gain of $3.6 million. During January and February 2002, the
Company purchased $16.9 million of the MGHI Notes resulting in an extraordinary
gain of $1.9 million.

      The net proceeds from the offering of the MGHI Notes after expenses were
approximately $125.0 million, all of which was loaned to 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, 2001, $58.1 million of interest had been deferred
and added to principal. An additional $10.1 million of interest was deferred and
added to principal on February 1, 2002. The Company expects MAXXAM to pay the
amount of the MAXXAM Note necessary to retire the MGHI Notes.

      Lakepointe Notes
      In June 2001, Lakepointe Assets financed the purchase of Lake Pointe Plaza
with proceeds from the Lakepointe Notes (see Note 3). The Lakepointe Notes
consist of $122.5 principal amount of 7.56% notes due June 8, 2021. The
Lakepointe Notes are secured by the Lake Pointe Plaza operating leases, Lake
Pointe Plaza and a $60.0 million residual value insurance contract.

      Maturities
      Scheduled maturities of long-term and short-term debt outstanding at
December 31, 2001 are as follows: $37.8 million in 2002, $107.4 million in 2003,
$20.8 million in 2004, $22.8 million in 2005, $30.8 million in 2006 and $769.6
million thereafter.

      At December 31, 2001, the estimated fair value of the Company's current
and long-term debt was $957.4 million. At December 31, 2000, the estimated fair
value of debt, including current maturities, was $816.4 million. The estimated
fair value of debt is determined based on the quoted market prices for the
publicly traded issues and on the current rates offered for borrowings similar
to the other debt. Some of the Company's publicly traded debt issues are thinly
traded financial instruments; accordingly, their market prices at any balance
sheet date may not be representative of the prices which would be derived from a
more active market.

      Restricted Net Assets of Subsidiaries
      As of December 31, 2001, 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. As of April
10, 2002, the Company had pledged a total of 23,443,953 shares of Kaiser
common stock (representing a 29.1% interest in Kaiser) to secure the MGHI Notes.

9.    BENEFIT (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") as amended effective March 1,
1999, Pacific Lumber is liable to MAXXAM for the federal consolidated income tax
liability of Pacific Lumber, Scotia LLC and other subsidiaries of Pacific Lumber
(collectively, the "PL SUBGROUP") computed as if the PL Subgroup was a separate
affiliated group of corporations which was never connected with MAXXAM. 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") as amended effective March 1, 1999, provides that MGI's federal
income tax liability is computed as if MGI files a consolidated tax return with
all of its subsidiaries, and that such corporations were never connected with
MAXXAM (the "MGI CONSOLIDATED TAX LIABILITY"). 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). 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") as amended March 1, 1999, provides that the Company's federal
consolidated income tax liability is computed as if MGHI and its subsidiaries
file a consolidated tax return and that such corporations were never connected
with MAXXAM (the "MGHI CONSOLIDATED TAX LIABILITY"). 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 benefit (provision) in lieu of income taxes on income (loss) before
income taxes consists of the following (in millions):


                                                                   YEARS ENDED DECEMBER 31,
                                                                ------------------------------
                                                                  2001      2000       1999
                                                                --------- ---------  ---------
Current:
   Federal in lieu of income taxes............................  $      -  $    0.1   $   (3.0)
   State and local............................................         -         -        0.1
                                                                --------- ---------  ---------
                                                                       -       0.1       (2.9)
                                                                --------- ---------  ---------
Deferred:
   Federal in lieu of income taxes............................       3.9      (9.3)     (53.4)
   State and local............................................       0.5      (4.2)     (21.6)
                                                                --------- ---------  ---------
                                                                     4.4     (13.5)     (75.0)
                                                                --------- ---------  ---------
                                                                $    4.4  $  (13.4)  $  (77.9)
                                                                ========= =========  =========

      A reconciliation between the benefit (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,
                                                                                     ------------------------------
                                                                                       2001      2000       1999
                                                                                     --------- ---------  ---------
Income (loss) before income taxes..................................................  $  (80.9) $   39.3   $  177.9
                                                                                     ========= =========  =========

Amount of federal income tax benefit (provision) based upon the statutory rate.....  $   28.3  $  (13.8)  $  (62.3)
Changes in valuation allowances and revision of prior years' tax estimates.........     (14.6)      1.2        4.5
Equity in earnings (loss) of Kaiser not tax effected...............................      (9.6)      2.1       (6.6)
State and local taxes, net of federal tax effect...................................       0.6      (2.9)     (13.2)
Expenses for which no federal tax benefit is available.............................      (0.3)        -       (0.3)
                                                                                     --------- ---------  ---------
                                                                                     $    4.4  $  (13.4)  $  (77.9)
                                                                                     ========= =========  =========

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

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


                                                                         DECEMBER 31,
                                                                    -----------------------
                                                                       2001        2000
                                                                    ----------  -----------
Deferred income tax assets:
   Loss and credit carryforwards..................................  $   167.7   $    144.1
   Timber and timberlands.........................................       23.8         28.1
   Other..........................................................       23.2         20.2
   Valuation allowances...........................................      (62.8)       (47.6)
                                                                    ----------  -----------
      Total deferred income tax assets, net.......................      151.9        144.8
                                                                    ----------  -----------
Deferred income tax liabilities:
   Deferred gains on sales of timber and timberlands..............     (111.0)      (130.4)
   Property, plant and equipment..................................      (39.0)       (14.9)
   Inventories....................................................       (8.4)        (8.9)
   Other..........................................................       (7.4)        (6.2)
                                                                    ----------  -----------
      Total deferred income tax liabilities.......................     (165.8)      (160.4)
                                                                    ----------  -----------
Net deferred income tax assets (liabilities)......................  $   (13.9)  $    (15.6)
                                                                    ==========  ===========

      Included in net deferred income tax assets as of December 31, 2001 is
$104.9 million attributable to the tax benefit of loss and credit carryforwards,
net of valuation allowances. The Company evaluated all appropriate factors in
determining the realizability of the deferred tax assets attributable to loss
and credit carryforwards, including any limitations on their use, the reversal
of deferred gains, other temporary differences, the year the carryforwards
expire and the levels of taxable income necessary for utilization. The Company
also considered the potential recognition for tax purposes of the deferred gains
on sales of timber and timberlands. Based on this evaluation of the appropriate
factors to determine the proper valuation allowances for these carryforwards, the
Company believes that it is more likely than not that it will realize the
benefit for the carryforwards for which valuation allowances were not provided.
The deferred income tax liabilities related to deferred gains on the sales of
timber and timberlands are a result of the sales of the Headwaters Timberlands
(1999), the Owl Creek grove (2000), and the Grizzly Creek grove (2001). The
Company has reinvested a portion of these proceeds, and expects to make further
reinvestments. Reinvestments beyond the levels currently planned could impact
the Company's evaluation of deferred gains available for offset against net
operating losses and in turn the Company's evaluation of the realizability of
its net operating losses.

      Included in the net deferred income tax assets (liabilities) listed above are
$4.1 million and $2.8 million at December 31, 2001 and 2000, respectively, which
are recorded pursuant to the tax allocation agreements with MAXXAM in respect of
federal taxes. The remaining portion of the net deferred assets (liabilities) is
attributable to state tax jurisdictions.

      The following table presents the estimated tax attributes for federal
income tax purposes for the Company and its subsidiaries as of December 31,
2001, 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...................................................................  $   454.4         2021
Alternative Minimum Tax Attribute Carryforwards:
   Net operating losses...................................................................  $   404.0         2021

      The income tax benefit (provision) related to other comprehensive income
for the years ended December 31, 2001, 2000 and 1999 was $(0.2) million, ($0.3)
million, and $0.2 million, respectively.

10.   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, 2001 and 2000, respectively (in millions):


                                                                            PENSION BENEFITS   MEDICAL/LIFE BENEFITS
                                                                          -------------------- --------------------
                                                                                  YEARS ENDED DECEMBER 31,
                                                                          -----------------------------------------
                                                                            2001       2000      2001       2000
                                                                          ---------  --------- ---------  ---------
Change in benefit obligation:
   Benefit obligation at beginning of year..............................  $   38.2   $   33.7  $    6.0   $    4.9
   Service cost.........................................................       2.2        1.9       0.3        0.2
   Interest cost........................................................       2.9        2.7       0.4        0.3
   Plan participants' contributions.....................................         -          -       1.2        1.1
   Actuarial loss.......................................................       1.3        0.8       0.4        1.2
   Benefits paid........................................................      (0.9)      (0.9)     (1.7)      (1.7)
   Plan amendments and termination benefits.............................      (0.4)         -      (0.4)         -
                                                                          ---------  --------- ---------  ---------
      Benefit obligation at end of year.................................      43.3       38.2       6.2        6.0
                                                                          ---------  --------- ---------  ---------

Change in plan assets:
   Fair value of plan assets at beginning of year.......................      34.7       37.1         -          -
   Actual return on assets..............................................      (2.4)      (1.5)        -          -
   Employer contributions...............................................       1.3          -       0.5        0.6
   Plan participants' contributions.....................................         -          -       1.2        1.1
   Benefits paid........................................................      (0.9)      (0.9)     (1.7)      (1.7)
                                                                          ---------  --------- ---------  ---------
   Fair value of plan assets at end of year.............................      32.7       34.7         -          -
                                                                          ---------  --------- ---------  ---------

   Benefit obligation in excess of (less than) plan assets..............      10.6        3.5       6.2        6.0
   Unrecognized actuarial gain..........................................       0.7        7.5       0.4        0.8
   Unrecognized prior service costs.....................................      (0.6)      (0.7)      0.3          -
                                                                          ---------  --------- ---------  ---------
      Accrued benefit liability.........................................  $   10.7   $   10.3  $    6.9   $    6.8
                                                                          =========  ========= =========  =========




                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2001       2000      1999       2001      2000       1999
                                                     ---------  --------  ---------  --------- ---------  ---------
Components of net periodic benefit costs:
   Service cost....................................  $    2.2   $   1.9   $    2.4   $    0.3  $    0.2   $    0.3
   Interest cost...................................       2.9       2.7        2.5        0.4       0.3        0.4
   Expected return on assets.......................      (2.8)     (2.6)      (2.1)         -         -          -
   Prior service costs amortization................       0.1       0.1        0.1          -         -          -
   Recognized net actuarial gain...................      (0.4)     (0.4)         -          -      (0.1)      (0.1)
                                                     ---------  --------  ---------  --------- ---------  ---------
      Net periodic benefit cost....................       2.0       1.7        2.9        0.7       0.4        0.6
   Effects of curtailments, settlements and special
      termination benefits.........................      (0.4)        -          -       (0.1)        -          -
                                                     ---------  --------  ---------  --------- ---------  ---------
      Total benefit costs..........................  $    1.6   $   1.7   $    2.9   $    0.6  $    0.4   $    0.6
                                                     =========  ========  =========  ========= =========  =========



                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2001       2000      1999       2001      2000       1999
                                                     ---------  --------  ---------  --------- ---------  ---------
Weighted-average assumptions:
   Discount rate...................................    7.3%       7.5%      7.8%       7.3%      7.5%       7.8%
   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, 2001 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 $1.4 million, $1.5 million and $1.4 million for the
years ended December 31, 2001, 2000 and 1999, 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 $12.9
million and $9.2 million at December 31, 2001 and 2000, respectively. Workers'
compensation expenses amounted to $7.3 million, $3.4 million and $3.9 million
for the years ended December 31, 2001, 2000 and 1999, respectively.

11.     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 $2.4 million, $2.2 million and $3.1 million for the years
ended December 31, 2001, 2000 and 1999, 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.

12.     COMMITMENTS AND CONTINGENCIES

      Commitments
      Minimum rental commitments under operating leases at December 31, 2001 are
as follows: years ending December 31, 2002--$3.4 million; 2003--$3.2 million;
2004--$2.1 million; 2005--$1.6 million; 2006--$1.2 million thereafter--$1.8
million. Rental expense for operating leases was $4.0 million, $4.7 million and
$4.2 million for the years ended December 31, 2001, 2000 and 1999, respectively.

      The Lake Pointe Plaza building is leased to tenants under operating
leases. Building lease terms are for 20 years. Minimum rentals on operating
leases are contractually due as follows: 2002 - $11.3 million; 2003 - $11.3
million; 2004 - $10.2 million; 2005 - $9.7 million; 2006 - $10.0 million;
thereafter - $155.8 million.

      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, dealing with
timber harvesting practices, threatened and endangered species and habitat for
such species, and air and water quality.

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

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

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

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

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

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

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

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

13.   SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2001      2000       1999
                                                                                     --------- ---------  ---------
                                                                                              (IN MILLIONS)
                                                                                               ---------  ---------
Supplemental information on non-cash investing and financing activities:
   Deferral of interest on MAXXAM note receivable..................................  $   18.6  $   16.7   $   15.0
   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......................................  $   76.5  $   79.3   $   80.8
   Tax allocation payments to (from) MAXXAM........................................       1.3      (0.5)       1.8


14.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

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


                                                                            THREE MONTHS ENDED
                                                        -----------------------------------------------------------
                                                          MARCH 31        JUNE 30     SEPTEMBER 30     DECEMBER 31
                                                        -------------  -------------  -------------- --------------
2001:
   Net sales..........................................  $       44.8   $       53.3   $        47.0  $        44.6
   Operating income (loss)............................          (4.5)           0.9            (1.2)         (21.7)
   Income (loss) before extraordinary items...........          33.7          (26.8)           12.6          (96.0)
   Extraordinary items, net...........................           1.9            1.7               -              -
   Net income (loss)..................................          35.6          (25.1)           12.6          (96.0)

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



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, 2001 and 2000
           Consolidated Statement of Operations for the Years Ended December 31, 2001,
               2000 and 1999
           Consolidated Statement of Stockholder's Deficit for the Years Ended
               December 31, 2001, 2000 and 1999
           Consolidated Statement of Cash Flows for the Years Ended December 31, 2001,
               2000 and 1999
           Notes to Consolidated Financial Statements

      2.   FINANCIAL STATEMENT SCHEDULES:

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

           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 November 19, 2001, the Company filed a current report on Form 8-K
(under Item 5) dated November 15, 2001, related to the sale of a portion of
Pacific Lumber's Grizzly Creek grove.

      On January 15, 2002, the Company filed a current report on Form 8-K (under
Item 5) dated January 15, 2002, related to Kaiser's discussions with its
noteholders on its near-term debt maturities.

      On January 31, 2002, the Company filed a current report on Form 8-K (under
Item 5) dated January 29, 2002, related to the deferral by MAXXAM and Kaiser of
their release of the 2001 fourth quarter earnings, and Kaiser's decision to not
make an interest payment on a series of notes.

      On February 12, 2002, the Company filed a current report on Form 8-K
(under Item 5) concerning the voluntary petition filed by Kaiser on February 12,
2002 under Chapter 11 of the Federal Bankruptcy Code.

(C)   EXHIBITS

      Reference is made to the Index of Exhibits immediately preceding the
exhibits hereto (beginning on page 52), 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,
                                                                                               --------------------
                                                                                                 2001       2000
                                                                                               ---------  ---------
                                            ASSETS

Current assets:
   Cash and cash equivalents.................................................................. $    9.3   $   46.9
   Marketable securities......................................................................     26.4        7.4
   Receivable from MAXXAM Inc.................................................................      8.3        7.6
                                                                                               ---------  ---------
      Total current assets....................................................................     44.0       61.9
Note receivable from MAXXAM Inc...............................................................    183.1      164.5
Deferred income taxes.........................................................................      0.5        6.4
Investment in Kaiser..........................................................................        -       27.6
Deferred financing costs......................................................................      1.2        2.0
                                                                                               ---------  ---------
                                                                                               $  228.8   $  262.4
                                                                                               =========  =========

                             LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
   Accounts payable and other accrued liabilities............................................. $    0.8   $    1.3
   Accrued interest...........................................................................      4.4        5.9
                                                                                               ---------  ---------
      Total current liabilities...............................................................      5.2        7.2
Losses recognized in excess of investments in subsidiaries....................................    256.3      185.8
Long-term debt................................................................................     88.2      118.8
Other long-term liabilities...................................................................      1.1          -
                                                                                               ---------  ---------
      Total liabilities.......................................................................    350.8      311.8
                                                                                               ---------  ---------

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........................................................................   (245.5)    (172.6)
   Accumulated other comprehensive loss.......................................................      0.3          -
                                                                                               ---------  ---------
      Total stockholder's deficit.............................................................   (122.0)     (49.4)
                                                                                               ---------  ---------
                                                                                               $  228.8   $  262.4
                                                                                               =========  =========


     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,
                                                                               ------------------------------------
                                                                                  2001        2000         1999
                                                                               ----------  -----------  -----------
Investment, interest and other income (expense), net.......................... $    22.1   $     24.9   $     17.7
Interest expense..............................................................     (12.0)       (15.2)       (16.4)
General and administrative expenses...........................................      (0.6)        (0.3)        (0.3)
Equity in earnings (loss) of subsidiaries.....................................     (81.6)        23.6         99.3
                                                                               ----------  -----------  -----------
Income (loss) before income taxes.............................................     (72.1)        33.0        100.3
Provision in lieu of income taxes.............................................      (4.4)        (3.3)        (0.3)
                                                                               ----------  -----------  -----------
Income (loss) before extraordinary items......................................     (76.5)        29.7        100.0
Extraordinary items:
   Gain on repurchases of debt, net of provision in lieu of income taxes......       3.6          0.4            -
                                                                               ----------  -----------  -----------
Net income (loss)............................................................. $   (72.9)  $     30.1   $    100.0
                                                                               ==========  ===========  ===========


     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,
                                                                                    -------------------------------
                                                                                       2001      2000       1999
                                                                                    ---------- ---------  ---------
Cash flows from operating activities:
   Net income (loss)..............................................................  $   (72.9) $   30.1   $  100.0
   Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
      Extraordinary loss (gain) on early extinguishment of debt, net..............       (3.6)     (0.4)         -
      Net gains on marketable securities..........................................       (2.1)     (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...................................       81.6     (23.6)     (99.3)
      Dividends from subsidiaries.................................................       17.1     108.4       18.7
      Increase (decrease) in cash resulting from changes in:
        Receivable from MAXXAM Inc................................................      (19.4)    (22.1)     (11.0)
        Accrued and deferred income taxes.........................................        4.7       2.8        0.3
        Accrued interest, other liabilities and other.............................       (1.7)      0.1       (6.1)
                                                                                    ---------- ---------  ---------
        Net cash provided by operating activities.................................        4.5      89.2        3.4
                                                                                    ---------- ---------  ---------

Cash flows from investing activities:
   Net purchases of marketable securities.........................................      (17.0)     (0.5)         -
                                                                                    ---------- ---------  ---------
      Net cash used for investing activities......................................      (17.0)     (0.5)         -
                                                                                    ---------- ---------  ---------

Cash flows from financing activities:
   Repurchases of long-term debt..................................................      (25.1)     (5.8)         -
   Dividends paid.................................................................          -     (45.0)         -
                                                                                    ---------- ---------  ---------
   Net cash used for financing activities.........................................      (25.1)    (50.8)         -
                                                                                    ---------- ---------  ---------

Net increase in cash and cash equivalents.........................................      (37.6)     37.9        3.4
Cash and cash equivalents at beginning of year....................................       46.9       9.0        5.6
                                                                                    ---------- ---------  ---------
Cash and cash equivalents at end of year..........................................  $     9.3  $   46.9   $    9.0
                                                                                    ========== =========  =========





     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, and as if such corporations were never connected with MAXXAM, and
then reducing such consolidated amounts by the amounts recorded by MGHI's
subsidiaries, pursuant to their respective tax allocation agreements with
MAXXAM. 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 reversal of
deferred gains, other temporary differences, the year the carryforwards expire
and the levels of taxable income necessary for utilization. The Company also
considered the potential recognition for tax purposes of the deferred gains on
sales of timber and timberlands. 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,
                                                                       -----------------------------------------
                                                                            2001          2000         1999
                                                                       --------------  ---------- --------------
                                                                                      (IN MILLIONS)
                                                                       --------------  ---------- --------------

