10-Q

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


                                    FORM 10-Q

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


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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

                          Commission File Number 1-3924


                                   MAXXAM INC.
             (Exact name of Registrant as specified in its charter)



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

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




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



      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 / /

  Number of shares of common stock outstanding at November 12, 2001: 6,527,671



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                                TABLE OF CONTENTS



PART I. - FINANCIAL INFORMATION

          Item 1.   Financial Statements:
                    Report of Independent Public Accountants
                    Consolidated Balance Sheet at September 30, 2001 and
                        December 31, 2000
                    Consolidated Statement of Operations for the three and nine
                        months ended September 30, 2001 and 2000
                    Consolidated Statement of Cash Flows for the nine months
                        ended September 30, 2001 and 2000
                    Condensed Notes to Consolidated Financial Statements

          Item 2.   Management's Discussion and Analysis of Financial Condition
                        and Results of Operations

          Item 3.   Quantitative and Qualitative Disclosures About Market Risk

PART II. - OTHER INFORMATION

          Item 1.   Legal Proceedings
          Item 6.   Exhibits and Reports on Form 8-K
          Signatures

APPENDIX A - GLOSSARY OF DEFINED TERMS

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To MAXXAM Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of MAXXAM
Inc. (a Delaware corporation) and subsidiaries as of September 30, 2001, and the
related condensed consolidated statements of operations for the three-month and
nine-month periods ended September 30, 2001 and 2000, and the condensed
consolidated statement of cash flows for the nine-month periods ended September
30, 2001 and 2000. These financial statements are the responsibility of the
company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States, the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of MAXXAM Inc. and
subsidiaries as of December 31, 2000, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year then
ended (not presented separately herein), and in our report dated March 27, 2001,
we expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 2000, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.


                                                             ARTHUR ANDERSEN LLP



Houston, Texas
November 12, 2001

                          MAXXAM INC. AND SUBSIDIARIES

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


                                                                                        SEPTEMBER 30, DECEMBER 31,
                                                                                             2001         2000
                                                                                        ------------- -------------
                                                                                         (UNAUDITED)
ASSETS
Current assets:
   Cash and cash equivalents........................................................... $      315.2  $      353.2
   Marketable securities and other investments.........................................        148.3          44.6
   Receivables:
      Trade, net of allowance for doubtful accounts of $5.7 and $6.4, respectively.....        164.3         202.3
      Other............................................................................        161.0         251.6
   Inventories.........................................................................        389.4         451.3
   Prepaid expenses and other current assets...........................................        189.3         203.1
                                                                                        ------------- -------------
        Total current assets...........................................................      1,367.5       1,506.1
Property, plant and equipment, net of accumulated depreciation of $1,093.3 and
   $1,033.0, respectively..............................................................      1,516.3       1,331.3
Timber and timberlands, net of accumulated depletion of $190.8 and $183.8,
   respectively........................................................................        240.2         244.3
Investments in and advances to unconsolidated affiliates...............................         67.6          85.5
Deferred income taxes..................................................................        492.4         553.1
Restricted cash, marketable securities and other investments...........................         98.8         106.3
Long-term receivables and other assets.................................................        763.1         677.4
                                                                                        ------------- -------------
                                                                                        $    4,545.9  $    4,504.0
                                                                                        ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable.................................................................... $      177.5  $      248.7
   Accrued interest....................................................................         38.1          70.1
   Accrued compensation and related benefits...........................................        164.9         180.8
   Other accrued liabilities...........................................................        281.6         313.5
   Payable to affiliates...............................................................         59.2          78.3
   Short-term borrowings and current maturities of long-term debt......................        266.1         100.6
                                                                                        ------------- -------------
        Total current liabilities......................................................        987.4         992.0
Long-term debt, less current maturities................................................      1,696.7       1,882.8
Accrued postretirement medical benefits................................................        660.1         667.4
Other noncurrent liabilities...........................................................        879.5         779.9
                                                                                        ------------- -------------
        Total liabilities..............................................................      4,223.7       4,322.1
                                                                                        ------------- -------------
Commitments and contingencies (see Note 10)
Minority interests.....................................................................        206.0         132.8
Stockholders' equity:
   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.................................................................        (16.2)        (68.2)
   Accumulated other comprehensive gain (loss).........................................         17.5          (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.....................................................        116.2          49.1
                                                                                        ------------- -------------
                                                                                        $    4,545.9  $    4,504.0
                                                                                        ============= =============


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


                          MAXXAM INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
               (IN MILLIONS OF DOLLARS, EXCEPT SHARE INFORMATION)


                                                                     THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                        SEPTEMBER 30,            SEPTEMBER 30,
                                                                   -----------------------  -----------------------
                                                                      2001         2000        2001        2000
                                                                   -----------  ----------  ----------  -----------
                                                                                      (UNAUDITED)
Net sales:
   Aluminum......................................................  $    430.3   $   545.2   $ 1,357.4   $  1,673.7
   Forest products...............................................        44.8        49.4       142.8        152.7
   Real estate...................................................        20.8        15.7        41.5         34.2
   Racing........................................................         8.2         8.0        23.0         22.4
                                                                   -----------  ----------  ----------  -----------
                                                                        504.1       618.3     1,564.7      1,883.0
                                                                   -----------  ----------  ----------  -----------
Costs and expenses:
   Cost of sales and operations:
      Aluminum...................................................       418.6       445.8     1,061.7      1,393.7
      Forest products............................................        36.9        40.5       119.6        112.3
      Real estate................................................         7.9         7.7        19.4         16.5
      Racing.....................................................         5.7         5.3        15.1         14.1
   Selling, general and administrative expenses..................        39.7        40.6       120.3        118.6
   Aluminum labor settlement.....................................           -        38.5           -         38.5
   Impairment of assets..........................................         0.7        13.0         0.7         13.7
   Depreciation, depletion and amortization......................        28.9        25.5        83.1         75.1
                                                                   -----------  ----------  ----------  -----------
                                                                        538.4       616.9     1,419.9      1,782.5
                                                                   -----------  ----------  ----------  -----------

Operating income (loss)..........................................       (34.3)        1.4       144.8        100.5

Other income (expense):
   Gain on sale of an interest in QAL............................       163.6           -       163.6            -
   Investment, interest and other income (expense), net..........        21.9         5.8        (0.3)        40.3
   Interest expense..............................................       (46.7)      (45.9)     (136.2)      (141.1)
   Amortization of deferred financing costs......................        (1.9)       (1.8)       (6.4)        (5.3)
                                                                   -----------  ----------  ----------  -----------
Income (loss) before income taxes and minority interests.........       102.6       (40.5)      165.5         (5.6)

Credit (provision) for income taxes..............................       (48.3)       16.0       (73.5)         2.2
Minority interests...............................................       (24.9)        7.2       (43.6)        (0.1)
                                                                   -----------  ----------  ----------  -----------
Income (loss) before extraordinary item..........................        29.4       (17.3)       48.4         (3.5)
Extraordinary item:
   Gains on repurchases of debt, net of income tax provision
      of $0.3, $2.0 and $1.3, respectively.......................           -         0.6         3.6          2.0
                                                                   -----------  ----------  ----------  -----------
Net income (loss)................................................  $     29.4   $   (16.7)  $    52.0   $     (1.5)
                                                                   ===========  ==========  ==========  ===========

Basic earnings (loss) per common share:
   Income (loss) before extraordinary item.......................  $     4.09   $   (2.54)  $    6.66   $    (0.50)
   Extraordinary item............................................           -        0.07        0.50         0.28
                                                                   -----------  ----------  ----------  -----------
   Net income (loss).............................................  $     4.09   $   (2.47)  $    7.16   $    (0.22)
                                                                   ===========  ==========  ==========  ===========

Diluted earnings (loss) per common and common equivalent share:
   Income (loss) before extraordinary item.......................  $     4.08   $   (2.54)  $    6.64   $    (0.50)
   Extraordinary item............................................           -        0.07        0.50         0.28
                                                                   -----------  ----------  ----------  -----------
   Net income (loss).............................................  $     4.08   $   (2.47)  $    7.14   $    (0.22)
                                                                   ===========  ==========  ==========  ===========


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

                          MAXXAM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                            (IN MILLIONS OF DOLLARS)

                                                                                               NINE MONTHS ENDED
                                                                                                 SEPTEMBER 30,
                                                                                            -----------------------
                                                                                               2001        2000
                                                                                            ----------  -----------
                                                                                                  (UNAUDITED)
Cash flows from operating activities:
   Net income (loss)......................................................................  $    52.0   $    (1.5)
   Adjustments to reconcile net income (loss) to net cash provided by operating activities:
      Depreciation, depletion and amortization............................................       83.1         75.1
      Non-cash impairment and restructuring charges.......................................       21.4         17.4
      Extraordinary gains on repurchases of debt, net.....................................       (3.6)        (2.0)
      Net gains on marketable securities..................................................       (8.7)       (19.6)
      Net gains on other asset dispositions...............................................     (169.1)       (39.6)
      Minority interests..................................................................       43.6          0.1
      Amortization of deferred financing costs and discounts on long-term debt............        6.4          5.4
      Equity in earnings of unconsolidated affiliates, net of dividends received..........        4.5         19.9
      Increase (decrease) in cash resulting from changes in:
        Receivables.......................................................................      125.4       (111.1)
        Inventories.......................................................................       49.3         90.3
        Prepaid expenses and other assets.................................................        7.8         17.1
        Accounts payable..................................................................      (43.5)       (18.3)
        Accrued and deferred income taxes.................................................       30.8        (15.7)
        Payable to affiliates and other liabilities.......................................       (2.6)        38.7
        Accrued interest..................................................................      (32.0)       (33.1)
        Long-term assets and long-term liabilities........................................        7.9        (34.0)
      Other...............................................................................       17.5         12.9
                                                                                            ----------  -----------
        Net cash provided by operating activities.........................................      190.2          2.0
                                                                                            ----------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net proceeds from dispositions of property and investments.............................      170.4        139.8
   Net purchases of marketable securities and other investments...........................      (94.2)       (17.2)
   Capital expenditures...................................................................     (295.5)      (173.2)
   Restricted cash withdrawals used to acquire timberlands................................          -          0.8
   Other..................................................................................       (0.3)         1.3
                                                                                            ----------  -----------
        Net cash used for investing activities............................................     (219.6)       (48.5)
                                                                                            ----------  -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuances of long-term debt..............................................      132.4          1.9
   Redemptions, repurchases of and principal payments on long-term debt...................      (86.5)       (35.6)
   Borrowings (repayments) under revolving and short term credit facilities...............      (48.8)        19.6
   Incurrence of deferred financing costs.................................................       (5.4)           -
   Redemption of preference stock.........................................................       (5.6)        (2.6)
   Restricted cash withdrawals, net.......................................................        8.2         10.3
   Treasury stock repurchases.............................................................       (2.9)       (12.8)
                                                                                            ----------  -----------
        Net cash used for financing activities............................................       (8.6)       (19.2)
                                                                                            ----------  -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................................................      (38.0)       (65.7)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..........................................      353.2        275.7
                                                                                            ----------  -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................................  $   315.2   $    210.0
                                                                                            ==========  ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
   Repurchases of debt using restricted cash..............................................  $       -   $     36.1
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid, net of capitalized interest.............................................  $   168.3   $    174.1
   Income taxes paid, net.................................................................       41.6          9.6
   Increase (decrease) in accounts payable attributable to capital expenditures...........      (29.9)        42.9


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

                          MAXXAM INC. AND SUBSIDIARIES

              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    GENERAL

      The information contained in the following notes to the consolidated
financial statements is condensed from that which would appear in the annual
consolidated financial statements; accordingly, the consolidated financial
statements included herein should be reviewed in conjunction with the
consolidated financial statements and related notes thereto contained in the
Form 10-K. Any capitalized terms used but not defined in these Condensed Notes
to Consolidated Financial Statements are defined in the "Glossary of Defined
Terms" contained in Appendix A. All references to the "Company" include MAXXAM
Inc. and its subsidiary companies unless otherwise noted or the context
indicates otherwise. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year end. The results of operations for
the interim periods presented are not necessarily indicative of the results to
be expected for the entire year.

      The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in the
opinion of management, are necessary for a fair presentation of the consolidated
financial position of the Company at September 30, 2001, and the consolidated
results of operations for the three and nine months ended September 30, 2001 and
2000, and the consolidated cash flows for the nine months ended September 30,
2001 and 2000.

      LIQUIDITY
      Near-term Debt Maturities
      Kaiser has significant near-term debt maturities, including $177.4 million
(remaining principal amount outstanding as of October 31, 2001) of its KACC 9
7/8% Senior Notes due February 2002 and $400.0 million of the KACC Senior
Subordinated Notes due February 2003. The KACC Credit Agreement will expire
December 15, 2001, unless it is extended, replaced or renewed. As of October 31,
2001, Kaiser had approximately $190.0 million of cash and cash equivalents. See
Note 9 for a discussion of Kaiser's plans with respect to such near-term debt
maturities.

      Cash Flow, Other Than Near-term Debt Maturities
      Kaiser's ability to make payments on, retire or refinance its debt depends
on its ability to generate cash in the future. In addition to being impacted by
normal operating items, Kaiser's near-term liquidity and cash flows will be
negatively affected by the restart of the Gramercy facility, until it reaches
its full production level and full efficiency, and net payments for
asbestos-related liabilities. For a discussion of these matters, see Notes 3 and
10.

      Absent an improvement in the markets in which Kaiser operates or faster
than expected improvement in the operating performance of the Gramercy refinery
(as a result of its completion) and other facilities (as a result of Kaiser's
performance improvement initiative), Kaiser's operations and working capital and
other commitments (before considering near-term debt maturities), including
interest and expected tax payments, the funding of pension, post- retirement
medical and net asbestos-related liabilities, capital spending and other
previously accrued obligations may cause near-term cash flows to be negative.
Kaiser expects its cash flow in mid-2002 to improve substantially over expected
near-term cash flows as a result of the Gramercy alumina refinery reaching its
full operating rate and full efficiency, operating improvements resulting from
Kaiser's performance improvement initiative and as certain of its other
previously accrued, non-recurring, near-term obligations are satisfied. However,
such changes are subject to prevailing market and economic conditions and, as
such, no assurances can be given in this regard.

      Possible Year-End Financial Statement Item
      The assets of the Company's 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 year-to-date performance of the stock market, it is
likely that, barring a material improvement in the stock market during the
fourth quarter of 2001, the Company will be required to reflect a significant
additional minimum pension liability in its year-end 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 ultimate amount of such additional adjustment cannot be
determined until year-end 2001. However, based on stock market performance
through September 30, 2001, the Company estimates that such amount could be in
the $25.0 million to $50.0 million range. Substantially all of the amount is expected
to be attributable to Kaiser's pension plan. 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 recent 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.

      COMPREHENSIVE INCOME (LOSS)
      The following table sets forth comprehensive income (loss) (in millions).


                                                                          THREE MONTHS ENDED     NINE MONTHS ENDED
                                                                             SEPTEMBER 30,         SEPTEMBER 30,
                                                                          -------------------  --------------------
                                                                            2001       2000      2001       2000
                                                                          ---------  --------  ---------  ---------

Net income (loss)........................................................ $   29.4   $(16.7)   $   52.0   $  (1.5)
Cumulative effect of accounting change, net of income tax provision
   of $0.3...............................................................        -         -        1.1          -
Unrealized net gains on derivative instruments arising during the period,
   net of income tax provision of $13.1 and $10.4, respectively..........     22.4         -       17.8          -
Less reclassification adjustment for realized net gains on derivative
   instruments included in net income (loss), net of income tax
   provision of $0.0 and $0.6, respectively..............................     (0.2)        -       (1.8)         -
Change in value of available-for-sale investments, net of income tax
   provision of $0.4, $0.0, $0.6 and $0.0, respectively..................      0.7       0.6        0.9        0.6
                                                                          ---------  --------  ---------  ---------
Comprehensive income (loss).............................................. $   52.3   $ (16.1)  $   70.0   $   (0.9)
                                                                          =========  ========  =========  =========

      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 hedging
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 also Note 12.

      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 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
2000.

      Effective January 1, 2001, the Company began reporting derivative
activities pursuant to 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. Changes in the market value of the
Company'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 (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 the income statement rather than in
other comprehensive income. This did not occur in the first nine months of 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 Kaiser's cash flow and earnings will be "fixed" to the
extent hedged.

      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. Based on the applicable prices
and exchange rates in effect at the adoption date, a pre-tax charge of
approximately $1.3 million is expected to be reclassified from accumulated other
comprehensive income to net income during 2001.

      NEW ACCOUNTING STANDARDS

      In June 2001, the Financial Accounting Standards Board issued SFAS Nos.
141 and 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. The
Company does not expect adoption of these standards to have a material impact on
its results of operations and financial position.

      In August 2001, the Financial Accounting Standards Board issued 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. Management is assessing the impact of the standard on its
results of operations and financial position.

2.    SEGMENT INFORMATION

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


                                                FOREST         REAL          RACING                   CONSOLIDATED
                                 ALUMINUM      PRODUCTS       ESTATE       OPERATIONS     CORPORATE       TOTAL
                               ------------  ------------- -------------  ------------  ------------  -------------
Net sales to unaffiliated
   customers for the three
   months ended:
      September 30, 2001.....  $     430.3   $       44.8  $       20.8   $       8.2   $         -   $      504.1
      September 30, 2000.....        545.2           49.4          15.7           8.0             -          618.3

Operating income (loss) for
   the three months ended:
      September 30, 2001.....        (34.7)          (1.9)          4.7          (0.3)         (2.1)         (34.3)
      September 30, 2000.....          4.3            0.1           0.8           0.5          (4.3)           1.4

Depreciation, depletion and
   amortization for the
   three months ended:
      September 30, 2001.....         21.7            4.2           2.5           0.4           0.1           28.9
      September 30, 2000.....         18.3            5.3           1.4           0.4           0.1           25.5

Net sales to unaffiliated
   customers for the nine
   months ended:
      September 30, 2001.....      1,357.4          142.8          41.5          23.0             -        1,564.7
      September 30, 2000.....      1,673.7          152.7          34.2          22.4             -        1,883.0

Operating income (loss) for the
   nine months ended:
      September 30, 2001.....        156.1           (5.4)          1.3           0.7          (7.9)         144.8
      September 30, 2000.....         95.7           14.5          (1.3)          2.0         (10.4)         100.5

Depreciation, depletion and
   amortization for the nine
   months ended:
      September 30, 2001.....         62.2           14.4           5.1           1.1           0.3           83.1
      September 30, 2000.....         54.5           14.8           4.3           1.1           0.4           75.1

Total assets as of:
      September 30, 2001.....      3,318.4          606.7         296.3          43.1         281.4        4,545.9
      December 31, 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 for the three and nine months
ended September 30, 2001 and 2000 includes the impact of certain non-recurring
items included in cost of sales and operations - aluminum, as shown in the
following table (in millions).

                                                                  THREE MONTHS ENDED           NINE MONTHS ENDED
                                                                     SEPTEMBER 30,               SEPTEMBER 30,
                                                               -------------------------    -----------------------
                                                                   2001         2000           2001        2000
                                                               ------------  -----------    ----------  -----------
Net gains on power sales (Note 4)............................  $       6.5   $     40.5     $   229.2   $     56.3
Gramercy related items (Note 3)..............................            -        (11.5)            -        (11.5)
Restructuring charges........................................        (24.5)        (5.1)        (27.0)        (8.6)
Contractual labor costs related to smelter
     curtailment (Note 4)....................................         (3.3)           -          (3.3)           -
Impairment charges...........................................            -        (13.0)            -        (13.7)
                                                               ------------  -----------    ----------  -----------
                                                               $     (21.3)  $     10.9     $   198.9   $     22.5
                                                               ============  ===========    ==========  ===========

      In May 2001, Kaiser announced that it had launched a performance
improvement initiative designed to increase operating cash flow, generate cash
benefits and improve Kaiser's financial flexibility. During the third quarter of
2001, these initiatives resulted in restructuring charges totaling $14.1 million
for employee benefit and related costs for a group of approximately 125 salaried
job eliminations. As of September 30, 2001, approximately half of the positions
had been eliminated. It is anticipated that the remaining job eliminations will
occur during the fourth quarter of 2001 or the first quarter of 2002.
Approximately $4.0 million of the costs are cash costs to be incurred over the
next several quarters. The balance are benefit costs that will be funded over
longer periods. The program also resulted in a third quarter 2001 inventory
charge of $5.6 million (see Note 7). In addition, third party costs of $7.3
million (of which $4.8 million was recorded in the third quarter) were incurred
in connection with the program. Additional cash and non-cash charges may be
required in the future as the program continues. Such additional charges could
be material.