Supplemental information on non-cash investing and financing activities:
   Deferral of interest on MAXXAM note receivable .....................     $     18.6       $     16.7      $        15.0

Supplemental disclosure of cash flow information:
   Interest paid.......................................................     $     12.8       $     14.9      $        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:   April 12, 2002                           By:              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:   April 12, 2002                           By:              CHARLES E. HURWITZ
                                                     -------------------------------------------
                                                                  Charles E. Hurwitz
                                                          Chairman of the Board, President,
                                                             and Chief Executive Officer


Date:   April 12, 2002                           By:               J. KENT FRIEDMAN
                                                     -------------------------------------------
                                                                   J. Kent Friedman
                                                                       Director


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


Date:   April 12, 2002                           By:             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      Second Amendment, dated June 15, 2001, 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 4.1 to Scotia LLC's Quarterly Report on
          Form 10-Q for the quarter ended June 30, 2001; File No. 333-63825)

4.11      Amended and Restated Credit Agreement dated as of August 14, 2001
          between The Pacific Lumber Company ("Pacific Lumber") and Bank of
          America, N.A. (incorporated herein by reference to Exhibit 4.1 to the
          Company's Quarterly Report on Form 10-Q for the quarter ended
          September 30, 2001)

4.12      Loan Agreement, dated as of June 28, 2001, between Lakepointe Assets
          LLC and Legg Mason Real Estate Services, Inc. (incorporated herein by
          reference to Exhibit 4.2 to the Company's Quarterly Report on Form
          10-Q for the quarter ended June 30, 2001; the "Company June 2001 Form
          10-Q")

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

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     Amendment of Tax Allocation Agreement, dated as of December 31, 2001,
          between MGHI and MAXXAM

10.3      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")

*10.4     Amendment of Tax Allocation Agreement, dated as of December 31, 2001,
          between MGI and MAXXAM

10.5      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)

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

*10.7     Amendment of Pacific Lumber Tax Allocation Agreement, dated as of
          December 31, 2001

10.8      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)

10.9      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)

10.10     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)

10.11     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")

10.12     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)

10.13     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)

10.14     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)

10.15     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)

10.16     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)

10.17     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")

10.18     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)

10.19     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)

10.20     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)

10.21     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)

10.22     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)

10.23     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)

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

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

*99.1     The consolidated financial statements and notes thereto of MAXXAM Inc.
          for the fiscal year ended December 31, 2001

*99.2     The financial statements and notes thereto of MAXXAM Group Inc. for
          the fiscal year ended December 31, 2001

*99.3     The consolidated financial statements and notes thereto of Kaiser
          Aluminum Corporation for the fiscal year ended December 31, 2001

*99.4     Item 7A. of Kaiser Aluminum Corporation's Annual Report on Form 10-K
          for the fiscal year ended December 31, 2001

*99.5     Letter dated April 12, 2002, to the Securities and Exchange Commission
          from the Company related to assurances the Company has received from
          Arthur Andersen LLP with respect to the audit of its financial
          statements for the fiscal year ended December 31, 2001.

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

* Included with this filing.

EX-10

                     Amendment of Tax Allocation Agreement
                                     Between
                                   MAXXAM Inc.
                                       and
                           MAXXAM Group Holdings Inc.



         WHEREAS, MAXXAM Inc. ("MAXXAM") and MAXXAM Group Holdings Inc. ("MGHI")
executed a tax allocation agreement as of December 23, 1996 covering all taxable
years during which MGHI is included in MAXXAM's Federal consolidated income tax
returns (the "MGHI Tax Allocation Agreement"); and

         WHEREAS, MGHI is currently a member of the affiliated group within the
meaning of Section 1504(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), of which MAXXAM is the common parent corporation (the "Group"); and

         WHEREAS, pursuant to an Amendment of Tax Allocation Agreement dated as
of December 31, 2001, MAXXAM and The Pacific Lumber Company, a wholly owned
indirect subsidiary of MAXXAM, amended a tax allocation agreement dated as of
March 23, 1993 (the "Amended PL Tax Allocation Agreement"); and

         WHEREAS, pursuant to an Amendment of Tax Allocation Agreement dated as
of December 31, 2001, MAXXAM and MGI, a wholly owned indirect subsidiary of
MAXXAM, amended a tax allocation agreement dated as of August 4, 1993 (the
"Amended MGI Tax Allocation Agreement"); and

         WHEREAS, MAXXAM and MGHI desire to amend the MGHI Tax Allocation
Agreement in a manner similar to the Amended PL Tax Allocation Agreement and the
Amended MGI Tax Allocation Agreement as contemplated herein.

         NOW, THEREFORE, MAXXAM and MGHI hereby agree to the following
amendments to the MGHI Tax Allocation Agreement effective for periods beginning
after February 28, 1999:

1.   The first sentence of Section 4(a) of the MGHI Tax Allocation Agreement is
     replaced with, and superseded by, the following language:

              For purposes of making the computations described herein, MGHI and
              all lower (with respect to MGHI) tier entities, including
              newly-formed Restricted Subsidiaries, in which MGHI has direct or
              indirect ownership (individually and collectively referred to as
              "MGHI Subgroup Subsidiary" or "MGHI Subgroup Subsidiaries") shall
              be treated as an affiliated group of corporations (the "MGHI
              Subgroup"), the common parent of which is MGHI, provided, however,
              that the MGHI Subgroup shall only include any MGHI Subgroup
              Subsidiary to the extent that such MGHI Subgroup Subsidiary meets
              the test of affiliation under Section 1504 of the Code as it would
              apply to the MGHI Subgroup.

2.   Section 4(e) is replaced with, and superseded by, the following language:

              For purposes of Section 4(c) of this Agreement, net operating
              losses available to the MGI Subgroup under the Revised MGI
              Agreement, as further revised by amendment as of December 31, 2001
              (the "Amended MGI Agreement"), shall be available to offset income
              of the MGHI Subgroup in the same manner as under the Amended MGI
              Agreement. For the avoidance of doubt, net operating losses of
              MGHI Subgroup Members are available to offset Salmon Creek
              Corporation's 1999 taxable income recognized on the sale of its
              Headwaters timberlands.

         IN WITNESS WHEREOF, MAXXAM and MGHI have executed this Amendment of Tax
Allocation Agreement by duly authorized officers thereof as of December 31,
2001.

                                     MAXXAM Inc.


                                     By: /s/ Paul N. Schwartz

                                     Title: President


                                     MAXXAM Group Holdings Inc.


                                     By:  /s/ Elizabeth D. Brumley

                                     Title:  Controller

EX-10

                      Amendment of Tax Allocation Agreement
                                     Between
                                   MAXXAM Inc.
                                       and
                                MAXXAM Group Inc.



         WHEREAS, MAXXAM Inc. ("MAXXAM") and MAXXAM Group Inc. ("MGI") executed
a tax allocation agreement as of August 4, 1993 covering all taxable years
during which MGI is included in MAXXAM's Federal consolidated income tax returns
(the " MGI Tax Allocation Agreement"); and

         WHEREAS, MGI is currently a member of the affiliated group within the
meaning of Section 1504(a) of the Internal Revenue Code of 1986, as amended (the
"Code"), of which MAXXAM is the common parent corporation (the "Group"); and

         WHEREAS, pursuant to an Amendment of Tax Allocation Agreement dated as
of December 31, 2001, MAXXAM and The Pacific Lumber Company, a wholly owned
indirect subsidiary of MAXXAM, amended a tax allocation agreement dated as of
March 23, 1993 (the "Amended PL Tax Allocation Agreement"); and

         WHEREAS, MAXXAM and MGI desire to amend the MGI Tax Allocation
Agreement in a manner similar to the Amended PL Tax Allocation Agreement as
contemplated herein.

         NOW, THEREFORE, MAXXAM and MGI hereby agree to the following amendments
to the MGI Tax Allocation Agreement effective for periods beginning after
February 28, 1999:

1.   The first sentence of Section 4(a) is replaced with, and superseded by, the
     following language:

              For purposes of making the computations described herein, MGI and
              all lower (with respect to MGI) tier entities, including
              newly-formed Restricted Subsidiaries, in which MGI has direct or
              indirect ownership (individually and collectively referred to as
              "MGI Subgroup Subsidiary" or "MGI Subgroup Subsidiaries") shall be
              treated as an affiliated group of corporations (the "MGI
              Subgroup"), the common parent of which is MGI, provided, however,
              that the MGI Subgroup shall only include any MGI Subgroup
              Subsidiary to the extent that such MGI Subgroup Subsidiary meets
              the test of affiliation under Section 1504 of the Code as it would
              apply to the MGI Subgroup.

2.   Sections 4(h), (i), and (j) are redesignated as Sections 4(i), (j), and
     (k), respectively.

3.   Section 4 is amended by adding the following language as new subsection
     (h):

              For purposes of Section 4(c) of this Agreement, net operating
              losses of MGI Subgroup Members arising after August 31, 1993 are
              available to offset Salmon Creek Corporation's 1999 taxable income
              recognized on the sale of its Headwaters timberlands.

4.   Section 4(j), as redesignated, is amended by changing the reference
     contained therein from "subsection (h)" to "subsection (i)."

         IN WITNESS WHEREOF, MAXXAM and MGI have executed this Amendment of Tax
Allocation Agreement by duly authorized officers thereof as of December 31,
2001.


                                  MAXXAM Inc.


                                  By: /s/ Paul N. Schwartz

                                  Title: President




                                  MAXXAM Group Inc.


                                  By:  /s/ Gary L. Clark

                                  Title:  Vice President

EX-10

                      Amendment of Tax Allocation Agreement
                                     Between
                                   MAXXAM Inc.
                                       and
                           The Pacific Lumber Company



         WHEREAS, MAXXAM Inc. ("MAXXAM"), The Pacific Lumber Company ("Pacific
Lumber"), Scotia Pacific Holding Company ("Scotia"), and Salmon Creek
Corporation ("Salmon Creek") executed a tax allocation agreement as of March 23,
1993 covering all taxable years during which Pacific Lumber, Scotia, and Salmon
Creek were included in MAXXAM's Federal consolidated income tax returns (the
"Tax Allocation Agreement"); and

         WHEREAS, Pacific Lumber is currently a member of the affiliated group
within the meaning of Section 1504(a) of the Internal Revenue Code of 1986, as
amended ("the Code"), of which MAXXAM is the common parent corporation (the
"Group"); and

         WHEREAS, Scotia, a wholly owned subsidiary of Pacific Lumber, is no
longer a member of the Group as a result of being merged into a newly formed
wholly-owned subsidiary of Pacific Lumber, Scotia Pacific Company LLC ("Scotia
LLC"), on July 20, 1998; and

         WHEREAS, Scotia LLC is not a member of the Group since it is a single
member limited liability company which has not elected to be treated as an
association taxable as a corporation and, therefore, is treated as a division of
Pacific Lumber pursuant to Treasury Regulation ss.301.7701-3(b)(1); and

         WHEREAS, Salmon Creek Corporation, a wholly owned subsidiary of Pacific
Lumber, is no longer a member of the Group as a result of being converted into a
single member limited liability company, Salmon Creek LLC ("Salmon Creek LLC"),
on December 7, 1999; and

         WHEREAS, Salmon Creek LLC is not a member of the Group since it is a
single member limited liability company which has not elected to be treated as
an association taxable as a corporation and, therefore, is treated as a division
of Pacific Lumber pursuant to Treasury Regulation ss.301.7701-3(b)(1); and

         WHEREAS, MAXXAM and Pacific Lumber wish to amend the Tax Allocation
Agreement as contemplated herein.

         NOW, THEREFORE, MAXXAM and Pacific Lumber hereby agree to the following
amendments to the Tax Allocation Agreement effective for periods beginning after
February 28, 1999:

1.   Paragraph 4.(a) of the Tax Allocation Agreement is replaced with, and
     superseded by, the following language:

              For purposes of making the computations described herein, Salmon
              Creek and any Restricted Subsidiary which becomes a member of the
              Group (each a "PL Subgroup Subsidiary") shall, together with
              Pacific Lumber, be treated as an affiliated group of corporations
              ("the PL Subgroup"), the common parent of which is Pacific Lumber,
              provided, however, that the PL Subgroup shall only include any
              subsidiary to the extent that such subsidiary meets the test of
              affiliation under Section 1504 of the Code as it would apply to
              the PL Subgroup.

2.   Paragraph 4.(b) is amended by adding the following language after the first
     sentence:

              For the avoidance of doubt, Pacific Lumber's net operating losses
              are available to offset Salmon Creek's 1999 taxable income
              recognized on the sale of its Headwaters timberlands.

3.   Paragraphs 5.(a), (b), (c), (d), and (e) of the Tax Allocation Agreement
     are deleted and shall not apply.


         IN WITNESS WHEREOF, MAXXAM and Pacific Lumber have executed this
Amendment of Tax Allocation Agreement by duly authorized officers thereof as of
December 31, 2001.


                                 MAXXAM Inc.


                                 By: /s/ Paul N. Schwartz
                                 Title:  President


                                 The Pacific Lumber Company


                                 By:  /s/ Gary L. Clark
                                 Title:  Vice President - Finance
                                         and Administration

EX-99

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To MAXXAM Inc.:

We have audited the accompanying consolidated balance sheets of MAXXAM Inc. (a
Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
2001. These consolidated financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.

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

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

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

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

                                    ARTHUR ANDERSEN LLP

Houston, Texas
April 12, 2002


                          MAXXAM INC. AND SUBSIDIARIES

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


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

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


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

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

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

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

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



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



                          MAXXAM INC. AND SUBSIDIARIES

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


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

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

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

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

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

                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN MILLIONS OF DOLLARS)


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


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


                          MAXXAM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   BASIS OF PRESENTATION

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

                        CONDENSED BALANCE SHEET OF KAISER
                                DECEMBER 31, 2001


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

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

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

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


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

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


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

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

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

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

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

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

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

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

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

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

   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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


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

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

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

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

2.    SEGMENT INFORMATION AND SPECIAL CHARGES

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

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

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



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

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

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

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

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

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

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

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

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

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

      Non-recurring Items

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

3.    INCIDENT AT GRAMERCY FACILITY

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

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

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


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

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

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

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

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

4.    PACIFIC NORTHWEST POWER SALES AND OPERATING LEVEL

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

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

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

5.    SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

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

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

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

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

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

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

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

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

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

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

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

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

6.    CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS

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

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

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


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

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

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

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

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

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


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

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


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


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

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

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



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

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

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

7.    INVENTORIES

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

      Inventories consist of the following (in millions):


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

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

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

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

8.    PROPERTY, PLANT AND EQUIPMENT

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

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


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

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

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

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

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

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

9.    INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

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


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

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


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

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

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

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

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

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

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


10.   SHORT-TERM BORROWINGS

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

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

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

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

11.     LONG-TERM DEBT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

12.     INCOME TAXES

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

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


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

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

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

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

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


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

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

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

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


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

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

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

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

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

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

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


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

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

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

13.     EMPLOYEE BENEFIT AND INCENTIVE PLANS

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

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

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


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

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

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

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

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

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

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

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


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

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

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

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

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

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


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

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


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

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

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

14.   MINORITY INTERESTS

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

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

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

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

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

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

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


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

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

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

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

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

15.   STOCKHOLDERS' EQUITY (DEFICIT)

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

      Stock Option and Restricted Stock Plans
      In 1994, the Company adopted the MAXXAM 1994 Omnibus Employee Incentive
Plan (the "1994 OMNIBUS PLAN"). Up to 1,000,000 shares of common stock and
1,000,000 shares of Class A Preferred Stock were reserved for awards or for
payment of rights granted under the 1994 Omnibus Plan of which 23,092 and
910,000 shares, respectively, were available to be awarded at December 31, 2001.
The 1994 Omnibus Plan replaced the Company's 1984 Phantom Share Plan (the "1984
PLAN") which expired in June 1994, although previous grants thereunder remain
outstanding. The options (or rights, as applicable) granted in 1999, 2000 and
2001 generally vest at the rate of 20% per year commencing one year from the
date of grant. The following table summarizes the options or rights outstanding
and exercisable relating to the 1984 Plan and the 1994 Omnibus Plan. The prices
shown are the weighted average price per share for the respective number of
underlying shares.


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

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

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


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

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

      Concurrent with the adoption of the 1994 Omnibus Plan, the Company adopted
the MAXXAM 1994 Non-Employee Director Plan (the "1994 DIRECTOR PLAN"). Up to
35,000 shares of common stock are reserved for awards under the 1994 Director
Plan. Options were granted to non-employee directors to purchase 2,400 shares of
common stock in 2001, 2,300 shares in 2000, and 1,800 shares in 1999. The
weighted average exercise prices of these options are $17.02, $26.19 and $62.00
per share, respectively, based on the quoted market price at the date of grant.
The options vest at the rate of 25% per year commencing one year from the date
of grant. At December 31, 2001, options for 13,400 shares were outstanding,
7,925 of which were exercisable.

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


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

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

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


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


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

      Shares Reserved for Issuance
      At December 31, 2001, the Company had 2,446,582 common shares and
1,000,000 Class A Preferred shares reserved for future issuances in connection
with various options, convertible securities and other rights as described in
this Note.