      As of September 30, 2001, substantially all of the previous job
eliminations associated with the 2000 primary aluminum and corporate business
units efficiency initiatives have occurred.

      See Note 2 to Consolidated Financial Statements in the Form 10-K for the
year ended December 31, 2000, for discussions of incremental maintenance
spending and impairment charges associated with line exits in 2000.

      The aluminum segment's income before income taxes and minority interests
for the three and nine months ended September 30, 2001 and 2000, include the net
impact of certain non-recurring amounts included in investment, interest and
other income (expense), net, as shown in the following table (in millions):


                                                                  THREE MONTHS ENDED           NINE MONTHS ENDED
                                                                     SEPTEMBER 30,               SEPTEMBER 30,
                                                               -------------------------    -----------------------
                                                                   2001         2000           2001        2000
                                                               ------------  -----------    ----------  -----------
Mark-to-market gains (Notes 1 and 12)........................  $      13.9   $      0.9     $    32.3   $      9.6
Asbestos-related charges (Note 10)...........................            -        (43.0)        (53.3)       (43.0)
Gains on sale of real estate.................................          5.7         22.0           5.7         22.0
Adjustment to environmental liabilities......................         (1.0)           -          (9.0)           -
Lease obligation adjustment..................................            -         17.0             -         17.0
All other, net...............................................         (2.3)        (1.8)         (3.8)        (6.9)
                                                               ------------  -----------    ----------  -----------
                                                               $      16.3   $     (4.9)    $   (28.1)  $     (1.3)
                                                               ============  ===========    ==========  ===========

      As part of its ongoing initiatives to generate cash benefits, Kaiser sold
certain non-operating real estate during the third quarter of 2001 for net
proceeds totaling approximately $6.7 million, resulting in a gain of $5.7
million.

      During the quarter and nine-month periods ended September 30, 2001, Kaiser
recorded adjustments to environmental liabilities of $1.0 million and $9.0
million, respectively, as a result of its ongoing assessment of the estimated
costs reasonably expected to be incurred to remediate non-operating properties.
See Note 10 for additional information regarding environmental contingencies.

      See Note 1 of Notes to Consolidated Financial Statements in the Form 10-K
for the year ended December 31, 2000, for discussion of gains on sale of real
estate and the lease obligation adjustment recorded in 2000.

      Forest Products
      As a result of management's ongoing evaluation of operations due to
declines in harvest levels, increased logging costs, and continued difficulty
obtaining approval of timber harvest plans, two of the Company's sawmills have
been idled. In connection with the shut-down of one of these two mills, the
Company recorded a charge to operating costs of $0.7 million to write-down the
assets to estimated fair value. Further reductions or curtailments in sawmill or
other operations may occur during the next year as MGI completes its evaluation
process, and additional potentially significant writedowns of the investment in
certain assets may be required.

      Real Estate
      The real estate segment's investment, interest and other income (expense)
includes the following (in millions):


                                                                  THREE MONTHS ENDED           NINE MONTHS ENDED
                                                                     SEPTEMBER 30,               SEPTEMBER 30,
                                                               -------------------------    -----------------------
                                                                   2001         2000           2001        2000
                                                               ------------  -----------    ----------  -----------
Equity in earnings from real estate joint ventures...........  $       0.8   $      0.9     $     3.8   $     7.0
                                                               ============  ===========    ==========  ===========

3.    INCIDENT AT GRAMERCY FACILITY

      Production at Kaiser's Gramercy, Louisiana, alumina refinery, which had
been curtailed since July 1999 as a result of an explosion in the digestion area
of the plant, re-commenced during the middle of December 2000. Construction at
the facility was substantially completed during the third quarter of 2001. The
plant operated at approximately 78% of its newly-rated estimated annual capacity
of 1,250,000 tons during the third quarter of 2001. Subsequent to September 30,
2001, the plant has regularly operated at a rate equal to or greater than 90% of
its newly-rated estimated capacity. Based on current estimates, the facility is
expected to reach its full operating rate and full efficiency by the end of 2001
or early 2002.

      During the quarter and nine-month periods ended September 30, 2001,
abnormal Gramercy-related start-up costs totaled approximately $13.9 million and
$54.9 million, respectively. These abnormal costs resulted from operating the
plant in an interim mode pending the completion of construction. Kaiser's future
operating results will continue to be adversely affected until the Gramercy
plant is operating at its intended production rate and at full efficiency.

      As of September 30, 2001, Kaiser had collected $304.5 million of insurance
recoveries related to the property damage, business interruption and clean-up
and site preparation aspects of the Gramercy incident. 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 under which Kaiser:
(a) received an additional $35.0 million during the third quarter of 2001
related to losses/costs incurred prior to June 30, 2001; and (b) will receive an
agreed allocation from any recoveries that may result from joint actions against
certain third parties. As a result of the settlement, Kaiser recognized $15.2
million of additional insurance benefit (as a reduction of cost of sales and
operations) in the second quarter of 2001. In October 2001, settlements were
reached in certain (but not all) of the joint actions by Kaiser and its
insurers. Under the terms of the joint action agreement, as well as the prior
agreement between Kaiser and its insurers, Kaiser will receive an additional,
approximately $30.0 million, during the fourth quarter of 2001, in respect of
its share of third quarter 2001 and prior period costs from the Gramercy
incident. Accordingly, Kaiser recorded $21.4 million of additional insurance
benefit (as a reduction of cost of sales and operations) during the third
quarter of 2001 after deducting offsetting costs and receivable amounts.
Additional recoveries may result from the remaining joint actions. However,
Kaiser cannot predict the likelihood or timing of any such incremental
recoveries.

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

      See Note 3 to the Consolidated Financial Statements in the Form 10-K for
additional information regarding the Gramercy incident.

4.    PACIFIC NORTHWEST POWER SALES AND OPERATING LEVEL

      POWER SALES
      During the first six months of 2001, Kaiser, in a series of transactions,
sold a substantial majority of the remaining power available for its Northwest
smelters that it had under contract through September 2001 and recorded net
pre-tax gains of approximately $222.7 million. The gains were net of
approximately $33.0 million of employee-related expenses and other fixed or
incremental costs associated with the continuing curtailment of its Northwest
smelters. During the third quarter of 2001, Kaiser sold the remaining Northwest
power that it had under contract resulting in net pre-tax gains of approximately
$6.5 million which have been recorded in cost of sales-aluminum operations (see
Note 2). Approximately $321.0 million of proceeds from the power sales were
received in the first nine months of 2001 ($88.0 million related to 2000 power
sales and the balance related to 2001 power sales). The balance of the proceeds
from sales of power (approximately $26.5 million) will be received during the
fourth quarter of 2001.

      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, is to provide Kaiser's operations in
the State of Washington with approximately 290 megawatts of power through
September 2006. The contract will provide Kaiser with sufficient power to fully
operate Kaiser'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 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
announced by the BPA in June 2001 and is approximately 46% higher than power
costs under the prior contract. Kaiser cannot predict what rates will be charged
in future periods. Such rates will be dependent on such factors as the
availability of and demand for electrical power, which are largely dependent on
weather, the price for alternative fuels, particularly natural gas, as well as
general and regional economic and ecological factors. The contract also includes
a take-or-pay requirement and clauses under which Kaiser's power allocation
could be curtailed, or its costs increased, in certain instances. Under the
contract, Kaiser can only remarket its power allocation to reduce or eliminate
take-or-pay requirements. Kaiser is not entitled to receive any profits from any
such remarketing efforts. During October 2001, Kaiser and the BPA reached an
agreement whereby: (a) Kaiser retained its rights to restart its smelter
operations at any time; (b) Kaiser would not be obligated to pay for potential
take-or-pay obligations in the first year of the contract; and (c) 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 BPA and Kaiser separately agreed 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.

      Subject to the limited interruption rights granted to the BPA (described
above), Kaiser has sufficient power under contract, and retains the ability, to
restart up to 40% (4.75 potlines) of its Northwest smelting capacity. Were
Kaiser to 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
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. Given recent primary aluminum
prices and the forward price of power in the Northwest, it is unlikely that
Kaiser would operate more than a portion of its Northwest smelting capacity in
the near future. Were Kaiser to restart all or a portion of its Northwest
smelting capacity, it would take between three to six months to reach the full
operating rate for such operations, depending upon the number of lines
restarted. Even after achieving the full operating rate, operating only a
portion of the Northwest capacity would result in production/cost inefficiencies
such that operating results would, at best, be breakeven to modestly negative at
long-term primary aluminum prices. However, operating at such a reduced rate
could, depending on prevailing economics, result in improved cash flows as
opposed to remaining curtailed and incurring the Company's fixed and continuing
labor and other costs. This is because Kaiser is contractually liable for
certain severance, supplemental unemployment benefits and early retirement
benefits for laid-off workers under Kaiser's contract with the USWA during
periods of curtailment. As of September 30, 2001, all such contractual
compensation costs have been accrued for all USWA workers in excess of those
expected to be required to run the Northwest smelters at a rate up to the above
stated 40% smelter operating rate. These costs are expected to be incurred
periodically through September 2002. Costs associated with the USWA workers that
Kaiser estimates would be required to operate the smelters at an operating rate
of up to 40% have been accrued through December 31, 2001, as Kaiser does not
currently expect to restart the Northwest smelters prior to that date given
recent prices for primary aluminum. If Kaiser does not restart and begin
operating the smelters at an operating rate of up to 40% beginning January 2002,
it could become liable for additional supplemental unemployment benefits for
these workers. Additionally, if such workers are not recalled prior to early
2003, Kaiser could become liable for additional early retirement costs. Such
costs could be significant and would adversely impact the Company's consolidated
operating results and liquidity.

5.    ACQUISITION/DISPOSITION OF ASSETS

      ALUMINUM OPERATIONS
      In September 2001, Kaiser sold an approximate 8.3% interest in QAL and
recorded a pre-tax gain of approximately $163.6 million. 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 currently guaranteed by
Kaiser. As a result of the transaction, Kaiser now owns a 20% interest in QAL.