      Rights

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

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

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

16.   Commitments and Contingencies

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

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

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

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

   Aluminum Operations

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

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

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

      Based on Kaiser's evaluation of these and other environmental matters,
Kaiser has established environmental accruals primarily related to potential
solid waste disposal and soil and groundwater remediation matters. During 2001,
Kaiser's ongoing assessment process resulted in Kaiser recording charges of
$13.5 million (included in investment, interest and other income (expense), net;
see Note 2) to increase its environmental accrual. Additionally, Kaiser's
environmental accruals were increased during 2001 by approximately $6.0 million
in connection with the purchase of certain property. The following table
presents the changes in such accruals, which are primarily included in other
noncurrent liabilities (in millions):


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

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

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

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

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

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

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

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

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

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

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

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


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

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

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


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

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

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

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

      Forest Products Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

17.   DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

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

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

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


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

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

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

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

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

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

18.   SUBSEQUENT EVENT

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

19.   SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION

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

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

20.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

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


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

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

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

EX-99

                    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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

                                                      ARTHUR ANDERSEN LLP


San Francisco, California
March 28, 2002




                       MAXXAM GROUP INC. AND SUBSIDIARIES

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


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

Current assets:
   Cash, cash equivalents and restricted cash.............................................  $    56.7   $    154.7
   Marketable securities..................................................................       27.2         21.5
   Receivables:
      Trade...............................................................................       12.5         10.4
      Other...............................................................................        2.3          3.1
   Inventories............................................................................       49.6         53.3
   Prepaid expenses and other current assets..............................................       17.4         14.3
                                                                                            ----------  -----------
        Total current assets..............................................................      165.7        257.3
Property, plant and equipment, net of accumulated depreciation of $108.9 and
   $111.8 respectively....................................................................      224.5         99.5
Timber and timberlands, net of accumulated depletion of $261.7 and $251.9,
   respectively...........................................................................      252.6        262.8
Deferred financing costs, net.............................................................       21.6         17.9
Deferred income taxes.....................................................................       12.9         20.8
Restricted cash, marketable securities and other investments..............................       89.8         96.6
Other assets..............................................................................        6.8          7.8
                                                                                            ----------  -----------
                                                                                            $   773.9   $    762.7
                                                                                            ==========  ===========

LIABILITIES AND STOCKHOLDER'S DEFICIT:

Current liabilities:
   Accounts payable.......................................................................  $     5.7   $      6.1
   Accrued interest.......................................................................       26.1         26.4
   Accrued compensation and related benefits..............................................       12.4          8.2
   Deferred income taxes..................................................................        7.5          8.8
   Other accrued liabilities..............................................................        6.5          3.6
   Short-term borrowings and current maturities of long-term debt, excluding $2.3 and
      $2.2, respectively, of repurchased Timber Notes held in the SAR Account.............       35.5         51.3
                                                                                            ----------  -----------
        Total current liabilities.........................................................       93.7        104.4
Long-term debt, less current maturities and excluding $55.4 and $57.7, respectively, of
   repurchased Timber Notes held in the SAR Account.......................................      874.5        770.0
Deferred income taxes.....................................................................       18.4         31.2
Other noncurrent liabilities..............................................................       28.2         26.6
                                                                                            ----------  -----------
        Total liabilities.................................................................    1,014.8        932.2
                                                                                            ----------  -----------

Contingencies (See Note 10)

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....................................................................     (323.1)      (251.4)
   Accumulated other comprehensive income.................................................        0.9          0.6
                                                                                            ----------  -----------
        Total stockholder's deficit.......................................................     (240.9)      (169.5)
                                                                                            ----------  -----------
                                                                                            $   773.9   $    762.7
                                                                                            ==========  ===========




   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,
                                                                                -----------------------------------
                                                                                   2001        2000        1999
                                                                                ----------  ----------  -----------
Net sales:
   Lumber and logs............................................................  $   162.8   $   178.8   $    165.5
   Other......................................................................       26.9        21.3         22.3
                                                                                ----------  ----------  -----------
                                                                                    189.7       200.1        187.8
                                                                                ----------  ----------  -----------

Operating expenses:
   Cost of goods sold.........................................................      164.3       157.4        159.5
   Selling, general and administrative expenses...............................       21.1        15.4         15.4
   Special charges............................................................        8.2           -            -
   Depletion and depreciation.................................................       22.6        20.3         17.3
                                                                                ----------  ----------  -----------
                                                                                    216.2       193.1        192.2
                                                                                ----------  ----------  -----------

Operating income (loss).......................................................      (26.5)        7.0         (4.4)

Other income (expense):
   Gains on sales of timberlands..............................................       16.7        59.5        239.8
   Investment, interest and other income (expense), net.......................       11.1        20.6         26.9
   Interest expense...........................................................      (65.0)      (64.1)       (66.5)
                                                                                ----------  ----------  -----------
Income (loss) before income taxes.............................................      (63.7)       23.0        195.8
Benefit (provision) in lieu of income taxes...................................        9.1       (10.2)       (77.6)
                                                                                ----------  ----------  -----------
Income (loss) before extraordinary item.......................................      (54.6)       12.8        118.2
Extraordinary items:
   Gains on repurchases of debt, net of provision in lieu of income
      taxes of $2.2...........................................................          -         3.8            -
                                                                                ----------  ----------  -----------
Net income (loss).............................................................  $   (54.6)  $    16.6   $    118.2
                                                                                ==========  ==========  ===========


   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, 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)
   Net loss...................................          -          -      (54.6)          -      (54.6)  $   (54.6)
   Change in value of available-for-sale
      investments.............................          -          -          -         0.3        0.3         0.3
                                                                                                         ----------
   Comprehensive loss.........................                                                           $   (54.3)
                                                                                                         ==========
   Dividend...................................          -          -      (17.1)          -      (17.1)
                                                ---------- ----------  ---------  ----------  ---------
Balance, December 31, 2001....................  $          $    81.3   $ (323.1)  $     0.9   $ (240.9)
                                                ========== ==========  =========  ==========  =========


   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,
                                                                                     ------------------------------
                                                                                       2001      2000       1999
                                                                                     --------- ---------  ---------
Cash flows from operating activities:
   Net income (loss)...............................................................  $  (54.6) $   16.6   $  118.2
   Adjustments to reconcile net income (loss) to net cash provided by (used for)
      operating activities:
      Depletion and depreciation...................................................      22.6      20.3       17.3
      Special charges..............................................................       7.6         -          -
      Gains on sales of timberlands................................................     (16.7)    (59.5)    (239.8)
      Extraordinary loss (gains) on early extinguishments of debt, net.............         -      (3.8)         -
      Amortization of deferred financing costs.....................................       1.6       1.5        1.6
      Net gains on marketable securities...........................................         -      (8.2)     (11.5)
      Other........................................................................       7.0         -          -
   Increase (decrease) in cash resulting from changes in:
      Receivables..................................................................      (0.8)      3.9       (6.7)
      Inventories, net of depletion................................................       3.1     (11.7)      (2.0)
      Prepaid expenses and other assets............................................      (2.3)     (3.3)      (4.5)
      Accounts payable.............................................................      (0.7)        -        2.7
      Accrued interest.............................................................      (0.4)     (1.8)      (0.1)
      Accrued and deferred income taxes............................................     (10.4)     10.6       75.8
      Long-term assets and long-term liabilities...................................       0.4       2.0        0.1
   Other ..........................................................................       2.4      (0.1)      (0.1)
                                                                                     --------- ---------  ---------
        Net cash used for operating activities.....................................     (41.2)    (33.5)     (49.0)
                                                                                     --------- ---------  ---------

Cash flows from investing activities:
   Proceeds from dispositions of property and investments..........................      19.9      67.3      298.3
   Net sales (purchases) of marketable securities..................................      (4.8)     30.9       (4.7)
   Capital expenditures............................................................    (144.7)    (14.0)     (23.1)
   Restricted cash withdrawals used to acquire timberlands.........................         -       0.8       12.9
                                                                                     --------- ---------  ---------
        Net cash provided by (used for) investing activities.......................    (129.6)     85.0       283.4
                                                                                     --------- ---------  ---------

Cash flows from financing activities:
   Proceeds from issuance of long-term debt........................................     122.5         -          -
   Borrowings (repayments) under revolving credit agreements.......................     (18.7)     37.0          -
   Incurrence of deferred financing costs..........................................      (5.3)        -       (0.7)
   Redemptions, repurchases of and principal payments on long-term debt............     (15.1)    (16.0)      (8.3)
   Dividends paid..................................................................     (17.1)   (108.3)     (18.7)
   Restricted cash withdrawals (deposits), net.....................................       6.5       9.7     (171.1)
                                                                                     --------- ---------  ---------
        Net cash provided by (used for) financing activities.......................      72.8     (77.6)    (198.8)
                                                                                     --------- ---------  ---------

Net increase (decrease) in cash, cash equivalents and restricted cash..............     (98.0)    (26.1)      35.6
Cash, cash equivalents and restricted cash at beginning of year....................     154.7     180.8      145.2
                                                                                     --------- ---------  ---------
Cash, cash equivalents and restricted cash at end of year..........................  $   56.7  $  154.7   $  180.8
                                                                                     ========= =========  =========

   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 wholly owned 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.

      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"). Salmon Creek's wholly owned subsidiary is Lakepointe Assets
Holdings LLC ("LAKEPOINTE ASSETS"). The Company's core business is 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 is engaged in commercial real estate ownership and leasing through
Lakepointe Assets.

      Liquidity and Cash Resources
      Pacific Lumber's 2001 cash flows from operations were adversely affected
by operating inefficiencies, lower lumber prices, an inadequate supply of logs
and a related slowdown in lumber production. During 2001, comprehensive external
and internal reviews were conducted of Pacific Lumber's business operations.
These reviews were an effort to identify ways in which Pacific Lumber could
operate on a more efficient and cost effective basis. Based upon the results of
these reviews, Pacific Lumber, among other things, indefinitely idled two of its
four sawmills, eliminated certain of its operations, including its soil
amendment and concrete block activities, began utilizing more efficient
harvesting methods and adopted certain other cost saving measures. Most of these
changes were implemented by Pacific Lumber in the last quarter of 2001, or the
first quarter of 2002. Pacific Lumber also ended its internal logging operations
as of April 1, 2002, and intends to rely exclusively on third party contract
loggers to conduct these activities in the future. The adverse impact on
liquidity of its poor operating results was offset by $79.9 million in
distributions made by Scotia LLC to Pacific Lumber (principally from the sale of
the Owl Creek grove), $9.3 million in repayments on an intercompany loan by MGI,
and $18.5 million of proceeds received from the sale of a portion of the Grizzly
Creek grove. The $29.4 million release from the SAR Account discussed in Note 4
will also improve Pacific Lumber's liquidity. However, Pacific Lumber may
require funds available under the Pacific Lumber Credit Agreement, additional
repayments by MGI of an intercompany loan and/or capital contributions from MGI
to enable it to meet its working capital and capital expenditure requirements
for the next year.

      With respect to long-term liquidity, although the Company and its
subsidiaries expect that their existing cash and cash equivalents, lines of
credit and ability to generate cash flows from operations should provide
sufficient funds to meet their debt service 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.

   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 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 quantities. Periodically, the Company will reassess its
depletion rates considering currently estimated merchantable timber and will
adjust depletion rates prospectively.

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

      The Company had three customers which accounted for 15%, 3% and 3%,
respectively, of total net lumber sales for the year ended December 31, 2001.
Trade receivables from these customers totaled $1.3 million as of December 31,
2001.

      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. Rental revenue on operating leases
is recognized on a straight-line basis over the term of the lease.

      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.

      New Accounting Standards
      In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS NO. 143") which
addresses accounting and reporting standards for obligations associated with the
retirement of tangible long-lived assets and the related asset retirement costs.
The Company is required to adopt SFAS No. 143 beginning on January 1, 2003. In
general, SFAS No. 143 requires the recognition of a liability resulting from
anticipated asset retirement obligations, offset by an increase in the value of
the associated productive asset for such anticipated costs. Over the life of the
asset, depreciation expense is to include the ratable expensing of the
retirement cost included with the asset value. The statement applies to all
legal obligations associated with the retirement of a tangible long-lived asset
that results from the acquisition, construction, or development and (or) the
normal operation of a long-lived asset, except for certain lease obligations.
Excluded from this statement are obligations arising solely from a plan to
dispose of a long-lived asset and obligations that result from the improper
operation of an asset (e.g. environmental obligations). The Company is
continuing its evaluation of SFAS No. 143. However, the Company does not
currently expect the adoption of SFAS No. 143 to have a material impact on its
future financial statements.

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

2.    SEGMENT INFORMATION AND SPECIAL CHARGES

      As a result of the acquisition of certain real estate in June 2001 which
is described in Note 3 below, the Company's financial results are reported in
two business segments: forest products and real estate. The column corporate and
other includes the results of the parent company and also serves to reconcile
the total of the reportable segments' amounts to the total in the Company's
consolidated financial statements. The following table presents such financial
information, consistent with the manner in which management reviews and
evaluates the Company's business activities (in millions).



                                                                   FOREST       REAL     CORPORATE    CONSOLIDATED
                                                    DECEMBER 31,  PRODUCTS     ESTATE    AND OTHER        TOTAL
                                                    ------------ -----------  --------- ------------ --------------
Net sales                                               2001     $    185.3   $    4.4  $         -         $189.7
                                                        2000          200.1          -            -          200.1
                                                        1999          187.8          -            -          187.8

Operating income (loss)                                 2001          (27.5)       1.6         (0.6)         (26.5)
                                                        2000            7.6          -         (0.6)           7.0
                                                        1999           (4.1)         -         (0.3)          (4.4)

Investment, interest and other income (expense), net    2001           11.3          -         (0.2)          11.1
                                                        2000           20.5          -          0.1           20.6
                                                        1999           26.9          -            -           26.9


Interest expense                                        2001           60.1        4.9            -           65.0
                                                        2000           64.1          -            -           64.1
                                                        1999           66.5          -            -           66.5

Depletion and depreciation                              2001           19.4        2.6          0.6           22.6
                                                        2000           19.7          -          0.6           20.3
                                                        1999           17.0          -          0.3           17.3

Income (loss) before income taxes                       2001          (59.6)      (3.3)        (0.8)         (63.7)
                                                        2000           23.9          -         (0.9)          23.0
                                                        1999          196.1          -         (0.3)         195.8

Capital expenditures                                    2001           13.4      131.3            -          144.7
                                                        2000           14.0          -            -           14.0
                                                        1999           23.1          -            -           23.1

Total assets                                            2001          610.8      133.7         29.4          773.9
                                                        2000          726.2          -         36.5          762.7



      Special Charges
      The strategic reviews of the Company's operations discussed in Note 1
 resulted in impairment charges, restructuring charges and accruals for
environmental remediation costs.

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

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

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

      Other unusual items include pre-tax gains on the sale of a portion of the
Grizzly creek grove of $16.7 million in November 2001, $60.0 million on the sale
of the Owl Creek grove in December 2000, and $239.8 million on the sale of the
Headwaters Timberlands in March 1999. See Note 3.

3.    SIGNIFICANT ACQUISITIONS AND DISPOSITIONS

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

      Headwaters Transactions
      In March 1999, the United States and California acquired approximately
5,600 acres of timberlands containing a significant amount of virgin old growth
timber, from Salmon Creek and Pacific Lumber (the "HEADWATERS TIMBERLANDS").
Salmon Creek received $299.9 million for its 4,900 acres, and for its 700 acres
Pacific Lumber received the 7,700 acre Elk River Timberlands, which Pacific
Lumber contributed to Scotia LLC in June 1999. See Note 10 below for a
discussion of additional arrangements entered into at that time.

      As a result of the disposition of the Headwaters Timberlands, the Company
recognized a pre-tax gain of $239.8 million ($142.1 million net of deferred
taxes) 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.
On November 15, 2001, Pacific Lumber sold a portion of the Grizzly Creek grove
to California for $19.8 million, resulting in a pre-tax gain of $16.7 million.

4.    CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS

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

      Marketable securities consist primarily of investments in debt securities.
The Company determines the appropriate classification of its investments in debt
securities at the time of purchase and reevaluates such determinations at each
balance sheet date. Debt securities are classified as "held-to-maturity" when
the Company has the positive intent and ability to hold the securities to
maturity. Debt securities which the Company does not have the intent or ability
to hold to maturity are classified as "available-for- sale." "Held-to-maturity"
securities are stated at amortized cost. Debt securities classified as
"held-to-maturity" as of December 31, 2001 and 2000, totaled $11.9 million and
$18.9 million, respectively, and had a fair market value of $11.9 million and
$18.9 million, respectively. "Available-for-sale" securities are carried at fair
market value, with the unrealized gains and losses included in other
comprehensive income and reported in 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, 2001 were: 2001
- - no net realized gains or losses and net unrealized gains of $1.3 million; 2000
- - net realized gains of $9.4 million and no net unrealized gains or losses; 1999
- - net realized gains of $12.7 million and net unrealized losses of $0.9 million.

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


                                                                                               December 31,
                                                                                       ----------------------------
                                                                                           2001           2000
                                                                                       ------------- --------------
Current assets:
   Cash and cash equivalents:
      Amounts held as security for short positions in marketable securities..........  $          -  $         5.1
      Other restricted cash and cash equivalents.....................................          35.4           29.2
                                                                                       ------------- --------------
                                                                                               35.4           34.3
                                                                                       ------------- --------------
   Marketable securities, restricted:
      Amounts held in SAR Account....................................................          17.1           16.3
                                                                                       ------------- --------------

Long-term restricted cash, marketable securities and other investments:
   Amounts held in SAR Account.......................................................         137.8          144.4
   Other amounts restricted under the Timber Notes Indenture.........................           2.8            2.9
   Other long-term restricted cash...................................................           2.2            2.0
   Less:  Amounts attributable to Timber Notes held in SAR Account...................         (53.0)         (52.7)
                                                                                       ------------- --------------
                                                                                               89.8           96.6
                                                                                       ------------- --------------

Total restricted cash, marketable securities and other investments...................  $      142.3  $       147.2
                                                                                       ============= ==============

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

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

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


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

Investment in Equity Fund Partnership:
   Restricted........................................................................   $       10.6    $        10.1
   Unrestricted......................................................................           10.0               -
                                                                                        -------------   --------------
                                                                                        $       20.6    $        10.1
                                                                                        =============   ==============

Percentage of ownership held.........................................................            6.0%            10.8%
                                                                                        =============   ==============

       As of December 31, 2001, long-term restricted cash, marketable
securities, and other investments also included $5.1 million related to an
investment in a limited partnership which invests in debt and equity securities
associated with developed and emerging markets.

5.    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,
                                                                                               --------------------
                                                                                                 2001       2000
                                                                                               ---------  ---------
Lumber........................................................................................ $   26.1   $   30.7
Logs..........................................................................................     23.5       22.6
                                                                                               ---------  ---------
                                                                                               $   49.6   $   53.3
                                                                                               =========  =========

      Inventories at December 31, 2001 have been reduced by a $1.6 charge (in
cost of goods sold) due to a decline in current market prices below the cost of
such inventory.

6.    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment, including capitalized interest, is stated
at cost, net of accumulated depreciation. Depreciation is computed principally
utilizing the straight-line method at rates based upon the estimated useful
lives of the various classes of assets. The carrying value of property, plant
and equipment is assessed when events and circumstances indicate that an
impairment might exist. The existence of an impairment is determined by
comparing the net carrying value of the asset to its estimated undiscounted
future cash flows. If an impairment is present, the asset is reported at the
lower of carrying value or fair value. As discussed in Note 1, the Company
recorded $2.2 million for asset impairments in 2001. The major classes of
property, plant and equipment are as follows (dollar amounts in millions):


                                                                               ESTIMATED         DECEMBER 31,
                                                                                            -----------------------
                                                                             USEFUL LIVES      2001        2000
                                                                             -------------  ----------  -----------
Logging roads, land and improvements.......................................       15 years  $    53.7   $     34.0
Buildings..................................................................       33 years      144.7         37.5
Machinery and equipment....................................................   3 - 15 years      131.5        137.0
Construction in progress...................................................                       3.5          2.8
                                                                                            ----------  -----------
                                                                                                333.4        211.3
Less:  accumulated depreciation............................................                    (108.9)      (111.8)
                                                                                            ----------  -----------
                                                                                            $    224.5  $     99.5
                                                                                            ==========  ===========

      Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $12.7 million, $10.3 million and $10.0 million, respectively.

7.    LONG-TERM AND SHORT-TERM DEBT

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001        2000
                                                                                            ----------  -----------
Pacific Lumber Credit Agreement...........................................................  $    17.7   $     37.0
6.55% Scotia LLC Class A-1 Timber Collateralized Notes due July 20, 2028..................      120.3        136.7
7.11% Scotia LLC Class A-2 Timber Collateralized Notes due July 20, 2028..................      243.2        243.2
7.71% Scotia LLC Class A-3 Timber Collateralized Notes due July 20, 2028..................      463.3        463.3
7.56% Lakepointe Notes (see Note 2).......................................................      121.7            -
Other.....................................................................................        1.5          1.0
                                                                                            ----------  -----------
                                                                                                967.7        881.2
Less: current maturities..................................................................      (35.5)       (51.3)
   Timber Notes held in SAR Account.......................................................      (57.7)       (59.9)
                                                                                            ----------  -----------
                                                                                            $   874.5   $    770.0
                                                                                            ==========  ===========

      Scotia LLC Timber Notes
      Scotia LLC issued $867.2 million aggregate principal amount of Timber
Notes on July 20, 1998. The Timber Notes and the Scotia LLC Line of Credit
(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 $120.3 million of Class A-1 Timber
Notes).

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

      Pursuant to certain liquidity requirements under the Timber Notes
Indenture, Scotia LLC has entered into an agreement (the "SCOTIA LLC LINE OF
CREDIT") with a group of banks pursuant to which Scotia LLC may borrow to pay
interest on the Timber Notes. The maximum amount Scotia LLC may borrow is equal
to one year's interest on the aggregate outstanding principal balance of the
Timber Notes (the "REQUIRED LIQUIDITY AMOUNT"). At December 31, 2001, the
Required Liquidity Amount was $60.9 million. On June 1, 2001, the Scotia LLC
Line of Credit was extended an additional year to July 12, 2002. Annually,
Scotia LLC will request that the banks extend the Scotia LLC Line of Credit for
a period of not less than 364 days. If not extended, Scotia LLC may draw upon
the full amount available. The amount drawn would be repayable in 12 semiannual
installments on each note payment date (after the payment of certain other
items, including the Aggregate Minimum Principal Amortization Amount, as
defined, then due), commencing approximately two and one-half years following
the date of the draw. Borrowings under the Scotia LLC Line of Credit generally
bear interest at the Base Rate (as defined in the agreement) plus 0.25% or at a
one month or six month LIBOR rate plus 1.0% at any time the borrowings have not
been continually outstanding for more than six months. As of December 31, 2001,
Scotia LLC had no borrowings outstanding under the Scotia LLC Line of Credit.

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

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

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

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

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

      Lakepointe Notes
      In June 2001, Lakepointe Assets financed the purchase of Lake Pointe Plaza
with proceeds from the Lakepointe Notes (see Note 3). The Lakepointe Notes
consist of $122.5 principal amount of 7.56% notes due June 8, 2021. The
Lakepointe Notes are secured by the Lake Pointe Plaza operating leases, Lake
Pointe Plaza and a $60.0 million residual value insurance contract.

      Maturities
      Scheduled maturities of long-term and short-term debt outstanding at
December 31, 2001 are as follows: $35.5 million in 2002, $19.2 million in 2003,
$20.8 million in 2004, $22.8 million in 2005, $26.8 million in 2006 and $784.9
million thereafter.

      At December 31, 2001, the estimated fair value of the Company's current
and long-term debt was $882.4 million. At December 31, 2000, the estimated fair
value of debt, including current maturities, was $707.1 million. The estimated
fair value of debt is determined based on the quoted market prices for the
publicly traded issues and on the current rates offered for borrowings similar
to the other debt. Some of the Company's publicly traded debt issues are thinly
traded financial instruments; accordingly, their market prices at any balance
sheet date may not be representative of the prices which would be derived from a
more active market.

      Restricted Net Assets of Subsidiaries
      As of December 31, 2001, all of the assets of the Company are subject to
certain debt instruments which restrict the ability to transfer assets, make
loans and advances and pay dividends to MGHI.

8.    BENEFIT (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"), as amended effective March 1,
1999, Pacific Lumber is liable to MAXXAM for the federal consolidated income tax
liability of Pacific Lumber, Scotia LLC and other subsidiaries of Pacific Lumber
(collectively, the "PL SUBGROUP") computed as if the PL Subgroup was a separate
affiliated group of corporations which was never connected with MAXXAM. 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") as amended effective March 1, 1999, 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, and that such corporations were never
connected with MAXXAM (the "MGI CONSOLIDATED TAX LIABILITY"). 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). 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 benefit (provision) in lieu of income taxes on income (loss) before
income taxes consists of the following (in millions):


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2001      2000       1999
                                                                                     --------- ---------  ---------
Current:
   Federal in lieu of income taxes.................................................  $      -  $    0.1   $   (3.0)
   State and local.................................................................         -         -        0.1
                                                                                     --------- ---------  ---------
                                                                                            -       0.1       (2.9)
                                                                                     --------- ---------  ---------
Deferred:
   Federal in lieu of income taxes.................................................       8.6      (6.2)     (53.1)
   State and local.................................................................       0.5      (4.1)     (21.6)
                                                                                     --------- ---------  ---------
                                                                                          9.1     (10.3)     (74.7)
                                                                                     --------- ---------  ---------
                                                                                     $    9.1  $  (10.2)  $  (77.6)
                                                                                     ========= =========  =========

      A reconciliation between the benefit (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,
                                                                                     ------------------------------
                                                                                       2001      2000       1999
                                                                                     --------- ---------  ---------
Income (loss) before income taxes..................................................  $  (63.7) $   23.0   $  195.8
                                                                                     ========= =========  =========

Amount of federal income tax benefit (provision) based upon the statutory rate.....  $   22.3  $   (8.1)  $  (68.6)
Changes in valuation allowances and revision of prior years' tax estimates.........     (13.6)      0.7        4.5
State and local taxes, net of federal tax effect...................................       0.7      (2.7)     (13.1)
Expenses for which no federal tax benefit is available.............................      (0.3)     (0.2)      (0.4)
Other..............................................................................         -       0.1          -
                                                                                     --------- ---------  ---------
                                                                                     $    9.1  $  (10.2)  $  (77.6)
                                                                                     ========= =========  =========

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

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


                                                                                                 DECEMBER 31,
                                                                                            -----------------------
                                                                                               2001        2000
                                                                                            ----------  -----------
Deferred income tax assets:
   Loss and credit carryforwards..........................................................  $   173.1   $    144.7
   Timber and timberlands.................................................................       17.2         21.0
   Other..................................................................................       24.0         20.4
   Valuation allowances...................................................................      (61.8)       (47.6)
                                                                                            ----------  -----------
      Total deferred income tax assets, net...............................................       152.5       138.5
                                                                                            ----------  -----------
Deferred income tax liabilities:
   Deferred gains on sales of timber and timberlands......................................     (111.0)      (130.4)
   Property, plant and equipment..........................................................      (38.9)       (14.7)
   Inventories............................................................................       (7.7)        (8.2)
   Other..................................................................................       (7.4)        (6.1)
                                                                                            ----------  -----------
      Total deferred income tax liabilities...............................................     (165.0)      (159.4)
                                                                                            ----------  -----------
Net deferred income tax liabilities.......................................................  $   (12.5)  $    (20.9)
                                                                                            ==========  ===========

      Included in net deferred income tax assets as of December 31, 2001 is
$111.3 million attributable to the tax benefit of loss and credit carryforwards,
net of valuation allowances. The Company evaluated all appropriate factors in
determining the realizability of the deferred tax assets attributable to loss
and credit carryforwards, including any limitations on their use, the reversal
of deferred gains, other temporary differences, the year the carryforwards
expire and the levels of taxable income necessary for utilization. The Company
also considered the potential recognition for tax purposes of the deferred gains
on sales of timber and timberlands. Based on this evaluation of the appropriate
factors to determine the proper valuation allowances for these carryforwards,
the Company believes that it is more likely than not that it will realize the
benefit for the carryforwards for which valuation allowances were not provided.
The deferred income tax liabilities related to deferred gains on the sales of
timber and timberlands are a result of the sales of the Headwaters Timberlands
(1999), the Owl Creek grove (2000), and the Grizzly Creek grove (2001). The
Company has reinvested a portion of these proceeds, and expects to make further
reinvestments. Reinvestments beyond the levels currently planned could impact
the Company's evaluation of deferred gains available for offset against net
operating losses and in turn the Company's evaluation of the realizability of
its net operating losses.

      Included in the net deferred income tax liabilities listed above are $5.9
million and $(1.9) million at December 31, 2001 and 2000, respectively, which
are recorded pursuant to the tax allocation agreements with MAXXAM in respect of
federal taxes. The remaining portion of the net deferred liabilities is
attributable to state tax jurisdictions.

      The following table presents the estimated tax attributes for federal
income tax purposes for the Company and its subsidiaries as of December 31,
2001, 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...................................................................  $   469.4         2021
   Alternative Minimum tax credit.........................................................        0.7   Indefinite
Alternative Minimum Tax Attribute Carryforwards:
   Net operating losses...................................................................  $   419.2         2021

      The income tax provision related to other comprehensive income for the
years ended December 31, 2001 and 2000 was $0.2 million and $0.5 million,
respectively. There was no provision related to other comprehensive income for
the year ended December 31, 1999.

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, 2001 and 2000, respectively (in millions):


                                                                            PENSION BENEFITS   MEDICAL/LIFE BENEFITS
                                                                          -------------------- --------------------
                                                                                  YEARS ENDED DECEMBER 31,
                                                                          -----------------------------------------
                                                                            2001       2000      2001       2000
                                                                          ---------  --------- ---------  ---------
Change in benefit obligation:
   Benefit obligation at beginning of year..............................  $   38.2   $   33.7  $    6.0   $    4.9
   Service cost.........................................................       2.2        1.9       0.3        0.2
   Interest cost........................................................       2.9        2.7       0.4        0.3
   Plan participants' contributions.....................................         -          -       1.2        1.1
   Actuarial (gain) loss................................................       1.3        0.8       0.4        1.2
   Benefits paid........................................................      (0.9)      (0.9)     (1.7)      (1.7)
   Plan amendments and termination benefits.............................      (0.4)         -      (0.4)         -
                                                                          ---------  --------- ---------  ---------
      Benefit obligation at end of year.................................      43.3       38.2       6.2        6.0
                                                                          ---------  --------- ---------  ---------

Change in plan assets:
   Fair value of plan assets at beginning of year.......................      34.7       37.1         -          -
   Actual return on assets..............................................      (2.4)      (1.5)        -          -
   Employer contributions...............................................       1.3          -       0.5        0.6
   Plan participants' contributions.....................................         -          -       1.2        1.1
   Benefits paid........................................................      (0.9)      (0.9)     (1.7)      (1.7)
                                                                          ---------  --------- ---------  ---------
      Fair value of plan assets at end of year..........................      32.7       34.7         -          -
                                                                          ---------  --------- ---------  ---------

   Benefit obligation in excess of (less than) plan assets..............      10.5        3.5       6.1        6.0
   Unrecognized actuarial gain..........................................       0.7        7.5       0.4        0.8
   Unrecognized prior service costs.....................................      (0.6)      (0.7)      0.3          -
                                                                          ---------  --------- ---------  ---------
      Accrued benefit liability.........................................  $   10.6   $   10.3  $    6.8   $    6.8
                                                                          =========  ========= =========  =========




                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2001       2000      1999       2001      2000       1999
                                                     ---------  --------  ---------  --------- ---------  ---------
Components of net periodic benefit costs:
   Service cost....................................  $    2.2   $   1.9   $    2.4   $    0.3  $    0.2   $   0.3
   Interest cost...................................       2.9       2.7        2.5        0.4       0.3       0.4
   Expected return on assets.......................      (2.8)     (2.6)      (2.1)         -         -          -
   Prior service cost and amortization.............       0.1       0.1        0.1          -         -          -
   Recognized net actuarial gain...................      (0.4)     (0.4)         -          -      (0.1)      (0.1)
                                                     ---------  --------  ---------  --------- ---------  ---------
      Net periodic benefit cost....................       2.0       1.7        2.9        0.7       0.4        0.6
   Effect of curtailments, settlements and
      special termination benefits.................      (0.4)        -          -       (0.1)        -          -
                                                     ---------  --------  ---------  --------- ---------  ---------
   Net total benefit costs.........................  $    1.6   $   1.7   $    2.9   $    0.6  $    0.4   $    0.6
                                                     =========  ========  =========  ========= =========  =========





                                                            PENSION BENEFITS             MEDICAL/LIFE BENEFITS
                                                     ------------------------------  ------------------------------
                                                                        YEARS ENDED DECEMBER 31,
                                                     --------------------------------------------------------------
                                                       2001       2000      1999       2001      2000       1999
                                                     ---------  --------  ---------  --------- ---------  ---------
Weighted-average assumptions:
   Discount rate...................................    7.3%       7.5%      7.8%       7.3%      7.5%       7.8%
   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, 2001 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 $1.4 million, $1.5 million and $1.4 million for the
years ended December 31, 2001, 2000 and 1999, 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 $12.9
million and $9.2 million at December 31, 2001 and 2000, respectively. Workers'
compensation expenses amounted to $7.3 million, $3.4 million and $3.9 million
for the years ended December 31, 2001, 2000 and 1999, 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 $2.4 million, $2.0 million and $3.0 million for the years
ended December 31, 2001, 2000 and 1999, 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, 2001 are
as follows: years ending December 31, 2002--$3.4 million; 2003--$3.2 million;
2004--$2.1 million; 2005--$1.6 million; 2006--$1.2 million; thereafter--$1.8
million. Rental expense for operating leases was $4.0 million, $4.7 million and
$4.2 million for the years ended December 31, 2001, 2000 and 1999, respectively.

      The Lake Pointe Plaza building is leased to tenants under operating
leases. Building lease terms are for 20 years. Minimum rentals on operating
leases are contractually due as follows: 2002 - $11.3 million; 2003 - $11.3
million; 2004 - $10.2 million; 2005 - $9.7 million; 2006 - $10.0 million;
thereafter - $155.8 million.

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

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

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

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

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

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

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

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

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

12.   SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION


                                                                                        YEARS ENDED DECEMBER 31,
                                                                                     ------------------------------
                                                                                       2001      2000       1999
                                                                                     --------- ---------  ---------
                                                                                              (IN MILLIONS)
Supplemental information on non-cash investing and financing activities:
   Repurchases of debt using restricted cash........................................ $      -  $   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....................................... $   63.6  $   64.5   $   65.0
   Tax allocation payments to (from) MAXXAM.........................................      1.3      (0.5)       1.8



13.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

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


                                                                            THREE MONTHS ENDED
                                                        -----------------------------------------------------------
                                                          MARCH 31        JUNE 30     SEPTEMBER 30     DECEMBER 31
                                                        -------------  -------------  -------------- --------------
2001:
   Net sales..........................................  $       44.8   $       53.3   $        46.9  $        44.7
   Operating income (loss)............................          (4.5)           0.8            (1.3)         (21.5)
   Income (loss) before extraordinary items...........          (9.1)          (3.4)          (16.3)         (25.8)
   Extraordinary items, net...........................             -              -               -              -
   Net income (loss)..................................          (9.1)          (3.4)          (16.3)         (25.8)
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

EX-99

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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, 2001
and 2000, 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, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to a going
concern which contemplate among other things, realization of assets and payment
of liabilities in the normal course of business. As discussed in Note 1 to the
consolidated financial statements, on February 12, 2002, the Company, its wholly
owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC") and certain of
KACC's subsidiaries filed for reorganization under Chapter 11 of the United
States Bankruptcy Code. This action raises substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities or the
effects on existing stockholders' equity that may result from any plans,
arrangements or other actions arising from the aforementioned proceedings, or
the possible inability of the Company to continue in existence.



ARTHUR ANDERSEN LLP




Houston, Texas
April 10, 2002



KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------


                                                                                               December 31,
                                                                                        --------------------------
(In millions of dollars, except share amounts)                                                  2001          2000
- ------------------------------------------------------------------------------------    ------------   -----------

ASSETS
Current assets:
   Cash and cash equivalents                                                            $     153.3    $     23.4
   Receivables:
     Trade, less allowance for doubtful receivables of $7.0 and $5.8                          124.1         188.7
     Other                                                                                     82.3         241.1
   Inventories                                                                                313.3         396.2
   Prepaid expenses and other current assets                                                   86.2         162.7
                                                                                        ------------   -----------

     Total current assets                                                                     759.2       1,012.1

Investments in and advances to unconsolidated affiliates                                       63.0          77.8
Property, plant, and equipment - net                                                        1,215.4       1,176.1
Deferred income taxes                                                                             -         454.2
Other assets                                                                                  706.1         622.9
                                                                                        ------------   -----------

     Total                                                                              $   2,743.7    $  3,343.1
                                                                                        ============   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                                     $     167.4    $    236.8
   Accrued interest                                                                            35.4          37.5
   Accrued salaries, wages, and related expenses                                               88.9         110.3
   Accrued postretirement medical benefit obligation - current portion                         62.0          58.0
   Other accrued liabilities                                                                  223.3         288.9
   Payable to affiliates                                                                       52.9          78.3
   Long-term debt - current portion                                                           173.5          31.6
                                                                                        ------------   -----------

     Total current liabilities                                                                803.4         841.4

Long-term liabilities                                                                         919.9         703.7
Accrued postretirement medical benefit obligation                                             642.2         656.9
Long-term debt                                                                                700.8         957.8
Minority interests                                                                            118.5         101.1
Commitments and contingencies
Stockholders' equity:
   Common stock, par value $.01, authorized 125,000,000 shares; issued
     and outstanding 80,698,066 and 79,599,557 shares                                            .8            .8
   Additional capital                                                                         539.1         537.5
   Accumulated deficit                                                                       (913.7)       (454.3)
   Accumulated other comprehensive income (loss)                                              (67.3)         (1.8)
                                                                                        ------------   -----------

     Total stockholders' equity                                                              (441.1)         82.2
                                                                                        ------------   -----------

     Total                                                                              $   2,743.7    $  3,343.1
                                                                                        ============   ===========


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


KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
- --------------------------------------------------------------------------------


                                                                                            Year Ended December 31,
                                                                                    ---------------------------------------
(In millions of dollars, except share amounts)                                             2001          2000          1999
- ---------------------------------------------------------------------------------   -----------   -----------   -----------

Net sales                                                                           $  1,732.7    $  2,169.8    $  2,083.6
                                                                                    -----------   -----------   -----------

Costs and expenses:
   Cost of products sold                                                               1,638.4       1,891.4       1,893.5
   Depreciation and amortization                                                          90.2          76.9          89.5
   Selling, administrative, research and development, and general                        102.8         104.1         105.4
   Non-recurring operating items                                                        (163.6)        (41.9)         24.1
                                                                                    -----------   -----------   -----------

     Total costs and expenses                                                          1,667.8       2,030.5       2,112.5
                                                                                    -----------   -----------   -----------

Operating income (loss)                                                                   64.9         139.3         (28.9)

Other income (expense):
   Interest expense                                                                     (109.0)       (109.6)       (110.1)
   Gain on sale of interest in QAL                                                       163.6         -             -
   Gain on involuntary conversion at Gramercy facility                                   -             -              85.0
   Other - net                                                                           (32.8)         (4.3)        (35.9)
                                                                                    -----------   -----------   -----------

Income (loss) before income taxes and minority interests                                  86.7          25.4         (89.9)

(Provision) benefit for income taxes                                                    (550.2)        (11.6)         32.7

Minority interests                                                                         4.1           3.0           3.1
                                                                                    -----------   -----------   -----------

Net income (loss)                                                                   $   (459.4)   $     16.8    $    (54.1)
                                                                                    ===========   ===========   ===========

Earnings (loss) per share:
   Basic/Diluted                                                                    $    (5.73)   $      .21    $     (.68)
                                                                                    ===========   ===========   ===========

Weighted average shares outstanding (000):
   Basic                                                                                80,235        79,520        79,336
                                                                                    ===========   ===========   ===========

   Diluted                                                                              80,235        79,523        79,336
                                                                                    ===========   ===========   ===========

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
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, 1998                  $            .8   $         535.4   $      (417.0) $         -      $    119.2

   Net income (loss)                                  -                 -               (54.1)           -           (54.1)
   Minimum pension liability adjustment,
      net of income tax benefit of $.7                -                 -                -                (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 income tax benefit of $.4                 -                 -                -                 (.6)        (.6)
                                                                                                                -----------
     Comprehensive income                             -                 -                -               -            16.2
   Incentive plan accretion                           -                    .7            -               -              .7
                                            ----------------  ----------------  -------------- ---------------- -----------

BALANCE, December 31, 2000                               .8             537.5          (454.3)            (1.8)       82.2

   Net income (loss)                                  -                 -              (459.4)           -          (459.4)
   Minimum pension liability
     adjustment, net of income tax
     benefit of $38.0                                 -                 -                -               (64.5)      (64.5)
   Cumulative effect of accounting
     change, net of income tax
     provision of $.5                                 -                 -                -                 1.8         1.8
   Unrealized net gain on derivative
     instruments arising during the
     period, net of income tax
     provision of $19.4                               -                 -                -                33.1        33.1
   Less reclassification adjustment for
     realized net gain on derivative
     instruments included in net
     income, net of income tax
     benefit of $5.8                                  -                 -                -               (10.9)      (10.9)
   Adjustment of valuation allowances for
     net deferred income tax assets provided
     in respect of items reflected in Other
     comprehensive income                             -                 -                -               (25.0)      (25.0)
                                                                                                                -----------
   Comprehensive income                                                                                             (524.9)
   Incentive plan and restricted stock
     accretion                                       -                    1.6            -               -            1.6
                                            ----------------  ----------------  -------------- ---------------- -----------

BALANCE, December 31, 2001                  $            .8   $         539.1   $      (913.7) $         (67.3) $   (441.1)
                                            ================  ================  ============== ================ ===========

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

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
- --------------------------------------------------------------------------------