      QAL, which is located in Queensland, Australia, owns one of the largest
and most competitive alumina refineries in the world. Kaiser's share of QAL's
production for the first eight months of 2001 and for the year 2000 was
approximately 668,000 tons and 1,064,000 tons, respectively. Had the sale of the
QAL interest been effective as of the beginning of 2000, Kaiser's share of QAL's
production for the first nine months of 2001 and for the year 2000 would have
been reduced by approximately 196,000 tons and 312,000 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 by the end
of 2001 or early 2002 at a higher capacity and, as recently announced, by
planned increases 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.

      REAL ESTATE OPERATIONS
      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 $122.5 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.

6.    CASH, MARKETABLE SECURITIES AND OTHER INVESTMENTS

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


                                                                                       SEPTEMBER 30,  DECEMBER 31,
                                                                                           2001           2000
                                                                                       ------------- --------------
Current assets:
   Cash and cash equivalents:
      Amounts held in connection with the extension of the KACC Credit Agreement.....  $       79.5  $           -
      Amounts held as security for short positions in marketable securities..........             -           30.9
      Other restricted cash and cash equivalents.....................................          22.0           36.7
                                                                                       ------------- --------------
                                                                                              101.5           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.......................................................         137.0          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....................         (51.9)         (52.7)
                                                                                       ------------- --------------
                                                                                               98.8          106.3
                                                                                       ------------- --------------

Total restricted cash, marketable securities and other investments...................  $      217.4  $       190.2
                                                                                       ============= ==============

      Cash, marketable securities and other investments include a limited
partnership interest in 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.
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).

                                                                                        SEPTEMBER 30,    DECEMBER 31,
                                                                                            2001             2000
                                                                                        -------------   --------------
Investment in Equity Fund Partnership:
   Restricted........................................................................   $       10.6    $        10.1
   Unrestricted......................................................................          130.0               -
                                                                                        -------------   --------------
                                                                                        $      140.6    $        10.1
                                                                                        =============   ==============

Percentage of ownership held.........................................................           40.7%            10.8%
                                                                                        =============   ==============

7.    INVENTORIES

      Inventories consist of the following (in millions):

                                                                                       SEPTEMBER 30,  DECEMBER 31,
                                                                                           2001           2000
                                                                                      -------------- --------------
Aluminum operations:
   FINISHED FABRICATED PRODUCTS...................................................... $        47.3  $        54.6
   PRIMARY ALUMINUM AND WORK IN PROCESS..............................................          87.5          126.9
   BAUXITE AND ALUMINA...............................................................          93.2           88.6
   OPERATING SUPPLIES AND REPAIR AND MAINTENANCE PARTS...............................         105.1          126.1
                                                                                      -------------- --------------
                                                                                              333.1          396.2
                                                                                      -------------- --------------
FOREST PRODUCTS OPERATIONS:
   LUMBER............................................................................          32.9           34.0
   LOGS..............................................................................          23.4           21.1
                                                                                      -------------- --------------
                                                                                               56.3           55.1
                                                                                      -------------- --------------
                                                                                      $       389.4  $       451.3
                                                                                      ============== ==============

      Substantially all product inventories are stated at last-in, first-out
(LIFO) cost, not in excess of market.  Replacement cost is not in excess of
LIFO cost.

      Kaiser's inventories at September 30, 2001, have been reduced by (a) a
$5.6 million charge (in cost of sales and operations - aluminum - see Note 2) to
write-down certain excess operating supplies and repair and maintenance parts
that will be sold, rather than used in production, as part of Kaiser's
performance improvement initiative to generate one- time cash and (b) $5.0
million 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. Additional LIFO charges in future periods are possible.

8.    SHORT-TERM BORROWINGS

      On August 14, 2001, the Pacific Lumber Credit Agreement was renewed. 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, and subject to the consent of the lender, the Pacific Lumber
Credit Agreement may be extended by one year. The other terms and conditions are
substantially the same as those under the expired facility. At September 30,
2001, $18.0 million of borrowings and $11.5 million of letters of credit were
outstanding under the Pacific Lumber Credit Agreement. Unused availability was
limited to $14.8 million at September 30, 2001.

      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.

9.    LONG-TERM DEBT

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

                                                                                        SEPTEMBER 30, December 31,
                                                                                            2001          2000
                                                                                        ------------- ------------
KACC Credit Agreement.................................................................  $          -  $      30.4
9 7/8% KACC Senior Notes due February 15, 2002, net of discount.......................         206.2        224.8
10 7/8% KACC Senior Notes due October 15, 2006, including premium.....................         225.5        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........................................................          51.4         52.7
12% MGHI Notes due August 1, 2003.....................................................          88.2        118.8
6.55% Scotia LLC Timber Notes due July 20, 2028.......................................         120.3        136.7
7.11% Scotia LLC Timber Notes due July 20, 2028.......................................         243.2        243.2
7.71% Scotia LLC Timber Notes due July 20, 2028.......................................         463.3        463.3
7.56% Lakepointe Notes (see Note 5)...................................................         122.2            -
Other notes and contracts, primarily secured by receivables, buildings, real estate
   and equipment......................................................................          49.9         41.5
                                                                                        ------------- ------------
                                                                                             1,992.2      1,992.9
      Less: current maturities........................................................        (237.8)       (50.2)
           Timber Notes held in SAR Account...........................................         (57.7)       (59.9)
                                                                                        ------------- ------------
                                                                                        $    1,696.7  $   1,882.8
                                                                                        ============= ============

      The amount attributable to the Timber Notes held in the SAR Account of
$51.9 million reflected in Note 6 above represents the amount paid to acquire
$57.7 million of principal amount of Timber Notes.

      CURRENT MATURITIES AND LIQUIDITY
      The KACC Credit Agreement provides a secured, revolving line of credit. In
October 2001, the expiration date of the KACC Credit Agreement was extended from
November 2, 2001 to December 15, 2001. The extension provides Kaiser with
additional flexibility while it continues its ongoing work on a longer-term
solution for near-term debt maturities. Kaiser is able to utilize the KACC Credit
Agreement by means of revolving credit advances or 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 and eligible
inventory. At September 30, 2001, $184.8 million (of which $95.4 million could
have been used for letters of credit) was available to Kaiser under the KACC
Credit Agreement, and no amounts were outstanding under the revolving credit
facility. Interest on any outstanding amounts bears a spread (which varies based
on the results of a financial test) over either a base rate or LIBOR, at
Kaiser's option. Kaiser typically chooses base rate based borrowings for shorter
term KACC Credit Agreement uses and LIBOR based loans for more extended KACC
Credit Agreement uses. The average interest rate on loans outstanding under the
KACC Credit Agreement during the first nine months of 2001 was approximately 10%
per annum. As of October 31, 2001, there were no revolving credit borrowings
outstanding under the KACC Credit Agreement. At October 31, 2001, outstanding
letters of credit were approximately $28.4 million.

      Kaiser intends to extend, replace or renew the KACC Credit Agreement prior
to its expiration. However, in order for the KACC Credit Agreement to be
extended, on a short-term basis, beyond December 2001, Kaiser will have to have
a demonstrable way to retire the remaining amount of KACC 9 7/8% Senior Notes
($177.4 principal amount as of October 31, 2001), due February 2002. For the
KACC Credit Agreement to be extended past February 2003, both the KACC 9 7/8%
Senior Notes and the $400.0 million of 12 3/4% KACC Senior Subordinated Notes
will have to be retired and/or refinanced. It is possible that Kaiser may use a
portion of the availability under the KACC Credit Agreement (or any extension,
replacement or renewal thereof) together with other cash resources used to
retire the KACC 9 7/8% Senior Notes. As of September 30, 2001, Kaiser had
purchased $18.8 million of the KACC 9 7/8% Senior Notes. The net gain from the
purchase of the notes was less than $0.1 million. As of October 31, 2001, Kaiser
had purchased $47.6 million of the KACC 9 7/8% Senior Notes at a modest net
gain. As of October 31, 2001, Kaiser had approval from the KACC Credit Agreement
lenders to spend up to an aggregate of $100.0 million to purchase the KACC 9
7/8% Senior Notes.

      Kaiser is working with financial advisors to review its options for
addressing its near-term debt maturities and its overall capital structure.
While Kaiser believes it will be successful in addressing its near-term debt
maturities and overall capital structure, no assurances in this regard can be
given. While Kaiser continues to consider potential asset transactions (beyond
the September 2001 sale of an 8.3% interest in QAL), Kaiser intends to pursue
only those transactions that would create long-term value through strategic
positioning and/or the generation of acceptable levels of earnings or cash.
Kaiser cannot predict if any such transactions will materialize.

      In connection with the above-mentioned extension of the KACC Credit
Agreement, Kaiser has agreed to hold half (approximately $79.5 million) of the
proceeds received from the sale of an 8.3% interest in QAL (see Note 5) in a
separate bank account until the earlier of (1) lender approval, (2) December 15,
2001, or (3) renewal or further extension of the KACC Credit Agreement.

      ALPART CARIFA LOANS
      During the first quarter of 2001, Alpart redeemed $34.0 million principal
amount of the CARIFA loans. Kaiser and its partner in Alpart both funded their
respective share of the redemption. 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.

10.     CONTINGENCIES

   ALUMINUM OPERATIONS

      Environmental Contingencies
      Kaiser is subject to a number of environmental laws and regulations, to
fines or penalties assessed for alleged breaches of the environmental laws and
regulations, and to claims and litigation based upon such laws. Kaiser is
subject to a number of claims under 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 the
third quarter and nine-month periods ended September 30, 2001, Kaiser's ongoing
assessment process resulted in Kaiser recording charges of $1.0 million and $9.0
million, respectively, to increase its environmental accrual. Additionally,
Kaiser's environmental accruals were increased during the nine months ended
September 30, 2001, by approximately $6.0 million in connection with the
purchase of certain property. At September 30, 2001, the balance of Kaiser's
accruals for these and other matters, which are primarily included in other
noncurrent liabilities, totaled $58.7 million. 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 $4.0 million to $13.0 million for
the years 2001 through 2005 and an aggregate of approximately $24.0 million
thereafter.

      As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. Kaiser
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $20.0 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 actively pursuing claims
in this regard. No assurances can be given that Kaiser will be successful in its
attempts to recover incurred or future costs from insurers or that the amount of
recoveries received will ultimately be adequate to cover costs incurred.

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

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

      The following table presents the changes in the number of such claims
pending for the nine months ended September 30, 2001 and the year ended December
31, 2000.


                                                                                      SEPTEMBER 30,  DECEMBER 31,
                                                                                          2001           2000
                                                                                      -------------  ------------
Number of claims at beginning of period..............................................      110,800       100,000
Claims received......................................................................       27,300        30,600
Claims settled or dismissed..........................................................      (25,700)      (19,800)
                                                                                      -------------  ------------
Number of claims at end of period....................................................      112,400       110,800
                                                                                      =============  ============
Number of claims at end of period (included above) covered by agreements under
   which Kaiser expects to settle over an extended period............................       72,900        66,900
                                                                                      =============  ============

      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 the comparable period in 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 such costs are likely to continue 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 pace of claims review and processing by such
carriers and on the resolution of any disputes regarding coverage under such
policies. Kaiser believes that substantial recoveries from the insurance
carriers are probable. Kaiser reached this conclusion after considering its
prior insurance-related recoveries in respect of asbestos-related claims,
existing insurance policies, and the advice of Heller Ehrman White &
McAuliffe LLP with respect to applicable insurance coverage law relating to the
terms and conditions of those policies. During 2000, Kaiser filed suit against a
group of its insurers, after negotiations with certain of the insurers regarding
an agreement covering both reimbursement amounts and the timing of reimbursement
payments were unsuccessful. During October 2001, the court ruled favorably on a
number of issues. The rulings did not result in any change to Kaiser's estimates
of its current or future asbestos-related insurance recoveries. Additional
issues may be heard by the court from time to time. Given the significance of
expected asbestos-related payments in 2001 and 2002 based on settlement
agreements in place at September 30, 2001, the receipt of timely and appropriate
reimbursements from such insurers is critical to Kaiser's liquidity.

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


                                                                                 SEPTEMBER 30,      DECEMBER 31,
                                                                                     2001               2000
                                                                                ---------------   -----------------
Liability (current portion of $130.0 in both periods)...........................$        633.1    $          492.4
Receivable (included in long-term receivables and other assets)(1)..............        (501.1)             (406.3)
                                                                                ---------------   -----------------
                                                                                $        132.0    $           86.1
                                                                                ===============   =================

- ---------------
(1)   The asbestos-related receivable was determined on the same basis as the
      asbestos-related cost accrual. As of September 30, 2001, and December 31,
      2000, $25.6 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. No
      assurances can be given that Kaiser will be able to project similar
      recovery percentages for additional asbestos-related liabilities
      recognized in future periods or that the amounts related to any such
      additional asbestos-related liabilities will not ultimately exceed
      Kaiser's aggregate insurance coverage.


                                                                                   NINE MONTHS    INCEPTION
                                                                                      ENDED           TO
                                                                                  SEPTEMBER 30,  SEPTEMBER 30,
                                                                                      2001           2001
                                                                                  -------------  -------------
Payments made, including related legal costs....................................  $      86.9   $     307.4
Insurance recoveries............................................................        (77.3)       (208.6)
                                                                                  -------------  -------------
                                                                                  $       9.6   $      98.8
                                                                                  =============  =============



                                                         2001 AND 2002        2003 TO 2005          THEREAFTER
                                                      -------------------  -------------------  -------------------
Expected annual payment amounts, before
   considering insurance recoveries...................  $125.0 - $150.0       $50.0 - $75.0           $290.0

      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 $53.3 million (included in investment, interest and other income
(expense), see Note 2) in the nine months ended September 30, 2001, for
asbestos-related claims, net of expected insurance recoveries, based on recent
cost and other trends experienced by Kaiser and other companies. While
uncertainties are inherent in the final outcome of these asbestos matters and it
is presently impossible to determine the actual costs that ultimately may be
incurred and insurance recoveries that will be received, management believes
that, based on the factors discussed in the preceding paragraphs, the resolution
of asbestos-related uncertainties and the incurrence of asbestos-related costs
net of related insurance recoveries should not have a material adverse effect on
Kaiser's consolidated financial position or liquidity. However, as Kaiser's
estimates are periodically re-evaluated, additional charges may be necessary and
such charges could be material to the results of the period in which they are
recorded.

      Labor Matters
      In connection with the USWA strike and subsequent lock-out by Kaiser,
which was settled in September 2000, certain allegations of ULPs were filed with
the 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. Legal briefs must still be filed by all parties. 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. If these proceedings eventually result in a final
ruling against Kaiser with respect to either allegation, it could be obligated
to provide back pay to USWA members at the five plants for an approximate
twenty-month period (plus interest and minus any wages the USWA workers earned
during the twenty-month period). Such amounts could be material. However, Kaiser
continues to believe that the charges are without merit. While uncertainties are
inherent in matters such as this and it is presently impossible to determine the
actual costs, if any, that may ultimately arise in connection with this matter,
Kaiser does not believe that the outcome of this matter will have a material
adverse impact on Kaiser's liquidity or financial position. However, amounts
paid, if any, in satisfaction of this matter could be significant to the results
of the period in which they are recorded.

      FOREST PRODUCTS OPERATIONS

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

       The SYP complies with the California Board of Forestry and Fire
Protection regulations requiring timber companies to project timber growth and
harvest on their timberlands over a 100-year planning period and to demonstrate
that their projected average annual harvest for any decade within a 100-year
planning period will not exceed the average annual harvest level during the last
decade of the 100-year planning period. The SYP is effective for 10 years
(subject to review after five years) and may be amended by Pacific Lumber,
subject to approval by the CDF. Revised SYPs will be prepared every decade that
address the harvest level based upon reassessment of changes in the resource
base and other factors. The HCP and the Permits allow incidental "take" of
certain species located on the Company's timberlands which species have been
listed as endangered or threatened under the ESA and/or 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 CWA, the EPA is required to establish TMDLs in water courses
that have been declared to be "water quality impaired." The EPA and 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 the December 1999 EPA report dealing with TMDLs on two of
the nine water courses, the agency indicated that the requirements under the HCP
would significantly address the sediment issues that resulted in TMDL
requirements for these water courses. However, the September 2000 report by the
staff of the North Coast Water Board proposed various actions, including
restrictions on harvesting beyond those required under the HCP. Dates for
hearings concerning these matters have not been scheduled. Establishment of the
final TMDL requirements applicable to the Company's timberlands will be a
lengthy process, and the final TMDL requirements applicable to the Company's
timberlands may require aquatic protection measures that are different from or
in addition to the prescriptions to be developed pursuant to the watershed
analysis process provided for in the HCP.

      Since the consummation of the Headwaters Agreement on March 1, 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
have thus far failed to approve THPs in a timely manner. The rate of approvals
of THPs during the nine months ended September 30, 2001, has improved over that
for the prior year; however, it continues to be below what the Company requires
to meet its targeted harvest levels under the SYP. 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,
the ERF lawsuit was filed. 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,
but no further proceedings have occurred.

      On December 2, 1997, 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, the EPIC-SYP/Permits lawsuit was filed alleging various
violations of the CESA and the California Environmental Quality Act, and
challenging, among other things, the validity and legality of the SYP and the
Permits issued by California. On March 31, 1999, the USWA lawsuit was filed also
challenging the validity and legality of the SYP. The Company believes that
appropriate procedures were followed throughout the public review and approval
process concerning the HCP and the SYP, and the Company is working with the
relevant government agencies to defend these challenges. Although uncertainties
are inherent in the final outcome of the EPIC-SYP/Permits lawsuit and the USWA
lawsuit, the Company believes that the resolution of these matters should not
result in a material adverse effect on its financial condition, results of
operations or the ability to harvest timber.

      In connection with a February 2001 notice of intent to sue Pacific Lumber,
on July 24, 2001, 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 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 USAT, a wholly
owned subsidiary of 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 FDIC filed 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 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 September 30, 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, 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.

11.   MINORITY INTEREST

      In connection with the settlement of the labor dispute with the USWA,
during March 2001, Kaiser redeemed all of its outstanding Redeemable Preference
Stock ($17.5 million at December 31, 2000). The net cash impact of the
redemption on Kaiser was only approximately $5.5 million because approximately
$12.0 million of the redemption amount had previously been funded into
redemption funds.

      During June and July 2001, Kaiser completed an exchange with certain
employees who held stock options to purchase Kaiser's common stock whereby
options representing underlying shares totaling approximately 3,617,000 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.

12.   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 (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 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. The following table summarizes
Kaiser's material derivative hedging positions at September 30, 2001 (U.S. and
Australian dollars in millions):


                                                               NOTIONAL         ESTIMATED PERCENT       CARRYING/
                                                                AMOUNT              OF ANNUAL            MARKET
                COMMODITY                       PERIOD        OF CONTRACT        SALES/PURCHASES          VALUE
- -----------------------------------------  ----------------  -------------   -----------------------  -------------
Aluminum (in tons):
   Option contracts and swaps............     10/01 to 12/01       115,000             94%            $      15.0
   Option contracts and swaps............        2002              333,000             68%                   54.7
         Option contracts................        2003               90,000             17%                   15.3

Natural gas (in MMBtu's per day):
   Option contracts and swaps............      10/01 to 3/02        23,000             57%                    (2.8)
Fuel oil (in barrels per month):
   Option contracts and swaps............     10/01 to 12/01       150,000             65%                     0.6

Australian dollars (average A$ per month):
   Forwards and option contracts.........     10/01 to 12/01       A$ 11.4            100%                    (0.3)
   Option contracts......................     2002 to 2005         A$  7.5             70%                     3.6

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

      During the first quarter of 2001, market value changes in derivative
hedging positions included in the above table resulted in benefits to earnings
(included in investment, interest and other income (expense)) of $6.8 million
(see Note 2). Based on new accounting literature released in April 2001,
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 are now recorded in other
comprehensive income (see Note 1).