                                                                                               Year Ended December 31,
                                                                                   -----------------------------------------------
(In millions of dollars)                                                                     2001              2000           1999
- ---------------------------------------------------------------------------------  --------------    --------------   ------------
Cash flows from operating activities:
   Net income (loss)                                                               $      (459.4)    $        16.8    $     (54.1)
   Adjustments to reconcile net income to net cash (used) provided by
       operating activities:
       Depreciation and amortization (including deferred financing costs of $5.1,
         $4.4 and $4.3)                                                                     95.3              81.3           93.8
       Non-cash restructuring and impairment charges (Notes 2 and 6)                        41.7              63.3           19.1
       Gain on involuntary conversion at Gramercy facility                                   -                 -            (85.0)
       Gains - sale of QAL interest and real estate in 2001, real estate in 2000,
         and interests in AKW L.P. in 1999                                                (173.6)            (39.0)         (50.5)
       Equity in loss (income) of unconsolidated affiliates, net of distributions            1.1              13.1           (4.9)
       Minority interests                                                                   (4.1)             (3.0)          (3.1)
       Decrease (increase) in trade and other receivables                                  226.0            (168.8)          21.7
       Decrease (increase) in inventories                                                   66.7             125.8           (2.6)
       Decrease (increase) in prepaid expenses and other current assets                     23.2              20.8          (66.9)
       (Decrease) increase in accounts payable (associated with operating activities)
         and accrued interest                                                              (39.1)            (29.7)          58.8
       (Decrease) increase in payable to affiliates and other accrued liabilities          (48.5)             68.9           19.6
       Increase (decrease) in accrued and deferred income taxes                            521.8             (10.2)         (55.2)
       Net cash impact of changes in long-term assets and liabilities                      (12.5)            (69.4)          15.7
       Other                                                                                11.2              13.2            4.3
                                                                                   --------------    --------------   ------------

         Net cash provided (used) by operating activities                                  249.8              83.1          (89.3)
                                                                                   --------------    --------------   ------------

Cash flows from investing activities:
   Capital expenditures (including $78.6, $239.1 and $4.8 related to the Gramercy
     facility)                                                                            (148.7)           (296.5)         (68.4)
   (Decrease) increase in accounts payable - Gramercy-related capital expenditures         (34.6)             34.6             -
   Gramercy-related property damage insurance recoveries                                     -               100.0             -
   Net proceeds from dispositions; primarily QAL interest  in 2001, real estate in
     2000 and AKW L.P. interests in 1999                                                   171.6              66.9           74.8
   Other                                                                                     2.4                .2           (3.3)
                                                                                   --------------    --------------   ------------

         Net cash (used) provided by investing activities                                   (9.3)            (94.8)           3.1
                                                                                   --------------    --------------   ------------

Cash flows from financing activities:
   (Repayments) borrowings under credit agreement, net                                     (30.4)             20.0           10.4
   Repayments of other debt                                                                (74.7)             (2.9)           (.6)
   Redemption of minority interests' preference stocks                                      (5.5)             (2.8)          (1.6)
   Incurrence of financing costs                                                             -                 (.4)            -
   Capital stock issued                                                                      -                 -               .1
   Decrease in restricted cash, net                                                          -                 -               .8
                                                                                   --------------    --------------   ------------

         Net cash (used) provided by financing activities                                 (110.6)             13.9            9.1
                                                                                   --------------    --------------   ------------

Net increase (decrease) in Cash and cash equivalents during the year                       129.9               2.2          (77.1)
Cash and cash equivalents at beginning of year                                              23.4              21.2           98.3
                                                                                   --------------    --------------   ------------

Cash and cash equivalents at end of year                                           $       153.3     $        23.4    $      21.2
                                                                                   ==============    ==============   ============

Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized interest of $3.5, $6.5 and $3.4               $       106.0     $       105.3    $     105.4
   Income taxes paid                                                                        52.1              19.6           24.1
           The accompanying notes to consolidated financial statements are an
integral part of these statements.




KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(In millions of dollars, except share amounts)
- --------------------------------------------------------------------------------

1.   REORGANIZATION PROCEEDINGS

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

The necessity for filing the Cases was attributable to the liquidity and cash
flow problems of the Company arising in late 2001 and early 2002. The Company
was facing significant near-term debt maturities at a time of unusually weak
aluminum industry business conditions, depressed aluminum prices and a broad
economic slowdown that was further exacerbated by the events of September 11. In
addition, the Company had become increasingly burdened by the asbestos
litigation (see Note 12) and growing legacy obligations for retiree medical and
pension costs (see Note 10). The confluence of these factors created the
prospect of continuing operating losses and negative cash flow, resulting in
lower credit ratings and an inability to access the capital markets.

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

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

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

                     CONDENSED CONSOLIDATING BALANCE SHEETS
                                DECEMBER 31, 2001


                                                                                           Consolidation/
                                                                                             Elimination
                                                           Debtors         Non-Debtors         Entries        Consolidated
                                                      ----------------   ---------------  ----------------   --------------

Current assets                                        $         607.6    $        151.6   $          -       $       759.2
Investments in subsidiaries                                   1,390.4              33.4          (1,360.8)            63.0
Intercompany receivables (payables)                          (1,004.0)          1,004.0              -                 -
Property and equipment, net                                     825.5             389.9              -             1,215.4
Deferred income taxes                                           (66.6)             66.6              -                 -
Other assets                                                    696.9               9.2              -               706.1
                                                      ----------------   ---------------  ----------------   --------------
                                                      $       2,449.8    $      1,654.7   $      (1,360.8)   $     2,743.7
                                                      ================   ===============  ================   ==============

Current liabilities                                   $         702.0    $        101.4   $          -       $       803.4
Other long-term liabilities                                   1,510.2              51.9              -             1,562.1
Long-term debt                                                  678.7              22.1              -               700.8
Minority interests                                               -                 98.8              19.7            118.5
Stockholders' equity                                           (441.1)          1,380.5          (1,380.5)          (441.1)
                                                      ----------------   ---------------  ----------------   --------------
                                                      $       2,449.8    $      1,654.7   $      (1,360.8)   $     2,743.7
                                                      ================   ===============  ================   ==============

                  CONDENSED CONSOLIDATING STATEMENTS OF INCOME
                      FOR THE YEAR ENDED DECEMBER 31, 2001


                                                                                           Consolidation/
                                                                                             Elimination
                                                           Debtors         Non-Debtors         Entries        Consolidated
                                                      ----------------   ---------------  ----------------   --------------

Net sales                                             $       1,252.8    $        592.7   $        (112.8)   $     1,732.7
Costs and expenses:
     Operating costs and expenses                             1,354.0             577.8            (100.4)         1,831.4
     Non-recurring operating items                             (167.2)              3.6              -              (163.6)
                                                      ----------------   ---------------  ----------------   --------------
Operating income                                                 66.0              11.3             (12.4)            64.9
Interest expense                                               (106.5)             (2.5)             -              (109.0)
Other income (expense), net                                     131.8              (1.0)             -               130.8
Benefit (provision) for income tax                             (548.9)             (1.3)             -              (550.2)
Minority interests                                               -                  5.2              (1.1)             4.1
Equity in income of subsidiaries                                 11.7              -                (11.7)             -
                                                      ----------------   ---------------  ----------------   --------------
Net income (loss)                                     $        (445.9)   $         11.7   $         (25.2)   $      (459.4)
                                                      ================   ===============  ================   ==============

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

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

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

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

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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Going Concern. The consolidated financial statements of the Company have been
prepared on a "going concern" basis which contemplates the realization of assets
and the liquidation of liabilities in the ordinary course of business; however,
as a result of the commencement of the Cases, such realization of assets and
liquidation of liabilities are subject to a significant number of uncertainties.
The financial statements for periods ending after the Filing Date will include
adjustments and reclassifications to reflect the liabilities which have been
deferred as a result of the commencement of the Cases. Specifically, but not all
inclusive, the consolidated financial statements do not present: (a) the
classification of any long-term debt which is in default as a current liability,
(b) the realizable value of assets on a liquidation basis or the availability of
such assets to satisfy liabilities, (c) the amount which will ultimately be paid
to settle liabilities and contingencies which may be allowed in the Cases, or
(d) the effect of any changes which may be made in connection with the Debtors'
capitalizations or operations resulting from a plan of reorganization. Because
of the ongoing nature of the Cases, the discussions and consolidated financial
statements contained herein are subject to material uncertainties.

Future financial statements of the Company and the Debtors will be reported in
accordance with Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code ("SOP 90-7"). The more significant
impacts on the Company's future financial reporting (prior to any plan of
reorganization that may be approved by the Court) will be -

   -  The balance sheet will distinguish between pre-Filing Date liabilities
      that are subject to compromise from those that are not (such as fully
      secured liabilities that are expected not to be compromised) and
      post-Filing Date obligations. (See Note 8 for a break-down of secured vs.
      unsecured debt).

   -  Interest expense will only be reflected for fully secured debt.
      Contractual interest expense for debt subject to compromise will be
      reported parenthetically on the face of the statement of consolidated
      income (loss) but will not be deducted in determining net income.

   -  Revenues, gains and losses, costs and expenses (including professional
      fees) and provisions for losses resulting directly from the Cases will be
      separately reported as "Reorganization Items" in the statement of
      consolidated income (loss). Interest income earned by the Debtors that
      would not have otherwise been earned during the pendency of the Cases will
      also be reported as a "reorganization item." The amounts of reorganization
      items that will be incurred during the pendency of the Cases cannot be
      predicted at this time, but such amounts are expected to be significant.

Principles of Consolidation. The consolidated financial statements include the
statements of 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, 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 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 (see Note 15).

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.

Recognition of Sales. Sales are recognized when title, ownership and risk of
loss pass to the buyer.

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. However, earnings per share may
not be meaningful, because as a part of a plan of reorganization, it is possible
that the interests of the Company's existing stockholders could be diluted or
cancelled.

Diluted earnings per share for the year ended December 31, 2000 included the
dilutive effect of outstanding stock options ( 3,000 shares). The impact of
outstanding stock options was excluded from the computation of diluted loss per
share for the years ended December 31, 2001 and 1999, as their 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, 2001, have been reduced by
(a) a $5.6 charge (in non-recurring operating items) to write-down certain
excess operating supplies and repairs and maintenance parts that will be sold,
rather than used in production, as part of the Company's performance improvement
initiative to generate one-time cash and (b) $8.2 of LIFO inventory charges (in
cost of products sold) as reductions of inventory volumes were in inventory
layers with higher costs than current market prices ($3.2 of which was recorded
in the fourth quarter of 2001). Inventories at December 31, 2000, were reduced
by LIFO inventory charges totaling $24.1 ($.6 in cost of products sold and $23.5
in non-recurring operating items). 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,
                                                                       ----------------------------
                                                                               2001            2000
- --------------------------------------------------------------------   ------------   -------------
Finished fabricated products                                           $      30.4    $        54.6
Primary aluminum and work in process                                         108.3            126.9
Bauxite and alumina                                                           77.7             88.6
Operating supplies and repair and maintenance parts                           96.9            126.1
                                                                       ------------   -------------
                                                                       $     313.3    $       396.2
                                                                       ============   =============

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 2001, 2000 and 1999 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 2001 by $.3, reduce net income in 2000 by $2.2
and increase the net loss in 1999 by $1.8. The fair value of the 2001, 2000 and
1999 stock option grants were estimated using a Black-Scholes option pricing
model.

Other Income (Expense). Amounts included in other income (expense) in 2001, 2000
and 1999, other than interest expense, gain on sale of QAL interest and gain on
involuntary conversion at the Gramercy facility, included the following pre-tax
gains (losses):

                                                                           Year Ended December 31,
                                                                 -------------------------------------------
                                                                          2001          2000            1999
- ---------------------------------------------------------------- -------------  ------------  --------------
Asbestos-related charges (Note 12)                               $      (57.2)  $     (43.0)  $       (53.2)
Gains on sale of real estate (Note 5)                                     6.9          22.0            -
Mark-to-market gains (losses) (Note 13)                                  35.6          11.0           (32.8)
Adjustment to environmental liabilities (Note 12)                       (13.5)        -                 -
MetalSpectrum investment write-off (Note 4)                              (2.8)        -                 -
Lease obligation adjustment (Note 12)                                     -            17.0             -
Gain on sale of interests in AKW L.P. (Note 4)                            -             -              50.5
                                                                 -------------  ------------  --------------
   Special items, net                                                   (31.0)          7.0           (35.5)
All other, net                                                           (1.8)        (11.3)            (.4)
                                                                 -------------  ------------  --------------
                                                                 $      (32.8)  $      (4.3)  $       (35.9)
                                                                 =============  ============  ==============

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. As a result of the Cases, the
amortization of the deferred financing costs related to the Debtors' unsecured
debt was discontinued on the Filing Date.

Goodwill. Through the year ended December 31, 2001, the goodwill associated with
the acquisition of the Chandler, Arizona facility (see Note 5) was being
amortized on a straight-line basis over 20 years. Beginning with the first
quarter of 2002, the Company discontinued the amortization of goodwill
consistent with Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets ("SFAS No. 142"). However, the discontinuance of
amortization of goodwill will not have a material effect on the Company's
results of operations or financial condition (the amount of amortization in 2001
was less than $.8). In accordance with SFAS No. 142, which was adopted as of
January 1, 2002, the Company will review goodwill for impairment at least
annually. The adoption of SFAS No. 142 will not have a material impact on the
Company's future operating results. As of December 31, 2001, unamortized
goodwill was approximately $11.4 and was included in Other assets in the
accompanying consolidated balance sheets.

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.

Pre-2001 Accounting. Accounting guidelines in place through December 31, 2000,
provided that any interim fluctuations in option prices prior to the settlement
date were deferred until the settlement date of the underlying hedged
transaction, at which time they were recorded in net sales or cost of 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 1999 or 2000.

Current Accounting. Effective January 1, 2001, the Company began reporting
derivative activities pursuant to Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
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 by "marking-to-market" all of their hedging positions at each
period-end (see Note 13). This contrasts with 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 represent unrealized gains
or losses. Such unrealized gains or losses will fluctuate, based on prevailing
market prices at each subsequent balance sheet date, until the transaction date
occurs. Under SFAS No. 133, these changes are recorded as an increase or
reduction in stockholders' equity through either other comprehensive income or
net income, depending on the facts and circumstances with respect to the hedge
and its documentation. To the extent that changes in market values of the
Company's hedging positions are initially recorded in other comprehensive
income, such changes reverse out of other comprehensive income (offset by any
fluctuations in other "open" positions) and are recorded in net income (included
in net sales or cost of products sold, as applicable) when the subsequent
physical transactions occur. Additionally, under SFAS No. 133, if the level of
physical transactions ever falls below the net exposure hedged, "hedge"
accounting must be terminated for such "excess" hedges. In such an instance, the
mark-to-market changes on such excess hedges would be recorded in the income
statement rather than in other comprehensive income. This did not occur during
2001.

Differences between comprehensive income and net income, which have historically
been small, 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 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. Based
on authoritative accounting literature issued during the first quarter of 2001,
it was determined that all of the cumulative impact of adopting SFAS No. 133
should be recorded in other comprehensive income. The cumulative effect amount
was reclassified to earnings during 2001.

Fair Value of Financial Instruments. Given the fact that the fair value of
substantially all of the Company's outstanding indebtedness will be determined
as part of the plan of reorganization, it is impracticable and inappropriate to
estimate the fair value of these financial instruments at December 31, 2001.

New Accounting Pronouncements. Statement of Financial Accounting Standard No.
143, Accounting for Asset Retirement Obligations ("SFAS No. 143"), was issued in
June 2001 and must be first applied to the Company's consolidated financial
statements beginning January 1, 2003, although earlier adoption is permitted. In
general terms, SFAS No. 143 requires the recognition of a liability resulting
from anticipated retirement obligations, offset by an increase in the value of
the associated productive asset for such anticipated costs. Over the life of the
asset, depreciation expense is to include the ratable expensing of the
retirement cost included with the asset value. The statement applies to all
legal obligations associated with the retirement of a tangible long-lived asset
that results from the acquisition, construction, or development and (or) the
normal operation of a long-lived asset, except for certain lease obligations.
Excluded from this statement are obligations arising solely from a plan to
dispose of a long-lived asset and obligations that result from the improper
operation of an asset (i.e. the type of environmental obligations discussed in
Note 12).

The Company's consolidated financial statements already reflect reclamation
obligations by its bauxite mining operations in accordance with accounting
policies consistent with SFAS No. 143. At December 31, 2001, the amount of the
accrued reclamation obligations included in the consolidated financial
statements was approximately $3.1 after considering expenditures in 2001 of
approximately $3.0. The Company is continuing its evaluation of SFAS No. 143.
The Company expects that the costs associated with the accrued reclamation
obligations as of December 31, 2001 will be incurred, in the ordinary course,
during the ensuing 12 to 18 months. At the same time, additional accruals in
respect of future mining will be incurred. A decision as to the formal adoption
of SFAS No. 143 has not been made in respect of any other items that may be
applicable. However, the Company does not currently expect the adoption of SFAS
No. 143 to have a material impact on its future financial statements.

Statement of Financial Accounting Standard No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144") was issued in
August 2001. In general terms, SFAS No. 144 establishes a single accounting
model for impairment or disposal of long-lived assets, and supersedes prior
rules in this regard. SFAS No. 144 retains the existing accounting requirements
for recognizing impairments on long-lived assets that are to be held and used.
However, it provides additional guidelines such as a "probability-weighted cash
flow estimation" approach to deal with situations where alternative and
undecided courses of action exist. Under SFAS No. 144, long-lived assets to be
disposed of by sale are to be recorded at the lower of their carrying amount or
fair value less cost to sell. SFAS No. 144 must be first applied to the
Company's consolidated financial statements beginning January 1, 2002. The
adoption of SFAS No. 144 did not have a material impact on the Company's
financial statements.

3. 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. As a result of
the incident, alumina production at the facility was completely curtailed.
Construction on the damaged part of the facility began during the first quarter
of 2000. Initial production at the plant commenced during the middle of December
2000. However, construction was not substantially completed until the third
quarter of 2001. During the first nine months of 2001, the plant operated at
approximately 68% of its newly-rated estimated capacity of 1,250,000 tons.
During the fourth quarter of 2001, the plant operated at approximately 90% of
its newly-rated capacity. By the end of February 2002, the plant was operating
at just below 100% of its newly-rated capacity. The facility is now focusing its
efforts on achieving its full operating efficiency.

Property Damage. KACC's insurance policies provided that KACC would be
reimbursed for the costs of repairing or rebuilding the damaged portion of the
facility using new materials of like kind and quality with no deduction for
depreciation. In 1999, based on discussions with the insurance carriers and
their representatives and third party engineering reports, KACC recorded a
pre-tax 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 collected in 2000.


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


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

During July 2001, KACC and its insurers reached a global settlement agreement in
respect of all of KACC's business interruption and property damage claims. The
Company does not expect any additional insurance recoveries.

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 was completely curtailed. However, in accordance with an agreement
with KACC's insurers, during 2000, the Company recorded a depreciation charge of
$14.3, 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 had reflected (as a reduction of depreciation expense) an
equal and offsetting insurance receivable (incremental to the amounts discussed
in the preceding paragraph) since the insurers agreed to reimburse the Company
this amount. Since production at the facility was partially restored during
December 2000, normal depreciation commenced in December 2000.

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

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

4.   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") (20.0% 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, 2001 and 2000, KACC's net receivables from these affiliates were
not material.

In September 2001, KACC sold an approximate 8.3% interest in QAL and recorded a
pre-tax gain of approximately $163.6 (included in Other income/(expense) in the
accompanying consolidated statements of income (loss)). As a result of the
transaction, KACC now owns a 20% interest in QAL. The total value of the
transaction was approximately $189.0, consisting of a cash payment of
approximately $159.0 plus the purchaser's assumption of approximately $30.0 of
off-balance sheet QAL indebtedness guaranteed by KACC prior to the sale. KACC's
share of QAL's production for the first eight months of 2001 and for the years
ended December 31, 2000 and 1999 was approximately 668,000 tons, 1,064,000 tons
and 1,033,000 tons, respectively. Had the sale of the QAL interest been
effective as of the beginning of 1999, KACC's share of QAL's production for
2001, 2000 and 1999 would have been reduced by approximately 196,000 tons,
312,000 tons and 304,000 tons, respectively. Historically, KACC has sold about
half of its share of QAL's production to third parties and has used the
remainder to supply its Northwest smelters, which are temporarily curtailed (see
Note 7). The reduction in KACC's alumina supply associated with this transaction
is expected to be substantially offset by the return of its Gramercy alumina
refinery to full operations during the first quarter of 2002 at a higher
capacity and by planned increases during 2003 in capacity at its Alpart alumina
refinery in Jamaica. The QAL transaction is not expected to have an adverse
impact on KACC's ability to satisfy existing third-party alumina customer
contracts.