      During late 1999 and early 2000, Kaiser contracted with a counterparty to
receive certain fixed prices on 4,000 tons of primary aluminum per month over a
three year period commencing October 2001, unless market prices declined below a
stipulated "floor" price, in which case the fixed price sales portion of the
transactions terminate. These transactions do not qualify for treatment as a
"hedge" under either previous or current accounting guidelines. During September
2001, as a result of prevailing primary aluminum prices, approximately 40% of
the volumes attributable to periods after December 2001 terminated. The
mark-to-market impacts of the terminated and continuing portions of these
transactions, together with the $6.8 million discussed above, are recorded in
other income (expense) in the Consolidated Statement of Operations (see Note 2).
In October 2001, Kaiser reached an agreement with the counterparty terminating
the transaction. This will result in the recognition of approximately $3.0
million of mark-to-market income during the fourth quarter of 2001.

      As of September 30, 2001, Kaiser had sold forward substantially all of the
alumina available to it in excess of its projected internal smelting
requirements for the balance of 2001 and for 2002 and 2003 at prices indexed to
future prices of primary aluminum.

13.   PER SHARE INFORMATION

      Basic earnings per share is calculated by dividing net income 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 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 three and nine months ended September 30, 2000, has
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.

                                                               THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                 SEPTEMBER 30,                  SEPTEMBER 30,
                                                           ----------------------------    ---------------------------
                                                               2001            2000           2001            2000
                                                           -------------    -----------    -----------    ------------
Weighted average shares outstanding:
   Common Stock...........................................    6,527,671      6,766,523      6,600,281       6,964,755
   Effect of dilution:
      Class A Preferred Stock.............................      668,390              - (2)    668,421               - (2)
                                                           -------------    -----------    -----------    ------------
Weighted average number of common and common equivalent
    shares - Basic........................................    7,196,061      6,766,523      7,268,702       6,964,755
   Effect of dilution:
      Stock options.......................................       26,164 (1)          - (2)     15,808 (1)           - (2)
                                                           -------------    -----------    -----------    ------------
Weighted average number of common and common equivalent
    shares - Diluted......................................    7,222,225      6,766,523      7,284,510       6,964,755
                                                           =============    ===========    ===========    ============
- ------------------

(1)  Options to purchase 466,275 shares of Common Stock outstanding during the
     three and nine months ended September 30, 2001, 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 three and nine months ended September 30,
     2000; the Class A Preferred Stock and options were therefore not included
     in the computation of earnings per share for the period.

ITEM 2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATIONS

      The following should be read in conjunction with the financial statements
in Part I, Item 1 of this Report and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 8.
"Financial Statements and Supplementary Data" of the Form 10-K. Any capitalized
terms used but not defined in this Item are defined in the "Glossary of Defined
Terms" contained in Appendix A. Except as otherwise noted, all references to
notes represent the Notes to the Condensed Consolidated Financial Statements
included in Item 1.

      This Quarterly Report on Form 10-Q contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of places in
this section, in Item 3. "Quantitative and Qualitative Disclosures About Market
Risk" and in Part II. Item 1. "Legal Proceedings." Such statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Readers are cautioned that any such forward-looking
statements are not guarantees of future performance and involve significant
risks and uncertainties, and that actual results may vary materially from 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 Form
10-Q and the Form 10-K identify other factors that could cause such differences
between the 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.

RESULTS OF OPERATIONS

      The Company operates in four industries: aluminum, through its majority
owned subsidiary, Kaiser, an integrated aluminum producer; forest products,
through MGI and its wholly owned subsidiaries, principally Pacific Lumber and
Britt; real estate investment and development, managed through MPC; and racing
operations through SHRP, Ltd. MGHI owns 100% of MGI and is a wholly owned
subsidiary of the Company. All references to the "Company," "Kaiser," "MGHI,"
"MGI," "Pacific Lumber," "MPC" and "SHRP, Ltd." refer to the respective
companies and their subsidiaries, unless otherwise indicated or the context
indicates otherwise.

   ALUMINUM OPERATIONS

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

      Kaiser's operating results are sensitive to changes in the prices of
alumina, primary aluminum and fabricated aluminum products, and also depend to a
significant degree on the volume and mix of all products sold and on Kaiser's
hedging strategies. Primary aluminum prices have historically been subject to
significant cyclical fluctuations (see Notes 1 and 12 and Item 3. "Quantitative
and Qualitative Disclosures About Market Risk" for a discussion of Kaiser's
hedging activities).

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

      During the nine months ended September 30, 2000, the AMT Price per pound
of primary aluminum was $.76 per pound. During the nine months ended September
30, 2001, the AMT Price was $.71 per pound. The average AMT Price for primary
aluminum for the week ended October 26, 2001, was $.62 per pound.

      The following table presents selected operational and financial
information with respect to the Company's aluminum operations for the three and
nine months ended September 30, 2001 and 2000.

                                                                THREE MONTHS ENDED           NINE MONTHS ENDED
                                                                   SEPTEMBER 30,               SEPTEMBER 30,
                                                            --------------------------- ---------------------------
                                                             2001           2000          2001          2000
                                                            ------------  ------------- ------------- -------------
                                                             (IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES)
Shipments:(1)
   Alumina:(2)
      Third party.........................................        680.2          484.0       2,009.1       1,460.4
      Intersegment........................................         51.2          149.8         286.0         584.1
                                                            ------------  ------------- ------------- -------------
        Total alumina.....................................        731.4          633.8       2,295.1       2,044.5
                                                            ------------  ------------- ------------- -------------
   Primary aluminum: (3)
      Third party.........................................         59.7           96.3         186.4         261.8
      Intersegment........................................          0.3           34.0           2.3         119.4
                                                            ------------  ------------- ------------- -------------
        Total primary aluminum............................         60.0          130.3         188.7         381.2
                                                            ------------  ------------- ------------- -------------
   Flat-rolled products ..................................         17.0           34.9          59.8         125.7
                                                            ------------  ------------- ------------- -------------
   Engineered products....................................         28.0           40.3          92.2         131.9
                                                            ------------  ------------- ------------- -------------
Average realized third party sales price: (4)
   Alumina (per ton)......................................  $       183   $        207  $        189  $        211
   Primary aluminum (per pound)...........................          .63            .74           .69           .75
Net sales:
   Bauxite and alumina:  (2)
      Third party (includes net sales of bauxite).........  $     132.0   $      108.3  $      402.3  $      338.1
      Intersegment........................................          9.1           29.0          55.0         115.3
                                                            ------------  ------------- ------------- -------------
        Total bauxite and alumina.........................        141.1          137.3         457.3         453.4
                                                            ------------  ------------- ------------- -------------
   Primary aluminum: (3)
      Third party.........................................         83.0          156.7         282.1         430.0
      Intersegment........................................          0.5           56.5           3.8         196.1
                                                            ------------  ------------- ------------- -------------
        Total primary aluminum............................         83.5          213.2         285.9         626.1
                                                            ------------  ------------- ------------- -------------
   Flat-rolled products...................................         75.5          118.5         248.3         401.8
   Engineered products....................................        101.4          137.8         337.9         450.2
   Commodities Marketing..................................          9.5           (3.2)          5.9         (23.4)
   Minority interests.....................................         28.9           27.1          80.9          77.0
   Eliminations...........................................         (9.6)         (85.5)        (58.8)       (311.4)
                                                            ------------  ------------- ------------- -------------
        Total net sales...................................  $     430.3   $      545.2  $    1,357.4  $    1,673.7
                                                            ============  ============= ============= =============
Operating income (loss) (5)...............................  $     (34.7)  $        4.3  $      156.1  $       95.7
                                                            ============  ============= ============= =============
Income (loss) before income taxes and minority
   interests (6)..........................................  $     118.0   $      (27.5) $      209.4  $       10.8
                                                            ============  ============= ============= =============
- -----------------------------------------
(1)    Shipments are expressed in thousands of metric tons.  A metric ton is
       equivalent to 2,204.6 pounds.
(2)    Net sales for the quarter and nine month periods ended September 30,
       2001, included approximately 25,000 tons and 91,100 tons, respectively,
       of alumina purchased from third parties.   Net sales for the quarter and
       nine month periods ended September 30, 2000, included approximately
       50,000 tons and 249,000 tons, respectively, of alumina purchased from
       third parties.
(3)    Beginning in the first quarter of 2001, as a result of the continuing
       curtailment of Kaiser's Northwest smelters, the flat-rolled products
       business unit began purchasing its own primary aluminum rather than
       relying on the primary aluminum business unit to supply its aluminum
       requirements through production or third party purchases.  The engineered
       products business unit was already responsible for purchasing the
       majority of its primary aluminum requirements.  During the quarter and
       nine-month periods ended September 30, 2001, the primary aluminum
       business unit purchased approximately 2,300 tons and 27,300 tons,
       respectively, of primary aluminum from third parties to meet existing
       third party requirements.
(4)    Average realized prices for the flat-rolled products and engineered
       products business units are not presented as such prices are subject to
       fluctuations due to changes in product mix.
(5)    Operating income (loss) includes non-recurring items of $(21.3) million
       and $198.9 million, respectively, for the three and nine months ended
       September 30, 2001, and $10.9 million and $22.5 million, respectively,
       for the three and nine months ended September 30, 2000.  These items
       are described in further detail in Note 2.  Operating income for the
       three and nine months ended September 30, 2000 included a labor charge
       of $38.5 million.  During the quarter and nine month periods ended
       September 30, 2001, approximately $13.9 million and $54.9 million,
       respectively, of abnormal Gramercy start-up costs were incurred.
       Operating income (loss) for the quarter and nine month periods ended
       September 30, 2001, also included additional accrued business
       interruption recoveries related to the Gramercy facility of $21.4
       million and $36.6 million, respectively, based on a July 2001 agreement
       with Kaiser's insurers. Depreciation was suspended for the Gramercy
       facility during the first nine months of 2000 as a result of the July
       1999 incident.   Depreciation expense for the Gramercy facility for the
       first six months of 1999 was $6.0 million.  See Notes 1, 3 and 4 for
       additional information.
(6)    In addition to the items discussed in (5) above, income (loss) before
       income taxes and minority interests includes non-recurring items of
       $179.9 million and $135.5 million, respectively, for the three and nine
       months ended September 30, 2001, and $(4.9) million and $(1.3) million,
       respectively, for the three and nine months ended September 30, 2000.
       See Notes 2 and 5 for additional information.

      Recent Events and Developments

      Liquidity/Cash Resources
      Kaiser has significant near-term debt maturities. Kaiser's ability to make
payments on, retire or refinance its debt depends on its ability to generate
cash in the future. In addition to being impacted by normal operating items,
Kaiser's near-term liquidity and cash flows will also be negatively affected by
the remaining proceeds to be received from power sales, the restart of the
Gramercy facility, until it reaches its full production level and full
efficiency, and net payments for asbestos-related liabilities. See "Financial
Condition and Investing and Financial Activities -- Aluminum Operations" for a
discussion of these matters.

      Possible Year-End Financial Statement Item
      The assets of the Company's 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 year-to-date performance of the stock market, it is
likely that, barring a material improvement in the stock market during the
fourth quarter of 2001, the Company will be required to reflect a significant
additional minimum pension liability in its year-end 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 ultimate amount of such additional adjustment cannot be
determined until year-end 2001. However, based on stock market performance
through September 30, 2001, the Company estimates that such amount could be in
the $25.0 million to $50.0 million range. Substantially all of the amount is expected
to be attributable to Kaiser's pension plan. 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 recent 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.

      Sale of 8.3% Interest in QAL
      In September 2001, Kaiser sold an approximate 8.3% interest in QAL and
recorded a pre-tax gain of approximately $163.6 million. As a result of the
transaction, Kaiser's interest in QAL was reduced to 20%. See Note 5 for
additional discussion of the September 2001 sale.

      Incident at Gramercy Facility
      Production at Kaiser's Gramercy, Louisiana, alumina refinery, which had
been curtailed since July 1999 as a result of an explosion in the digestion area
of the plant, re-commenced during the middle of December 2000. Construction of
the facility was substantially completed during the third quarter of 2001. The
plant operated at approximately 78% of its newly-rated estimated capacity of
1,250,000 tons during the third quarter of 2001. Subsequent to September 30,
2001, the plant has regularly operated at a rate equal to or greater than 90% of
its newly-rated capacity. Based on current estimates, the facility is expected
to reach its full operating rate and full efficiency by the end of 2001 or early
2002.

      See Note 3 for additional discussion of the incident at the Gramercy
facility and the financial statement impact of Gramercy-related insurance
recoveries.

      Labor Matters
      Although the USWA dispute has been settled and the workers have returned
to the facilities, two allegations of ULPs in connection with the USWA strike
and subsequent lock-out by Kaiser remain to be resolved. Kaiser believes that
the remaining charges made against it by the USWA are without merit. See Note 10
for additional discussion on the ULP charges.

      Pacific Northwest Power Sales and Operating Level
      During the first nine months of 2001, Kaiser kept its Northwest smelters
curtailed and sold the remaining power available that it had under contract
through September 2001.

      Kaiser has the right to purchase power under a contract with the BPA that
provides sufficient power to operate Kaiser's Trentwood facility as well as
approximately 40% of the capacity of its Northwest aluminum smelting operations.
The rate for power for the initial period of the contract (from October 1, 2001
through March 31, 2002) will be approximately 46% higher than power costs under
the prior contract. Kaiser cannot predict what rates will be charged in future
periods. There are terms of the contract which are also less favorable than the
prior BPA contract, including the fact that Kaiser is not entitled to receive
any profits from its limited remarketing rights under the contract.

      Given recent primary aluminum prices and the forward price of power in the
Northwest, it is unlikely that Kaiser would operate more than a portion of its
Northwest smelting capacity in the near future. Operating only a portion of the
Northwest capacity would result in production/cost inefficiencies such that
operating results would, at best be breakeven to modestly negative at long-term
primary aluminum prices. However, operating at such a reduced rate could,
depending on prevailing economics, result in improved cash flows as opposed to
remaining curtailed and incurring Kaiser's fixed and continuing labor and other
costs. This is because Kaiser is liable for certain severance, supplemental
unemployment and early retirement benefits for the USWA workers at the curtailed
smelters. A substantial portion of such costs have been accrued through December
31, 2001. However, additional accruals may be required depending on when the
USWA workers are recalled and when the smelting operations are restarted. Such
amounts could be material.

      See Note 4 for additional information on the power sales, the contract and
additional detail regarding accrued liabilities with respect to the USWA
workers.

      Strategic Initiatives
      In May 2001, Kaiser announced that it had launched a performance
improvement initiative designed to increase operating cash flow, generate cash
from inventory reduction and improve Kaiser's financial flexibility. Kaiser
expects to realize substantial improvements in earnings as a result of the
program. In connection with the program, Kaiser recorded charges of $27.0
million (see Note 2). Additional cash and non-cash charges may be required in
the future as the program continues. Such additional charges could be material.

      See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations--Aluminum Operations--Recent Events
and Developments--Strategic Initiatives" in the Form 10-K for additional
information regarding strategic initiatives.

      Net Sales

      Net sales in the third quarter of 2001 totaled $430.3 million compared to
$545.2 million in the third quarter of 2000. The decrease was the result of
declines in average realized prices for alumina and primary aluminum as well as
a decline in shipments for primary aluminum, flat-rolled products and engineered
products. The decrease in average realized prices for alumina was due to a
decrease in primary aluminum market prices to which Kaiser's third-party alumina
sales contracts are linked. The decrease in primary aluminum shipments was
primarily due to the curtailment of Kaiser's Washington smelters during the last
half of 2000. The decrease in shipments for flat-rolled products was primarily
due to reduced shipments of can body stock as a part of the planned exit from
this product line, and to weak market demand for general engineering heat-treat
products and can lid and tab stock. The decrease in engineered product shipments
was the result of reduced transportation and electrical product shipments due to
weak market demand. These decreases were partially offset by an increase in
average realized prices for flat-rolled products which reflects the change in
product mix from the can body stock to heat-treat products and an increase in
alumina shipments which resulted primarily from the timing of shipments as well
as the restart of production at the Gramercy refinery in December 2000. The
increase in average realized prices for engineered products reflects a shift in
product mix to higher value-added products.

      Net sales for the nine months ended September 30, 2001, were $1,357.4
million as compared to $1,673.7 million in the prior year period. The decrease
is primarily due to the same factors which caused a decline in quarterly net
sales as described above.

      Operating Income (Loss)

      Operating income (loss) for the quarter and nine months ended September
30, 2001, includes non-recurring income (charges) of $(21.3) million and $198.9
million, respectively, whereas non-recurring items were $(27.6) million and
$(16.0) million, respectively, in the three and nine months ended September 30,
2000. Excluding these items, operating income (loss) decreased from $31.9
million and $111.7 million for the three and nine months ended September 30,
2000, respectively, to $(13.4) million and $(42.8) million for the three and
nine months ended September 30, 2001, respectively. In addition to the impact of
lower net sales discussed above, operating income (loss) for the three and nine
month periods ended September 30, 2001, was adversely affected by: abnormal
Gramercy related start-up costs of approximately $13.9 million and $54.9
million, respectively; excess overhead and other fixed costs associated with the
curtailed Northwest smelting operations which totaled approximately $4.5 million
and $15.0 million, respectively; and LIFO inventory charges of $5.0 million for
both periods. Also, as more fully discussed in Note 3, Kaiser recognized $21.4
million and $36.6 million of additional insurance benefits in the third quarter
and nine months ended September 30, 2001, respectively, related to the Gramercy
incident.

      Income (Loss) Before Income Taxes and Minority Interests

      Income (loss) before income taxes and minority interests increased from
$(27.5) million for the quarter ended September 30, 2000, to $118.0 million for
the quarter ended September 30, 2001, primarily as result of a $163.6 million
gain on Kaiser's sale of an approximate 8.3% interest in QAL as described in
Note 5. Income before income taxes and minority interests increased from $10.8
million for the nine months ended September 30, 2000, to $209.4 million for the
nine months ended September 30, 2001, also primarily as a result of this sale.
This improvement was offset somewhat by the impact of other factors which
negatively affected operating income as described above as well as the asbestos
related charges and other non-recurring items included in investment, interest
and other income (expense) described in Note 2.

   FOREST PRODUCTS OPERATIONS

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

      In recent years, MGI has experienced reduced harvests on its properties,
and as a result, production of lumber has decreased. The decline in harvest
levels is a result of the difficulties with THPs described under "--Trends."
Furthermore, logging costs have increased due to the harvest of smaller diameter
logs and compliance with environmental regulations and the Environmental Plans.
MGI's management is currently reevaluating MGI's operations in view of these
continuing challenges. In connection with the closure of one of its mills, MGI
recognized a writedown of $0.7 million (see Note 2). A second mill has also been
idled; however, a decision has not been made as to whether this mill will close
permanently. Further reductions or curtailments in sawmill or other operations
may occur during the next year as MGI completes its evaluation process, and
additional potentially significant writedowns of the investment in certain
assets may be required.

      The following table presents selected operational and financial
information for the three and nine months ended September 30, 2001 and 2000, for
the Company's forest products operations.


                                                            THREE MONTHS ENDED              NINE MONTHS ENDED
                                                               SEPTEMBER 30,                  SEPTEMBER 30,
                                                      ------------------------------  -----------------------------
                                                           2001            2000           2001           2000
                                                      ---------------  -------------  ------------  ---------------
                                                          (IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND PRICES)
Shipments:
   Lumber: (1)
      Redwood upper grades.........................              3.6            4.0          12.1             11.3
      Redwood common grades........................             41.5           33.4         123.6            110.0
      Douglas-fir upper grades.....................              2.0            2.7           6.7              8.4
      Douglas-fir common grades....................             11.4           20.1          44.2             59.0
      Other........................................              1.0            0.5           3.6              5.2
                                                      ---------------  -------------  ------------  ---------------
   Total lumber....................................             59.5           60.7         190.2            193.9
                                                      ===============  =============  ============  ===============
   Wood chips (2)..................................             29.6           48.8          90.2            133.3
                                                      ===============  =============  ============  ===============

Average sales price:
   Lumber: (3)
      Redwood upper grades.........................   $        1,739   $      1,820   $     1,788   $        1,760
      Redwood common grades........................              570            719           595              740
      Douglas-fir upper grades.....................            1,287          1,374         1,341            1,340
      Douglas-fir common grades....................              357            356           343              383
   Wood chips (4)..................................               64             70            67               68

Net sales:
   Lumber, net of discount.........................   $         36.5   $       42.0   $     119.2   $        135.8
   Wood chips......................................              1.9            3.4           6.1              9.0
   Cogeneration power..............................              2.0            1.6           9.4              3.2
   Other...........................................              4.4            2.4           8.1              4.7
                                                      ---------------  -------------  ------------  ---------------
      Total net sales..............................   $         44.8   $       49.4   $     142.8   $        152.7
                                                      ===============  =============  ============  ===============
Operating income (loss)............................   $         (1.9)  $        0.1   $      (5.4)  $         14.5
                                                      ===============  =============  ============  ===============
Operating cash flow (5)............................   $          3.0   $        5.4   $       9.7   $         29.3
                                                      ===============  =============  ============  ===============
Loss before income taxes and minority interests....   $        (14.8)  $      (11.1)  $     (41.7)  $        (17.5)
                                                      ===============  =============  ============  ===============
- ---------------------------
(1)   Lumber shipments are expressed in millions of board feet.
(2)   Wood chip shipments are expressed in thousands of bone dry units of
      2,400 pounds.
(3)   Dollars per thousand board feet.
(4)   Dollars per bone dry unit.
(5)   Operating income before depletion and depreciation, also referred to
      as "EBITDA."