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

In 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 2). The Company's equity in income of
AKW was $2.5 for the year ended December 31, 1999.

Summary of Combined Financial Position


                                                                               December 31,
                                                                        ---------------------------
                                                                               2001            2000
- ---------------------------------------------------------------------   -----------     -----------

Current assets                                                          $     362.4     $     350.1
Long-term assets (primarily property, plant, and equipment, net)              345.7           327.3
                                                                        -----------     -----------
   Total assets                                                         $     708.1     $     677.4
                                                                        ===========     ===========

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



Summary of Combined Operations

                                                                  Year Ended December 31,
                                                            -----------------------------------
                                                                2001          2000         1999
- ----------------------------------------------------------- --------      --------     --------
Net sales                                                   $ 633.5       $ 602.9      $ 594.9
Costs and expenses                                           (621.5)       (617.1)      (582.9)
(Provision) benefit for income taxes                           (3.9)         (4.5)          .8
                                                            --------      --------     --------
Net income (loss)                                           $   8.1       $ (18.7)     $  12.8
                                                            ========      ========     ========

Company's equity in income (loss)                           $   1.7       $  (4.8)     $   4.9
                                                            ========      ========     ========

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

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 and 1999.

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 $266.0,
$235.7 and $223.7, in the years ended December 31, 2001, 2000 and 1999,
respectively.

5.   PROPERTY, PLANT, AND EQUIPMENT

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

                                                                                 December 31,
                                                                          --------------------------
                                                                                2001            2000
- ----------------------------------------------------------------------    ----------      ----------

Land and improvements                                                     $   130.9       $   130.7
Buildings                                                                     207.0           197.2
Machinery and equipment                                                     1,881.3         1,702.8
Construction in progress                                                       46.4           130.3
                                                                          ----------      ----------
                                                                            2,265.6         2,161.0
Accumulated depreciation                                                   (1,050.2)         (984.9)
                                                                          ----------      ----------
     Property, plant, and equipment, net                                  $ 1,215.4       $ 1,176.1
                                                                          ==========      ==========


During the period from 1999 to 2001, the Company completed several acquisitions
and dispositions and, based on changes in circumstances, recorded impairment
charges as discussed below:

Acquisition and Disposition Activity -

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

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

- -    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 ($1.1 of property, plant and equipment $2.8 of accounts receivables,
     inventory and prepaid expenses and $12.2 of goodwill).

Impairment Charges -

- -    The Company concluded that the profitability of its Trentwood facility can
     be enhanced by further focusing resources on its core, heat-treat business
     and by exiting lid and tab stock product lines used in the beverage
     container market and brazing sheet for the automotive market. As a result
     of this decision, the Company plans to sell or idle several pieces of
     equipment resulting in an impairment charge of approximately $17.7 at
     December 31, 2001 (which amount was reflected in Non-recurring operating
     items - see Note 6). Additional charges are likely as the Company works
     through all of the operational impacts of this decision to exit the lid,
     tab and brazing sheet product lines.

- -    During 2000, 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 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, 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 Non-recurring operating items - see Note 6). The
     estimated fair value was based on anticipated future cash flows discounted
     at a rate commensurate with the risk involved.

- -    In 1999, based on negotiations with third parties, KACC concluded to sell
     the Micromill assets and technology for less than the then existing
     carrying value. Accordingly, the carrying value of the Micromill assets
     were reduced by recording an impairment charge of $19.1 in 1999 (see Note
     6).

6.   NON-RECURRING OPERATING ITEMS

The income (loss) impact associated with non-recurring operating items for 2001,
2000 and 1999 was as follows:


                                                                                           Year Ended December 31,
                                                                                  -----------------------------------------
                                                          Business Segment                  2001          2000         1999
- -------------------------------------------------   ----------------------------  --------------  ------------   ----------
Net gains from power sales (Note 7)                 Primary Aluminum              $       229.2   $     159.5    $    -

Restructuring charges                               Bauxite & Alumina                 (15.8)          (.8)        -
                                                    Primary Aluminum                       (7.5)         (3.1)        -
                                                    Flat-Rolled Products                  (10.7)        -             -
                                                    Corporate                              (1.2)         (5.5)        -
Contractual labor costs related to smelter
     curtailments (Note 7)                          Primary Aluminum                      (12.7)        -             -

Labor settlement charge                             See below                            -              (38.5)        -

Impairment charges associated with
     product line exits                             Flat-Rolled Products                 -              (12.6)        -
                                                    Engineered Products                  -               (5.6)        -
Other impairment charges (Note 5):
     Trentwood equipment                            Flat-Rolled Products                  (17.7)        -             -
     Washington smelters                            Primary Aluminum                     -              (33.0)        -
     Micromill                                      Micromill                            -              -            (19.1)

Gramercy related items:
     Incremental maintenance                        Bauxite & Alumina                -              (11.5)        -
     Insurance deductibles, etc.                    Bauxite & Alumina                -              -             (4.0)
                                                    Corporate                            -              -             (1.0)
     LIFO inventory charge (Note 2)                 Bauxite & Alumina                -               (7.0)        -
                                                                                  --------------  ------------   ----------
                                                                                  $       163.6   $      41.9    $   (24.1)
                                                                                  ==============  ============   ==========

During 2001, the Company launched a performance improvement initiative (the
"program") designed to increase operating cash flow, generate benefits and
improve the Company's financial flexibility. The program resulted in
restructuring charges totaling $35.2 which consisted of $17.9 of employee
benefit and related costs for a group of approximately 355 salaried and hourly
job eliminations ($3.8 of costs and job eliminations of 230 in the fourth
quarter of 2001), an inventory charge of $5.6 (see Note 2) and third party
consulting costs of $11.7 ($4.4 in the fourth quarter of 2001). As of December
31, 2001, approximately 340 of the job eliminations had occurred. It is
anticipated that the remaining job eliminations will occur during the first
quarter of 2002 or soon thereafter. Approximately $7.7 of the employee benefit
and related costs were cash costs that have been incurred or will be incurred
during the first quarter of 2002. The balance of the employee benefit and
related costs represent increased pension and post-retirement medical costs that
will be funded over longer periods. Additional cash and non-cash charges may be
required in the future as the program continues. Such additional charges could
be material.

The 2000 restructuring charges were associated with the Primary aluminum and
Corporate segments' ongoing cost reduction initiatives. During 2000, these
initiative resulted in restructuring charges for employee benefit and other
costs for approximately 50 job eliminations at the Company's Tacoma facility and
approximately 50 employee eliminations due to consolidation or elimination of
certain corporate staff functions. At December 31, 2001, all job eliminations
associated with these initiatives had occurred.

From September 1998 through September 2000, KACC and the United Steelworkers of
America ("USWA") were involved in a labor dispute as a result of the September
1998 USWA strike and the subsequent "lock-out" by KACC in February 1999. The
labor dispute was settled in September 2000. Under the terms of the settlement,
USWA members generally returned to the affected plants during October 2000. The
Company recorded a one-time pre-tax charge of $38.5 in 2000 to reflect the
incremental, non-recurring impacts of the labor settlement, including severance
and other contractual obligations for non-returning workers. The allocation of
the labor settlement charge to the business units was: Bauxite and alumina -
$2.1, Primary aluminum - $15.9, Flat-rolled products - $18.2 and Engineered
products - $2.3. At December 31, 2001, approximately $30.0 of such costs had
been paid. It is anticipated that substantially all remaining costs will be
incurred during 2002.

The $12.6 impairment charge reflected by KACC's Flat-Rolled products segment in
2000 included a $11.1 LIFO inventory charge (see Note 2) 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 included a $.9 LIFO inventory charge and a $4.7 charge to reduce the
carrying value of certain machining facilities and assets, which were no longer
required as a result of the segment's decision to exit a marginal product line,
to their estimated net realizable value.

The incremental maintenance charge in 2000 consisted of normal recurring
maintenance expenditures for the Gramercy facility that otherwise would have
been incurred in the ordinary course of business over a one to three year
period. The Company chose to incur the expenditures prior to the restart of the
facility to avoid normal operational outages that otherwise would have occurred
once the facility resumed production.

The insurance deductible charges in 1999 consist of deductible and
self-retention provisions under the insurance coverage related to the Gramercy
facility incident. See Note 3.

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 (first partially and then fully) curtailed the
primary aluminum production at the Tacoma and Mead, Washington smelters during
the last half of 2000 and all of 2001. As a result of the curtailments, as
permitted under the BPA contract, the Company sold the power that it had under
contract through September 30, 2001 (the end of the contract period). In
connection with such power sales, the Company recorded net pre-tax gains of
approximately $229.2 in 2001 and $159.5 in 2000. Gross proceeds were offset by
employee-related expenses, a non-cash LIFO inventory charge and other fixed
commitments. The resulting net gains have been reflected as Non-recurring
operating items (see Note 6). The net gain amounts were composed of gross
proceeds of $259.5 in 2001 and $207.8 in 2000, of which $347.5 was received in
2001 and $119.8 was received in 2000 (although a portion of such proceeds
represent a replacement of the profit that would have otherwise been generated
through operations).

Future Power Supply and its Impact on Future Operating Rate. During October
2000, KACC signed a new power contract with the BPA under which the BPA,
starting October 1, 2001, was to provide KACC's operations in the State of
Washington with approximately 290 megawatts of power through September 2006. The
contract provides KACC with sufficient power to fully operate KACC's Trentwood
facility (which requires up to an approximate 40 megawatts) as well as
approximately 40% of the combined capacity of KACC's Mead and Tacoma aluminum
smelting operations. The BPA has announced that it currently intends to set
rates under the contract in six month increments. The rate for the initial
period (from October 1, 2001 through March 31, 2002) was approximately 46%
higher than power costs under the prior contract. Power prices for the April
2002 through September 2002 period are essentially unchanged from the prior
six-month rate. KACC cannot predict what rates will be charged in future
periods. Such rates will be dependent on such factors as the availability of and
demand for electrical power, which are largely dependent on weather, the price
for alternative fuels, particularly natural gas, as well as general and regional
economic and ecological factors. The contract also includes a take-or-pay
requirement and clauses under which KACC's power allocation could be curtailed,
or its costs increased, in certain instances. Under the contract, KACC can only
remarket its power allocation to reduce or eliminate take-or-pay requirements.
KACC is not entitled to receive any profits from any such remarketing efforts.
During October 2001, KACC and the BPA reached an agreement whereby: (a) KACC
would not be obligated to pay for potential take-or-pay obligations in the first
year of the contract; and (b) KACC retained its rights to restart its smelter
operations at any time. In return for the foregoing, KACC granted the BPA
certain limited power interruption rights in the first year of the contract if
KACC is operating its Northwest smelters. The Department of Energy acknowledged
that capital spending in respect of the Gramercy refinery was consistent with
the contractual provisions of the prior contract with respect to the use of
power sale proceeds. Beginning October 2002, unless there is a further amendment
of KACC's obligations, KACC could be liable for take-or-pay costs under the BPA
contract, and such amounts could be significant. KACC is reviewing its rights
and obligations in respect of the BPA contract in light of Chapter 11 filings.

Subject to the limited interruption rights granted to the BPA (described above),
or any impact resulting from the Cases, KACC has sufficient power under
contract, and retains the ability, to restart up to 40% (4.75 potlines) of its
Northwest smelting capacity. Were KACC to want to restart additional capacity
(in excess of 4.75 potlines), it would have to purchase additional power from
the BPA or other suppliers. For KACC to make such a decision, it would have to
be able to purchase such power at a reasonable price in relation to current and
expected market conditions for a sufficient term to justify its restart costs,
which could be significant depending on the number of lines restarted and the
length of time between the shutdown and restart. Given recent primary aluminum
prices and the forward price of power in the Northwest, it is unlikely that KACC
would operate more than a portion of its Northwest smelter capacity in the near
future. Were KACC to restart all or a portion of its Northwest smelting
capacity, it would take between three to six months to reach the full operating
rate for such operations, depending upon the number of lines restarted. Even
after achieving the full operating rate, operating only a portion of the
Northwest capacity would result in production/cost inefficiencies such that
operating results would, at best be breakeven to modestly negative at long-term
primary aluminum prices. However, operating at such a reduced rate could,
depending on prevailing economics, result in improved cash flows as opposed to
remaining curtailed and incurring the Company's fixed and continuing labor and
other costs. This is because KACC is contractually liable for certain severance,
supplemental unemployment benefits and early retirement benefits for laid-off
workers under KACC's contract with the USWA during periods of curtailment. As of
December 31, 2001, all such contractual compensation costs have been accrued for
all USWA workers in excess of those expected to be required to run the Northwest
smelters at a rate up to the above stated 40% smelter operating rate. These
costs are expected to be incurred periodically through September 2002. Costs
associated with the USWA workers that KACC estimates would be required to
operate the smelters at an operating rate of up to 40% ($12.7 in 2001; $9.4 of
which was reflected in the fourth quarter) have been accrued through early 2003,
as KACC does not currently expect to restart the Northwest smelters prior to
that date. If such workers are not recalled prior to the end of the first
quarter of 2003, KACC could become liable for additional early retirement costs.
Such costs could be significant and could adversely impact the Company's
operating results and liquidity. The present value of such costs could be in the
$50.0 to $60.0 range. However, such costs would likely be paid out over an
extended period.

8.   LONG-TERM DEBT

Long-term debt and its maturity schedule are as follows (before considering any
impacts of the Debtors' Chapter 11 filings in February 2002 as discussed below):

                                                                                                             December 31,
                                                                                                           ----------------
                                                                                                     2007
                                                                                                      and     2001     2000
                                                       2002      2003    2004     2005     2006     After    Total    Total
- --------------------------------------------------  -------  -------- -------  -------  -------  --------  -------  -------
Secured:
     Credit Agreement                                                                                      $  -     $  30.4
     Alpart CARIFA Loans - (fixed and variable
         rates) due 2007, 2008                                                                   $   22.0     22.0     56.0
     7.6% Solid Waste Disposal Revenue Bonds
         due 2027                                                                                    19.0     19.0     19.0
Unsecured:
     9 7/8% Senior Notes due 2002, net              $ 172.8                                                  172.8    224.8
     10 7/8% Senior Notes due 2006, net                                                 $ 225.4              225.4    225.5
     12 3/4% Senior Subordinated Notes due 2003              $  400.0                                        400.0    400.0
     Other borrowings (fixed and variable rates)         .7        .8 $    .7  $    .8       .8      31.3     35.1     33.7
                                                    -------  -------- -------  -------  -------  --------  -------  -------

Total                                               $ 173.5  $  400.8 $    .7  $    .8  $ 226.2  $   72.3    874.3    989.4
                                                    =======  ======== =======  =======  =======  ========

Less current portion                                                                                         173.5     31.6
                                                                                                           -------  -------
     Long-term debt                                                                                        $ 700.8  $ 957.8
                                                                                                           =======  =======

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

Credit Agreement. Prior to the February 12, 2002 Filing Date, the Company and
KACC had a credit agreement, as amended (the "Credit Agreement") which provided
a secured, revolving line of credit. The Credit Agreement was 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 Credit Agreement terminated on the Filing Date and was replaced
by the DIP Facility discussed above. During the last six months of 2001, there
were no borrowings under the Credit Agreement. During the first six months of
2001, month-end borrowings under the Credit Agreement were as high as
approximately $94.0, which occurred in February 2001, primarily as a result of
costs incurred and capital spending related to the Gramercy rebuild, net of
insurance reimbursements. The average amount of borrowings outstanding under the
Credit Agreement during 2001 was approximately $11.8. The average interest rate
on loans outstanding under the Credit Agreement during 2001 was approximately
10.0% per annum. As of the Filing Date, outstanding letters of credit were
approximately $43.3 and there were no borrowings outstanding under the Credit
Agreement.

9 7/8% Notes, 10 7/8% Notes and 12 3/4% Notes. The obligations of KACC with
respect to its 9 7/8% Senior Notes due 2002 (the 9 7/8% Notes), its 10 7/8%
Senior Notes due 2006 (the "10 7/8% Notes") and its 12 3/4% Senior Subordinated
Notes due 2003 (the "12 3/4% Notes") are guaranteed, jointly and severally, by
certain subsidiaries of KACC. Prior to concluding that, as a result of the
events outlined in Note 1, the Company should file the Cases, KACC had purchased
$52.2 of the 9 7/8% Notes. The net gain from the purchase of the notes was less
than $1.1 and has been included in Other income (expense) in the accompanying
statements of consolidated income (loss).

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

During the first quarter of 2001, Alpart redeemed $34.0 principal amount of the
CARIFA loans. The 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
that supported the loan.

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

Debt Covenants and Restrictions. The DIP Facility 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 DIP Facility is secured by,
among other things, (i) mortgages on KACC's major domestic plants; (ii) subject
to certain exceptions, liens on the accounts receivable, inventory, equipment,
domestic patents and trademarks, and substantially all other personal property
of 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 indentures governing the 9 7/8% Notes, the 10 7/8% 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
9 7/8% Notes, the 10 7/8% Notes and the 12 3/4% Notes, respectively, upon the
occurrence of a Change of Control (as defined therein).

9.   INCOME TAXES

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

                                                            Year Ended December 31,
                                                  -------------------------------------------
                                                        2001             2000            1999
- --------------------------------------------      ----------      -----------      ----------
Domestic                                          $  (126.5)      $    (96.6)      $   (81.8)
Foreign                                               213.2            122.0            (8.1)
                                                  ----------      -----------      ----------

     Total                                        $    86.7       $     25.4       $   (89.9)
                                                  ==========      ===========      ==========

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
- --------------------------------------------------------      ------------      ------------     -----------     ----------
2001     Current                                              $      (1.1)      $     (40.6)     $       -       $   (41.7)
         Deferred                                                  (484.3)                .5          (24.7)        (508.5)
                                                              ------------      ------------     -----------     ----------
              Total                                           $    (485.4)      $     (40.1)     $    (24.7)     $  (550.2)
                                                              ============      ============     ===========     ==========

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
                                                              ============      ============     ===========     ==========


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,
                                                                                    ---------------------------------------
                                                                                            2001          2000         1999
- ----------------------------------------------------------------------------------  ------------  ------------  -----------
Amount of federal income tax (provision) benefit based on the statutory rate        $     (30.3)  $      (8.9)  $     31.2
Increase in valuation allowances and revision of prior years' tax estimates              (513.9)         (1.8)         1.1
Percentage depletion                                                                        4.9           3.0          2.8
Foreign taxes, net of federal tax benefit                                                  (9.6)         (3.2)        (3.2)
Other                                                                                      (1.3)          (.7)          .8
                                                                                    ------------  ------------  -----------
(Provision) benefit for income taxes                                                $    (550.2)  $     (11.6)  $     32.7
                                                                                    ============  ============  ===========



The components of the Company's net deferred income tax assets are as follows:

                                                                                                      December 31,
                                                                                              -----------------------------
                                                                                                      2001             2000
- ------------------------------------------------------------------------------------------    ------------      -----------
Deferred income tax assets:
     Postretirement benefits other than pensions                                              $     264.0       $    267.4
     Loss and credit carryforwards                                                                  150.0            125.2
     Other liabilities                                                                              192.7            143.7
     Other                                                                                          170.5            181.5
     Valuation allowances                                                                          (652.7)          (122.3)
                                                                                              ------------      -----------
         Total deferred income tax assets-net                                                       124.5            595.5
                                                                                              ------------      -----------

Deferred income tax liabilities:
     Property, plant, and equipment                                                                (122.3)          (105.1)
     Other                                                                                          (41.6)           (26.2)
                                                                                              ------------      -----------
         Total deferred income tax liabilities                                                     (163.9)          (131.3)
                                                                                              ------------      -----------

Net deferred income tax assets (liabilities)(1)                                               $     (39.4)      $    464.2
                                                                                              ============      ===========


(1)  Net deferred income tax assets of $56.0 are included in the Consolidated
     Balance Sheets as of December 31, 2000 in the caption entitled Prepaid
     expenses and other current assets. Net deferred income tax liabilities of
     $39.4 and $46.0 are included in the Consolidated Balance Sheets as of
     December 31, 2001 and 2000, respectively, in the caption entitled Long-term
     liabilities.

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

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

At December 31, 2001, 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 $60.3
and $1.0, respectively, which expire periodically through 2019 and 2011,
respectively, foreign tax credit ("FTC") carryforwards of $93.6, which expire
primarily from 2004 through 2006, and alternative minimum tax ("AMT") credit
carryforwards of $26.9, which have an indefinite life. The Company also has AMT
net operating loss and FTC carryforwards of $1.0 and $105.0, respectively,
available, subject to certain limitations, to offset future alternative minimum
taxable income, which expire periodically through 2011 and 2006, respectively.

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. Any such payments to MAXXAM by KACC would require approval by the DIP
Facility lenders and the Court.

See Note 12 concerning commitments and contingencies.

10.  EMPLOYEE BENEFIT AND INCENTIVE PLANS

Pension and Other Postretirement Benefit Plans. Retirement plans are generally
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
                                                       ---------------------------------   --------------------------------
                                                             2001        2000       1999         2001       2000       1999
                                                       ---------- ----------- ----------   ---------- ---------- ----------

Weighted-average assumptions as of December 31,
Discount rate                                               7.25%       7.75%      7.75%        7.25%      7.75%      7.75%
Expected return on plan assets                              9.50%       9.50%      9.50%          -          -          -
Rate of compensation increase                               4.00%       4.00%      4.00%        4.00%      4.00%      4.00%

In 2001, the average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 7.5% for all
participants. The assumed rate of increase is assumed to decline gradually to
5.0% in 2006 for all participants and remain at that level thereafter.

The following table presents the funded status of the Company's pension and
other postretirement benefit plans as of December 31, 2001 and 2000, and the
corresponding amounts that are included in the Company's Consolidated Balance
Sheets. The December 31, 2000, pension benefit amounts in the following table
have been revised from previous disclosures to include the balances of Alumina
Partners of Jamaica ("Alpart") and Kaiser Bauxite Company ("KBC") that were
already fully reflected in the consolidated balance sheet as of December 31,
2000.


                                                               Pension Benefits                  Medical/Life Benefits
                                                       --------------------------------    --------------------------------
                                                                 2001              2000              2001              2000
                                                       --------------    --------------    --------------     -------------
Change in Benefit Obligation:
     Obligation at beginning of year                   $       871.4     $       840.6     $       658.2      $      615.4
     Service cost                                               38.6              20.6              12.1               5.3
     Interest cost                                              63.6              63.4              48.7              45.0
     Currency exchange rate change                              (1.4)             (3.4)             -                 -
     Plan participants contributions                             2.0               1.7              -                 -
     Curtailments, settlements and amendments                     .3              33.7             (13.3)            (33.4)
     Actuarial (gain) loss                                      33.5              12.0             219.3              79.5
     Benefits paid                                             (92.4)            (97.2)            (56.8)            (53.6)
                                                       --------------    --------------    --------------     -------------
         Obligation at end of year                             915.6             871.4             868.2             658.2
                                                       --------------    --------------    --------------     -------------

Change in Plan Assets:
     FMV of plan assets at beginning of year                   791.1             890.6               -                  -
     Actual return on assets                                   (48.5)            (14.4)              -                  -
     Currency exchange rate change                              (1.1)             (2.8)             -                  -
     Employer contributions                                     21.7              14.9              56.8              53.6
     Benefits paid                                             (92.4)            (97.2)            (56.8)            (53.6)
                                                       --------------    --------------    --------------     -------------
     FMV of plan assets at end of year                         670.8             791.1               -                 -
                                                       --------------    --------------    --------------     -------------

     Obligation in excess of plan assets                       244.8              80.3             868.2             658.2
     Unrecognized net actuarial gain (loss)                   (128.4)             25.4            (240.5)            (21.6)
     Unrecognized prior service costs                          (39.9)            (45.1)             76.5              78.3
     Adjustment required to recognize minimum liability        105.5               3.0               -                  -
     Intangible asset and other                                 40.3               1.8               -                  -
                                                       --------------    --------------    --------------     -------------
         Accrued benefit liability                     $       222.3     $        65.4     $       704.2      $      714.9
                                                       ==============    ==============    ==============     =============

The assets of the Company sponsored pension plans, like numerous other
companies' plans, are, to a substantial degree, invested in the capital markets
and managed by a third party. Given the performance of the stock market during
2001, the Company was required to reflect an additional minimum pension
liability of $64.5 (net of income tax benefit of $38.0) in its 2001 financial
statements as a result of a decline in the value of the assets held by the
Company's pension plans. Minimum pension liability adjustments are non-cash
adjustments that are reflected as an increase in pension liability and an
offsetting charge to stockholders' equity (net of income tax) through
comprehensive income (rather than net income). The Company also anticipates that
the decline in the value of the pension plans' assets will unfavorably impact
pension costs reflected in its 2002 operating results. However, absent a
decision by the Company to increase its contributions to the pension plans as a
result of the 2001 asset performance, such asset performance is not expected to
have a material impact on the Company's near-term liquidity as pension funding
requirements generally allow for such impacts to be spread over multiple years.
Increases in post-2002 pension funding requirements could occur, however, if
capital market performance in future periods does not more closely approximate
the long-term rate of return assumed by the Company, and the amount of such
increases could be material.

The aggregate accumulated benefit obligation and fair value of plan assets for
pension plans with accumulated benefit obligation in excess of plan assets were
$856.1 and $634.7, respectively, as of December 31, 2001, and $789.3 and $748.5,
respectively, as of December 31, 2000. The December 31, 2000 net periodic
benefit costs in the following table have been revised from previous disclosures
to include the balances of Alpart and KBC that were fully reflected in the
statement of consolidated income (loss) for the year ended December 31, 2000.
The costs in the table for 1999 were not revised because the amounts were not
material.


                                                               Pension Benefits                  Medical/Life Benefits
                                                       ---------------------------------   --------------------------------
                                                             2001        2000       1999         2001       2000       1999
                                                       ---------- ----------- ----------   ---------- ---------- ----------
Components of Net Periodic Benefit Costs:
     Service cost                                      $    38.6  $     20.6  $    14.6    $    12.1  $     5.3  $     5.2
     Interest cost                                          63.6        63.4       59.7         48.7       45.0       41.5
     Expected return on assets                             (70.9)      (80.8)     (72.9)            -          -          -
     Amortization of prior service cost                      5.5         3.9        3.3        (15.1)     (12.8)     (12.1)
     Recognized net actuarial (gain) loss                    (.5)       (1.9)        .7            -          -          -
                                                       ---------- ----------- ----------   ---------- ---------- ----------
     Net periodic benefit cost                              36.3         5.2        5.4         45.7       37.5       34.6
     Curtailments, settlements, etc.                           -          .1         .4            -          -          -
                                                       ---------- ----------- ----------   ---------- ---------- ----------
         Adjusted net periodic benefit costs(1)        $    36.3  $      5.3  $     5.8    $    45.7  $    37.5  $    34.6
                                                       ========== =========== ==========   ========== ========== ==========


(1)  Approximately $24.5 of the $36.3 adjusted net periodic benefit costs in
     2001 and $6.1 of the $5.3 adjusted net periodic benefit costs in 2000
     related to pension accruals that were provided in respect to headcount
     reductions resulting from the performance improvement program (see Note 6)
     and the Pacific Northwest power sales (see Note 7).

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            $       91.6      $      (64.3)

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

Postemployment Benefits. The Company provides certain benefits to former or
inactive employees after employment but before retirement.

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

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 $4.5, $5.7
and $6.0 for the years ended December 31, 2001, 2000 and 1999, 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, 2001, 3,573,728
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.


                                                                                     2001              2000            1999
- ------------------------------------------------------------------------    -------------    --------------   -------------

Outstanding at beginning of year ($10.24, $10.24 and $9.98)                    4,375,947         4,239,210       3,049,122
Granted ($2.89, $10.23 and $11.15)                                               874,280           757,335       1,218,068
Exercised ($7.25)                                                                 -                 -               (7,920)
Expired or forfeited ($10.39, $11.08 and $11.02)                              (3,689,520)         (620,598)        (20,060)
                                                                            -------------    --------------   -------------

Outstanding at end of year ($8.37, $10.24 and $10.24)                          1,560,707         4,375,947       4,239,210
                                                                            =============    ==============   =============

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

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

As a part of a plan of reorganization, it is possible that the interests of the
holders of outstanding options could be diluted or cancelled.

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 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 2000 and 1999 in the table below)
are included in minority interests together with KACC's Redeemable Preference
Stock, which was redeemed in 2001, and KACC's Preference Stock discussed below.
Changes in minority interests were:


                                                                            2000                           1999
                                                                 ---------------------------    ---------------------------
                                                                     Redeemable                     Redeemable
                                                                     Preference                     Preference
                                                        2001              Stock        Other             Stock        Other
- ------------------------------------------     -------------     --------------  -----------    --------------   ----------
Beginning of period balance                    $      101.1      $        19.5   $     98.2     $        20.1    $   103.4
Redeemable preference stock -
   Accretion                                            -                    -           -                1.0             -
   Stock redemption                                     -                 (2.0)         (.8)             (1.6)            -
   Reclassification (see below)                         -                (17.5)          -                 -              -
Minority interests                                     17.4                  -          3.7                -          (5.2)
                                               -------------     --------------  -----------    --------------   ----------
End of period balance                          $      118.5      $           -   $    101.1     $        19.5    $    98.2
                                               =============     ==============  ===========    ==============   ==========

In 1985, KACC issued certain of its Redeemable Preference Stock with a par value
of $1 per share and a liquidation and redemption value of $50 per share plus
accrued dividends, if any. In connection with the USWA settlement agreement in
September 2000, KACC redeemed all of the remaining Redeemable Preference Stock
(350,872 shares outstanding at December 31, 2000) during March 2001. At December
31, 2000, given the pending redemption, the redemption value of the unredeemed
shares ($17.5) was classified 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 4 1/8% 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, 2001 and 2000, outstanding shares
of $100 Preference Stock were 8,969 and 9,250, respectively. In accordance with
the Code and DIP Facility, KACC is not permitted to repurchase any of its stock.
Further, as a part of a plan of reorganization, it is possible that the
interests of the holders of the $100 Preference Stock could be diluted or
cancelled.

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, 2001, 23,443,953 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 $88.2 principal amount
of 12% Senior Secured Notes due 2003 issued by MGHI.

12.  COMMITMENTS AND CONTINGENCIES

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

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, 2001, is $79.4
which matures as follows: $30.4 in 2002, $32.0 in 2003 and $17.0 in 2006. KACC's
share of payments, including operating costs and certain other expenses under
the agreements, has ranged between $92.0 - $103.0 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, 2001, are as
follows: years ending December 31, 2002 - $35.9; 2003 - $32.0; 2004 - $29.2;
2005 - $28.2; 2006 - $27.9; thereafter - $44.6. Pursuant to the Code, the
Debtors may elect to reject or assume unexpired pre-petition leases. At this
time, no decisions have been made as to which significant leases will be
accepted or rejected (see Note 1).

Rental expenses were $41.0, $42.5 and $41.1, for the years ended December 31,
2001, 2000 and 1999, 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. The future
minimum rentals receivable under subleases was $104.5 at December 31, 2001.
During 2000, KACC reduced its net lease obligation by $17.0 (see Note 2) 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. During the
year ended December 31, 2001, KACC's ongoing assessment process resulted in KACC
recording charges of $13.5 (of which $4.5 was recorded in the fourth quarter of
2001 and is included in Other income (expense) - see Note 2) to increase its
environmental accrual. Additionally, KACC's environmental accruals were
increased during the year ended December 31, 2001, by approximately $6.0 in
connection with purchase of certain property. The following table presents the
changes in such accruals, which are primarily included in Long-term liabilities,
for the years ended December 31, 2001, 2000 and 1999:


                                                                     2001        2000       1999
- -----------------------------------------------------------       -------     -------    -------

Balance at beginning of period                                    $ 46.1      $ 48.9     $ 50.7
Additional accruals                                                 23.1         2.6        1.6
Less expenditures                                                   (8.0)       (5.4)      (3.4)
                                                                  -------     -------    -------

Balance at end of period                                          $ 61.2      $ 46.1     $ 48.9
                                                                  =======     =======    =======

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 $1.3 to $12.2 for the years 2002 through 2006 and an
aggregate of approximately $24.8 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 $27.0. 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. However, no amounts have been accrued in the financial statements with
respect to such potential recoveries.

While uncertainties are inherent in the final outcome of these environmental
matters, and it is presently impossible to determine the actual costs that
ultimately may be incurred, 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 has been one of many defendants in a number of
lawsuits, some of which involve claims of multiple persons, in which the
plaintiffs allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their employment or
association with 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, 2001, 2000 and 1999.


                                                                                             2001         2000         1999
- ---------------------------------------------------------------------------------      ----------    ---------     --------
Number of claims at beginning of period                                                  110,800      100,000       86,400
Claims received                                                                           34,000       30,600       29,300
Claims settled or dismissed                                                              (32,000)     (19,800)     (15,700)
                                                                                       ----------    ---------     --------

Number of claims at end of period                                                        112,800      110,800      100,000
                                                                                       ==========    =========     ========
Number of claims at end of period (included above) covered by agreements under
     which KACC expects to settle over an extended period                                 49,700       66,900       31,900
                                                                                       ==========    =========     ========
Due to the Cases, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. However, during the pendency of the Cases, KACC expects additional
asbestos claims will be filed as part of the claims process. A separate
creditors' committee representing the interests of the asbestos claimants has
been appointed. The Debtors' obligations with respect to present and future
asbestos claims will be resolved pursuant to a plan of reorganization.

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 2011). 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 2011 and, accordingly, no accrual has been
recorded for any costs which may be incurred beyond 2011, the Company expects
that the plan of reorganization process may require an estimation of KACC's
entire asbestos-related liability, which may go beyond 2011, 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 pendency of the Cases and on the
resolution of any disputes regarding coverage under the applicable insurance
policies. The Company believes that substantial recoveries from the insurance
carriers are probable and additional amounts may be recoverable in the future if
additional claims are added. 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. During October 2001, the
court ruled favorably on a number of issues, and during February 2002, an
intermediate appellate court also ruled favorably on an issue involving
coverage. The rulings did not result in any changes to the Company's estimates
of its current or future asbestos-related insurance recoveries. Other courts may
hear additional issues from time to time. Moreover, KACC expects to amend its
lawsuit during the second quarter of 2002 to add additional insurers who may
have responsibility to respond for asbestos-related costs. Given the expected
significance of probable future asbestos-related payments, the receipt of timely
and appropriate payments from such insurers is critical to a successful plan of
reorganization and KACC's long-term liquidity.

The following tables present historical information regarding KACC's
asbestos-related balances and cash flows:


                                                                                December 31,
                                                                      --------------------------------
                                                                                2001              2000
- ----------------------------------------------------------------      --------------    --------------
Liability (current portion of $130.0 in both years)                   $       621.3     $       492.4
Receivable (included in Other assets)(1)                                      501.2             406.3
                                                                      --------------    --------------

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

(1)  The asbestos-related receivable was determined on the same basis as the
     asbestos-related cost accrual. However, no assurances can be given that
     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, 2001 and 2000, $33.0 and $36.9, 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
                                                               -------------------------------------------
                                                                       2001          2000             1999          To Date
                                                               ------------  ------------    -------------  ---------------
Payments made, including related legal costs................   $     118.1   $      99.5     $       24.6   $        338.6
Insurance recoveries........................................          90.3          62.8              6.6            221.6
                                                               ------------  ------------    -------------  ---------------
                                                               $      27.8   $      36.7     $       18.0   $        117.0
                                                               ============  ============    =============  ===============

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

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 $57.2, $43.0 and $53.2 (included in Other income (expense)
- - see Note 2) in the years ended December 31, 2001, 2000 and 1999, respectively,
for asbestos-related claims, net of expected insurance recoveries, based on
recent cost and other trends experienced by KACC and other companies. Additional
asbestos-related claims are likely to be filed against KACC as a part of the
Chapter 11 process. Management cannot reasonably predict the ultimate number of
such claims or the amount of the associated liability. However, it is likely
that such amounts could exceed, perhaps significantly, the liability amounts
reflected in the Company's consolidated financial statements, which (as
previously stated) is only reflective of an estimate of claims over the next
ten-year period. KACC's obligations in respect of the currently pending and
future asbestos-related claims will ultimately be determined (and resolved) as a
part of the overall Chapter 11 proceedings. It is anticipated that resolution of
these matters will be a lengthy process. Management will continue to
periodically reassess its asbestos-related liabilities and estimated insurance
recoveries as the Cases proceed. However, absent unanticipated developments such
as asbestos-related legislation, material developments in other asbestos-related
proceedings or in the Company's or KACC's Chapter 11 proceedings, it is not
anticipated that the Company will have sufficient information to reevaluate its
asbestos-related obligations and estimated insurance recoveries until much later
in the Cases. Any adjustments ultimately deemed to be required as a result of
the reevaluation of KACC's asbestos-related liabilities or estimated insurance
recoveries could have a material impact on the Company's future financial
statements.

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 concluded
in September 2001. A decision is not expected until sometime after the second
quarter of 2002. Any outcome from the trial before the administrative law judge
would be subject to additional appeals by the general counsel of the NLRB, the
USWA or KACC. This process could take months or years. This matter is currently
not stayed by the Cases. 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 remedy, 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, no assurances can be given
in this regard. Amounts due, if any, in satisfaction of this matter could be
significant to the results of the period in which they are recorded. If these
proceedings eventually resulted in a final ruling against KACC with respect to
either allegation, it could be liable for back pay to USWA members at the five
plants and such amount could be significant. Any liability ultimately determined
to exist in this matter will be dealt with in the overall context of the
Debtors' plan of reorganization.

Dispute with MAXXAM. In March 2002, MAXXAM filed a declaratory action with the
Court asking the Court to find that it has no further obligations to the Debtors
under the tax allocation agreements discussed in Note 9. MAXXAM asserts that the
agreements are personal contracts and financial accommodations which cannot be
assumed under the Code. At December 31, 2001, the Company had a receivable from
MAXXAM of $35.0 (included in Other assets) outstanding under the tax allocation
agreement in respect of various tax contingencies in an equal amount (reflected
in Long-term liabilities). The Company believes that MAXXAM's position is
without merit and that MAXXAM will be required to satisfy its obligations under
the tax allocation agreements.

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
from time to time 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 2
for a discussion of the effects of the new accounting requirements under SFAS
No. 133, which is being used for reporting results beginning with the first
quarter of 2001.

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


                                                                                    Carrying/
                                                                                     Market
                          Commodity                                Period             Value
- ------------------------------------------------------------  ----------------   --------------

Aluminum -
       Option contracts and swaps                                   2002         $        40.8
       Option contracts                                             2003                  11.9
Australian dollars - Option contracts                           2002 to 2005               4.0
Energy -
       Natural gas - Option contracts and swaps                 1/02 to 3/02              (1.2)
       Fuel Oil - Swaps                                         1/02 to 3/02                .7

During the first quarter of 2001, the Company recorded a mark-to-market benefit
of $6.8 (included in Other income (expense)) related to the application of SFAS
No. 133. However, starting in the second quarter of 2001, the income statement
impact of mark-to-market changes was essentially eliminated as unrealized gains
or losses resulting from changes in the value of these hedges began being
recorded in other comprehensive income (see Note 2) based on changes in SFAS No.
133 enacted in April 2001.

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

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

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

14.  SUBSEQUENT EVENT

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

15.  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 2. 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, 2001, 2000 and 1999
is as follows:

                                                                                           Year Ended December 31,
                                                                                  -----------------------------------------
                                                                                         2001           2000           1999
- ---------------------------------------------------------------------------       -----------    -----------    -----------
Net Sales:
   Bauxite and Alumina:(1)
     Net sales to unaffiliated customers                                          $    508.3     $    442.2     $    395.8
     Intersegment sales                                                                 77.9          148.3          129.0
                                                                                  -----------    -----------    -----------
                                                                                       586.2          590.5          524.8
                                                                                  -----------    -----------    -----------
   Primary Aluminum:(2)
     Net sales to unaffiliated customers                                               358.9          563.7          432.9
     Intersegment sales                                                                  3.8          242.3          240.6
                                                                                  -----------    -----------    -----------
                                                                                       362.7          806.0          673.5
                                                                                  -----------    -----------    -----------
   Flat-Rolled Products                                                                308.0          521.0          591.3
   Engineered Products                                                                 429.5          564.9          556.8
   Commodities Marketing                                                                22.9          (25.4)          18.3
   Minority Interests                                                                  105.1          103.4           88.5
   Eliminations                                                                        (81.7)        (390.6)        (369.6)
                                                                                  -----------    -----------    -----------
                                                                                  $  1,732.7     $  2,169.8     $  2,083.6
                                                                                  ===========    ===========    ===========
Equity in income (loss) of unconsolidated affiliates:
   Bauxite and Alumina                                                            $     (2.3)    $     (8.4)    $      3.4
   Primary Aluminum                                                                      4.0            3.6           (1.0)
   Engineered Products and Other                                                          -              -             2.5
                                                                                  -----------    -----------    -----------
                                                                                  $      1.7     $     (4.8)    $      4.9
                                                                                  ===========    ===========    ===========
Operating income (loss):
   Bauxite and Alumina - Note 3                                                   $    (46.9)    $     57.2     $    (10.5)
   Primary Aluminum (3)                                                                  5.1          100.1           (4.8)
   Flat-Rolled Products                                                                   .4           16.6           17.1
   Engineered Products                                                                   4.6           34.1           38.6
   Commodities Marketing                                                                 5.6          (48.7)          21.3
   Micromill                                                                              -             (.6)         (11.6)
   Eliminations                                                                          1.0             .1            6.9
   Corporate and Other                                                                 (68.5)         (61.4)         (61.8)
   Non-Recurring Operating Items - Note 6                                              163.6           41.9          (24.1)
                                                                                  -----------    -----------    -----------
                                                                                  $     64.9     $    139.3     $    (28.9)
                                                                                  ===========    ===========    ===========

(1)  Net sales for 2001, 2000 and 1999, included approximately 115,000 tons,
     322,000 tons and 395,000 tons, respectively, of alumina purchased from
     third parties.
(2)  Beginning in the first quarter of 2001, as a result of the continuing
     curtailment of KACC's Northwest smelters, the Flat-rolled products business
     unit began purchasing its own primary aluminum rather than relying on the
     Primary aluminum business unit to supply its aluminum requirements through
     production or third party purchases. The Engineered products business unit
     was already responsible for purchasing the majority of its primary aluminum
     requirements. During the years ended December 31, 2001, 2000 and 1999, the
     Primary aluminum business unit purchased approximately 27,300 tons, 56,100
     tons and 12,000 tons, respectively, of primary aluminum from third parties
     to meet existing third party commitments.
(3)  Operating income (loss) for 1999 included potline preparation and restart
     costs of $12.8.



                                                                                           Year Ended December 31,
                                                                                  -----------------------------------------
                                                                                         2001           2000           1999
- ---------------------------------------------------------------------------       -----------    -----------    -----------
Depreciation and amortization:
   Bauxite and Alumina - Note 3                                                   $     37.8     $     22.2     $     29.7
   Primary Aluminum                                                                     21.6           24.8           27.8
   Flat-Rolled Products                                                                 16.9           16.7           16.2
   Engineered Products                                                                  12.8           11.5           10.7
   Corporate and Other (includes Micromill in 1999)                                      1.1            1.7            5.1
                                                                                  -----------    -----------    -----------
                                                                                  $     90.2     $     76.9     $     89.5
                                                                                  ===========    ===========    ===========
Capital expenditures:
   Bauxite and Alumina - Note 3                                                   $    117.8     $    254.6     $     30.4
   Primary Aluminum                                                                      8.7            9.6           12.8
   Flat-Rolled Products                                                                  1.5            7.6           16.6
   Engineered Products - Note 5                                                         19.9           23.6            7.8
   Corporate and Other                                                                    .8            1.1             .8
                                                                                  -----------    -----------    -----------
                                                                                  $    148.7     $    296.5     $     68.4
                                                                                  ===========    ===========    ===========



                                                                                    December 31,
                                                                          --------------------------------
                                                                                    2001              2000
- ----------------------------------------------------------------------    --------------    --------------
Investments in and advances to unconsolidated affiliates:
   Bauxite and Alumina - Note 4                                           $        43.9     $        56.0
   Primary Aluminum                                                                18.8              19.0
   Corporate and Other - Note 4                                                      .3               2.8
                                                                          --------------    --------------

                                                                          $        63.0     $        77.8
                                                                          ==============    ==============
Segment assets:
   Bauxite and Alumina                                                    $       922.5     $       957.0
   Primary Aluminum - Note 7                                                      467.0             623.3
   Flat-Rolled Products                                                           261.5             337.7
   Engineered Products                                                            233.8             232.9
   Commodities Marketing                                                           48.4              62.1
   Corporate and Other - Note 9                                                   810.5           1,130.1
                                                                          --------------    --------------

                                                                          $     2,743.7     $     3,343.1
                                                                          ==============    ==============

Geographical information for net sales, based on country of origin, and
long-lived assets follows:


                                                                         Year Ended December 31,
                                                              ---------------------------------------------
                                                                      2001             2000            1999
- ---------------------------------------------------------     ------------    -------------    ------------
Net sales to unaffiliated customers:
     United  States                                           $   1,017.3     $     1,350.1    $    1,439.6
     Jamaica                                                        219.4             298.5           233.1
     Ghana                                                          221.3             237.5           153.2
     Other Foreign                                                  274.7             283.7           257.7
                                                              ------------    -------------    ------------
                                                              $   1,732.7     $     2,169.8    $    2,083.6
                                                              ============    =============    ============

                                                                      December 31,
                                                              -----------------------------
                                                                      2001             2000
- -------------------------------------------------------       ------------    -------------
Long-lived assets: (1)
     United States                                            $     832.5     $       809.0
     Jamaica                                                        303.8             290.3
     Ghana                                                           83.3              80.8
     Other Foreign                                                   58.8              73.8
                                                              ------------    -------------
                                                              $   1,278.4     $     1,253.9
                                                              ============    =============

(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, 2001, 2000 and 1999. No single
customer accounted for sales in excess of 10% of total revenue in 2001, 2000 and
1999. Export sales were less than 10% of total revenue during the years ended
December 31, 2001, 2000 and 1999.


                                                                                    Quarter Ended
                                                            -------------------------------------------------------------
(In millions of dollars, except share amounts)                   March 31,     June 30,    September 30,     December 31,
- --------------------------------------------------------    --------------   ----------   --------------   --------------

2001
   Net sales                                                $       480.3    $   446.8          $ 430.3          $ 375.3
   Operating income (loss)                                          215.4        (27.6)           (36.1)           (86.8)
   Net income (loss)                                                119.6 (1)    (64.1)(2)         68.4 (3)       (583.3)(4)
   Basic/Diluted Earnings per share                                  1.50 (1)     (.80)(2)          .85 (3)        (7.23)(4)
   Common stock market price:(11)
      High                                                           4.44         4.90             4.45             3.34
      Low                                                            3.23         3.25             2.57             1.56
2000
   Net sales                                                $       575.7    $   552.8          $ 545.2          $ 496.1
   Operating income                                                  36.9         51.5              2.8             48.1
   Net income (loss)                                                 11.7 (5)     11.0 (6)        (16.8)(7)         10.9 (8)
   Basic/Diluted Earnings (loss) per share                            .15 (5)      .14 (6)         (.21)(7)          .14 (8)
   Common stock market price:(11)
      High                                                           8.88         5.13             6.06             5.94
      Low                                                            4.13         2.94             3.50             3.50
1999
   Net sales                                                $       490.3    $   536.2          $ 528.7          $ 528.4
   Operating income (loss)                                          (33.0)          .7            (12.1)            15.5
   Net income (loss)                                                (38.2)       (15.7)           (39.2)(9)         39.0 (10)
   Basic/Diluted Earnings (loss) per share                           (.48)        (.20)            (.49)(9)          .49 (10)
   Common stock market price:(11)
      High                                                           6.94        10.13             9.69             8.25
      Low                                                            4.75         5.00             6.63             6.00



(1)     Includes the following pre-tax items: a gain of $228.2 from the sale of
        power and $15.3 of mark-to-market ("MTM") non-operating gains offset by
        a non-cash charge of $7.5 for asbestos-related claims, abnormal Gramercy
        start-up costs of $19.0 and excess overhead and other costs associated
        with curtailed Northwest smelting operations of $6.0. Excluding these
        items, results would have been a basic loss per share of approximately
        $.12.
(2)     Includes the following pre-tax items: a non-cash charge of $45.8 for
        asbestos-related claims, a non-cash charge of $8.0 for an adjustment to
        environmental liabilities, abnormal Gramercy start-up costs of $22.0 and
        certain other net non-recurring charges totaling $12.2 offset by a gain
        of $15.2 for Gramercy business interruption recoveries. Excluding these
        items, results would have been a basic loss per share of approximately
        $.25.
(3)     Includes the following pre-tax items: a gain of $163.6 from sale of QAL
        interest, $13.9 of MTM non-operating gains and a gain of $21.4 for
        Gramercy business interruption recoveries offset by charges of $24.5 for
        restructuring, abnormal Gramercy start-up costs of $13.9 and certain
        other net non-recurring charges totaling $1.6. Excluding these items,
        results would have been a basic loss per share of approximately $.31.
(4)     Includes increase in valuation allowances for net deferred income tax
        assets of $505.4 and the following pre-tax items: charges for
        restructuring of $8.2, abnormal Gramercy start-up and other costs of
        $16.5, contract labor costs related to smelter curtailment of $9.4,
        impairment charges related to Trentwood equipment of $17.7 and certain
        other net non-recurring charges totaling $9.6. Excluding these items,
        results would have been basic loss per share of approximately $.43.
(5)     Includes the following pre-tax items: MTM non-operating gains of $14.4
        offset by a charge of $2.0 for restructuring. Excluding these items,
        results would have been basic income per share of approximately $.05.
(6)     Includes the following pre-tax items: a gain of $15.8 from the sale of
        power offset by certain other non-recurring charges totaling $7.9.
        Excluding these items, results would have been basic income per share of
        approximately $.08.
(7)     Includes the following pre-tax items: a labor settlement charge of
        $38.5, a non-cash charge of $43.0 for asbestos-related claims, a charge
        of $11.5 for incremental maintenance spending and charges of $18.1 for
        non-recurring impairment and restructuring charges offset by a gain of
        $40.5 from the sale of power, gains of $39.0 related to real estate
        transactions and $.9 of MTM non-operating gains. Excluding these items,
        results would have been basic income per share of approximately $.03.
(8)     Includes the following pre-tax items: a gain of $103.2 from the sale of
        power offset by a non-cash impairment loss of approximately $33.0, a
        charge of $26.2 for operating profit foregone as a result of power sales
        and certain other net non-operating charges totaling $10.9. Excluding
        these items, but giving effect to operating profit foregone as a result
        of these power sales, results would have been basic loss per share of
        approximately $.19.
(9)     Includes the following pre-tax items: a non-cash charge of $19.1 to
        reduce the carrying value of the Company's Micromill assets, a non-cash
        charge of $15.2 for asbestos-related claims and certain other
        non-operating charges totaling $10.9. Excluding these items, results
        would have been basic loss per share of approximately $.11.
(10)    Includes the following pre-tax items: a gain of $85.0 on involuntary
        conversion at Gramercy facility (see Note 3) offset by $12.8 of MTM
        non-operating charges. Excluding this item, results would have been
        basic loss per share of approximately $.11.
(11)    As part of a plan of reorganization, it is possible that the interests
        of the Company's existing stockholders could be diluted or cancelled.


FIVE-YEAR FINANCIAL DATA
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------





                                                                                       December 31,
                                                               ------------------------------------------------------------
(In millions of dollars)                                              2001        2000        1999         1998        1997
- -----------------------------------------------------------    ----------- -----------  ----------  -----------  ----------
ASSETS                                                             (1)
Current assets:
   Cash and cash equivalents                                   $    153.3  $     23.4   $    21.2   $     98.3   $    15.8
   Receivables                                                      206.4       429.8       261.0        282.7       340.2
   Inventories                                                      313.3       396.2       546.1        543.5       568.3
   Prepaid expenses and other current assets                         86.2       162.7       145.6        105.5       121.3
                                                               ----------- -----------  ----------  -----------  ----------
      Total current assets                                          759.2     1,012.1       973.9      1,030.0     1,045.6

Investments in and advances to unconsolidated affiliates             63.0        77.8        96.9        128.3       148.6
Property, plant, and equipment - net                              1,215.4     1,176.1     1,053.7      1,108.7     1,171.8
Deferred income taxes                                                  -        454.2       440.0        377.9       330.6
Other assets                                                        706.1       622.9       634.3        346.0       317.3
                                                               ----------- -----------  ----------  -----------  ----------
      Total                                                    $  2,743.7  $  3,343.1   $ 3,198.8   $  2,990.9   $ 3,013.9
                                                               =========== ===========  ==========  ===========  ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accruals                               $    515.0  $    673.5   $   500.3   $    432.7   $   457.3
   Accrued postretirement medical benefit obligation -
      current portion                                                62.0        58.0        51.5         48.2        45.3
   Payable to affiliates                                             52.9        78.3        85.8         77.1        82.7
   Long-term debt - current portion                                 173.5        31.6          .3           .4         8.8
                                                               ----------- -----------  ----------  -----------  ----------
      Total current liabilities                                     803.4       841.4       637.9        558.4       594.1

Long-term liabilities                                               919.9       703.7       727.1        532.9       491.9
Accrued postretirement medical benefit obligation                   642.2       656.9       678.3        694.3       720.3
Long-term debt                                                      700.8       957.8       972.5        962.6       962.9
Minority interests                                                  118.5       101.1       117.7        123.5       127.7

Stockholders' equity:
   Common stock                                                        .8          .8          .8           .8          .8
   Additional capital                                               539.1       537.5       536.8        535.4       533.8
   Retained earnings (accumulated deficit)                         (913.7)     (454.3)     (471.1)      (417.0)     (417.6)
   Accumulated other comprehensive income (loss)                    (67.3)       (1.8)       (1.2)         -            -
                                                               ----------- -----------  ----------  -----------  ----------
      Total stockholders' equity                                   (441.1)       82.2        65.3        119.2       117.0
                                                               ----------- -----------  ----------  -----------  ----------
      Total                                                    $  2,743.7  $  3,343.1   $ 3,198.8   $  2,990.9   $ 3,013.9
                                                               =========== ===========  ==========  ===========  ==========

Debt-to-capital ratio(2)                                            147.9        81.2        81.2         76.9        77.8

(1)  Prepared on a "going concern" basis. See Notes 1 and 2 of Notes to
     Consolidated Financial Statements for a discussion of the possible impact
     of the Cases.

(2)  Total of long-term debt - current portion and long-term debt (collectively
     "total debt") as a ratio of total debt, deferred income tax liabilities,
     minority interests, and stockholders' equity.

FIVE-YEAR FINANCIAL DATA
STATEMENTS OF CONSOLIDATED INCOME (LOSS)
- --------------------------------------------------------------------------------

                                                                            Year Ended December 31,
                                                       -----------------------------------------------------------------
(In millions of dollars, except share amounts)                 2001          2000         1999         1998         1997
- -----------------------------------------------------  ------------   -----------  -----------  -----------  -----------
                                                             (1)
Net sales                                              $   1,732.7    $  2,169.8   $  2,083.6   $  2,302.4   $  2,423.3
                                                       ------------   -----------  -----------  -----------  -----------

Costs and expenses:
   Cost of products sold                                   1,638.4       1,891.4      1,893.5      1,892.2      2,001.3
   Depreciation and amortization                              90.2          76.9         89.5         99.1        102.5
   Selling, administrative, research and development,
     and general                                             102.8         104.1        105.4        115.5        131.8
   Non-recurring operating items                            (163.6)        (41.9)        24.1        105.0         19.7
                                                       ------------   -----------  -----------  -----------  -----------
     Total costs and expenses                              1,667.8       2,030.5      2,112.5      2,211.8      2,255.3
                                                       ------------   -----------  -----------  -----------  -----------

Operating income (loss)                                       64.9         139.3        (28.9)        90.6        168.0

Other income (expense):
   Interest expense                                         (109.0)       (109.6)      (110.1)      (110.0)      (110.7)
   Gain on sale of interest in QAL                           163.6           -            -            -            -
   Gain on involuntary conversion at Gramercy facility          -            -           85.0          -            -
   Other - net                                               (32.8)         (4.3)       (35.9)         3.5          3.0
                                                       ------------   -----------  -----------  -----------  -----------

Income (loss) before income taxes, minority interests         86.7          25.4        (89.9)       (15.9)        60.3

(Provision) benefit for income taxes                        (550.2)        (11.6)        32.7         16.4         (8.8)

Minority interests                                             4.1           3.0          3.1           .1         (3.5)
                                                       ------------   -----------  -----------  -----------  -----------

Net income (loss)                                           (459.4)         16.8        (54.1)          .6         48.0

Preferred stock dividends                                      -             -            -            -           (5.5)
                                                       ------------   -----------  -----------  -----------  -----------
Net income (loss) available to common shareholders     $    (459.4)   $     16.8   $    (54.1)  $       .6   $     42.5
                                                       ============   ===========  ===========  ===========  ===========

Earnings (loss) per share:
   Basic/Diluted                                       $     (5.73)   $      .21   $     (.68)  $      .01   $      .57
                                                       ============   ===========  ===========  ===========  ===========

Dividends per common share                             $        -     $       -    $       -    $       -    $       -
                                                       ============   ===========  ===========  ===========  ===========
Weighted average shares outstanding (000):
   Basic                                                    80,235        79,520       79,336       79,115       74,221

   Diluted                                                  80,235        79,523       79,336       79,156       74,382


(1)  Prepared on a "going concern" basis. See Notes 1 and 2 of Notes to
     Consolidated Financial Statements for a discussion of the possible impact
     of the Cases.

EX-99

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 2 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.

SENSITIVITY

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 million, based on recent fluctuations in operating levels.

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 20.0%-owned affiliate, QAL. 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 $1.0 - $2.0 million
(decrease) increase in the Company's annual pre-tax operating income.

Energy. KACC is exposed to energy price risk from fluctuating prices for natural
gas, fuel oil and diesel oil 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.

HEDGING POSITIONS

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

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

EX-99

                                 April 12, 2002



U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re:      MAXXAM Group Holdings Inc. - Requirements for
         Arthur Andersen LLP Auditing Clients


Dear Sir or Madam:

         Arthur Andersen LLP has represented to MAXXAM Group Holdings Inc. that
its audit was subject to Andersen's quality control system for the U.S.
accounting and auditing practice to provide reasonable assurance that the
engagement was conducted in compliance with professional standards and that
there was appropriate continuity of Andersen personnel working on the audit,
availability of national office consultation and availability of personnel at
foreign affiliates of Arthur Andersen to conduct the relevant portions of the
audit.






                                   By:          ELIZABETH D. BRUMLEY
                                       -----------------------------------
                                                Elizabeth D. Brumley
                                                     Controller
                                           (Principal Accounting Officer)