      Net Sales
      Net sales for the third quarter and first nine months of 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 for the third quarter and nine months
ended September 30, 2001, versus the comparable prior year periods. The segment
had higher sales volumes for redwood common grade lumber; however, this was more
than offset by lower shipments of common grade Douglas fir lumber.

      Operating Income (Loss)
      Forest Products experienced operating losses for the third quarter and
first nine months of 2001 compared to operating income for the same periods of
2000. With respect to the third quarter results, despite the decline in net
sales, gross margins on lumber sales were flat period to period as a result of a
decline in cost of sales. The operating loss for the third quarter of 2001 was
primarily due to lower gross margins on other products, higher general and
administrative expenses, and a $0.7 million asset impairment charge (see Note
2). In addition to the items impacting the third quarter, results for the nine
months ended September 30, 2001, reflect higher costs associated with lumber
production and logging operations.

      Loss Before Income Taxes and Minority Interests
      The loss before income taxes for the third quarter and first nine months
of 2001 increased from the loss in the comparable prior year periods, primarily
as a result of the decline in operating income discussed above.

   REAL ESTATE OPERATIONS

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


                                                                     THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                        SEPTEMBER 30,            SEPTEMBER 30,
                                                                   -----------------------  -----------------------
                                                                      2001         2000        2001        2000
                                                                   -----------  ----------  ----------  -----------
                                                                               (IN MILLIONS OF DOLLARS)

Net sales........................................................  $     20.8   $    15.7   $    41.5   $     34.2
Operating income (loss)..........................................         4.7         0.8         1.3         (1.3)
Income before income taxes and minority interests................         3.7         2.3         6.3          7.8

      Net Sales
      Net sales increased for the third quarter of 2001 from the third quarter
of 2000 primarily as a result of higher real estate acreage sales at the Palmas
del Mar development project, in addition to rental income from the Lake Pointe
Plaza office complex acquired in June 2001 (see Note 5). Net sales increased for
the first nine months of 2001, from the same period in 2000 primarily due to
increased sales of real estate at the Company's Palmas del Mar and Fountain
Hills development projects, in addition to rental income from the Lake Pointe
Plaza office complex. This improvement was somewhat offset by lower revenues
from commercial operations at Fountain Hills as a result of the sale of a water
utility in October 2000.

      Operating Income (Loss) and Income Before Income Taxes and Minority Interests
      Operating income for the third quarter and first nine months of 2001
increased from the same periods of 2000 primarily due to the increases in net
sales discussed above. Income before income taxes and minority interests
increased for the third quarter of 2001 as a result of the increase in operating
income discussed above. This improvement was offset in part by an increase in
interest expense related to the Lakepointe Notes and an October 2000 borrowing
at Palmas del Mar. Income before income taxes and minority interests decreased
for the nine months ended September 30, 2001, from the same period of 2000,
primarily due to additional interest expense related to the Lakepointe Notes and
the October 2000 borrowing by Palmas del Mar.

   RACING OPERATIONS

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

                                                                     THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                        SEPTEMBER 30,            SEPTEMBER 30,
                                                                   -----------------------  -----------------------
                                                                      2001        2000         2001        2000
                                                                   ---------- ------------  ----------  -----------
                                                                               (IN MILLIONS OF DOLLARS)

Net sales........................................................  $     8.2  $       8.0   $    23.0   $     22.4
Operating income (loss)..........................................       (0.3)         0.5         0.7          2.0
Income (loss) before income taxes and minority interests.........       (0.3)         0.4         0.7          1.7

      Net Sales
      Net sales for the racing segment increased in the third quarter of 2001
compared to the third quarter of 2000 due to higher overall net pari-mutuel
commissions and higher average per capita wagering. Net sales increased slightly
for the first nine months of 2001 over the year-ago period due to higher overall
net pari-mutuel commissions from Valley Race Park which had live racing during
the 2001 period but not the 2000 period. This improvement for the nine months
ended September 30, 2001, was partially offset by lower net pari-mutuel
commissions from Sam Houston Race Park which had fewer live racing days and
somewhat lower attendance.

      Operating Income (Loss) and Income (Loss) Before Income Taxes and Minority
         Interests
      Operating results and income (loss) before income taxes and minority
interests decreased for the third quarter of 2001 versus the comparable prior
year period due to decreases in wagering discussed above. Although net sales
increased for the nine months ended September 30, 2001, over the prior year
period, operating income decreased as the decline in earnings from Sam Houston
Race Park more than offset the improvement at Valley Race Park.

   OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS


                                                                     THREE MONTHS ENDED        NINE MONTHS ENDED
                                                                        SEPTEMBER 30,            SEPTEMBER 30,
                                                                   -----------------------  -----------------------
                                                                      2001         2000        2001        2000
                                                                   -----------  ----------  ----------  -----------
                                                                               (IN MILLIONS OF DOLLARS)
Operating loss...................................................  $     (2.1)  $    (4.3)  $    (7.9)  $    (10.4)
Income (loss) before income taxes and minority interests.........        (4.0)       (4.6)       (9.2)        (8.4)

      The operating losses represent corporate general and administrative
expenses that are not allocated to the Company's industry segments. The losses
before income taxes and minority interests include operating losses, investment,
interest and other income (expense) and interest expense, including amortization
of deferred financing costs, that are not attributable to the Company's industry
segments.

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

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

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

   OVERVIEW

      The Company conducts its operations primarily through its subsidiaries.
Creditors of subsidiaries of the Company have priority with respect to the
assets and earnings of such subsidiaries over the claims of the creditors of the
Company. Certain of the Company's subsidiaries, principally Kaiser, MGHI, MGI,
Pacific Lumber and Scotia LLC, are restricted by their various debt instruments
as to the amount of funds that can be paid in the form of dividends or loaned to
affiliates. Kaiser, MGHI and the Forest Products companies are highly leveraged
and have significant debt service requirements. Notes 8 and 9 and Notes 12 and
17 to the Consolidated Financial Statements in the Form 10-K contain additional
information concerning the Company's indebtedness, certain restrictive debt
covenants and a discussion of material commitments and contingencies affecting
Kaiser, MGHI and the Forest Products companies' liquidity and capital resources.
"MAXXAM PARENT" is used in this section to refer to the Company on a stand-alone
basis without its subsidiaries.

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



                                                    FOREST PRODUCTS
                                            -------------------------------
                                                                     MGI
                                            Scotia     Pacific       and        Real                             MAXXAM
                                ALUMINUM      LLC       Lumber      Other      ESTATE    RACING      MGHI        Parent     TOTAL
                               ----------   -------    --------    --------   --------   ------     -------     --------- ---------
                                                              (IN MILLIONS OF DOLLARS)

Debt and credit facilities
   (excluding intercompany
   notes)
Short-term borrowings and
      current maturities of
      long-term debt:
   September 30, 2001......... $   206.4 (1) $ 17.2     $  18.1    $    -     $  14.1     $    -    $     -     $  10.3   $  266.1
   December 31, 2000..........      31.6       16.4        37.1         -         2.1          -          -        13.4      100.6

Long-term debt, excluding
     current maturities:
   September 30, 2001......... $   698.7 (1) $752.2 (2) $   0.5    $          $ 156.9 (2) $  0.2    $  88.2 (2) $     -   $ 1,696.7
   December 31, 2000..........     957.8      767.2         0.6         -        38.2        0.2      118.8           -     1,882.8

Revolving credit facilities:
   Facility commitment
      amounts................. $   300.0     $ 60.9     $  50.0    $   2.5    $  23.6     $    -    $     -     $     -   $   437.0
   September 30, 2001:
      Borrowings..............         -         -         18.0         -         5.8          -          -           -        23.8
      Letters of credit.......      29.6         -         11.5         -         2.4          -          -           -        43.5
      Unused and available
        credit................     184.8      60.9         14.8        2.5        7.2          -          -           -       270.2

Cash, cash equivalents,
   marketable securities and
   other investments
September 30, 2001:
   Current amounts restricted
      for debt service........ $    79.5    $ 30.8      $     -    $    -     $   0.6     $    -    $    -      $      -   $  110.9
   Other current amounts......     132.6       2.5          0.6       28.7       11.5       11.5       36.0        129.2      352.6
                               ----------   -------    --------    --------   --------    ------    -------     ---------  ---------
                                   212.1      33.3          0.6       28.7       12.1       11.5       36.0        129.2      463.5
                               ----------   -------    --------    --------   --------    ------    -------     ---------  ---------
   Long-term amounts restricted
        for debt service......         -      87.9            -         -         1.9          -          -            -       89.8
   Other long-term restricted
        amounts...............       0.1         -            -        2.2        6.7          -          -            -        9.0
                               ----------   -------    --------    --------   --------    ------    -------     ---------  ---------
                                     0.1      87.9            -        2.2        8.6          -          -            -       98.8
                               ----------   -------    --------    --------   --------    ------    -------     --------- ---------
                               $   212.2    $121.2     $   0.6     $  30.9    $  20.7     $ 11.5    $  36.0     $ 129.2   $   562.3
                               ==========   =======    ========    ========   ========    ======    =======     ========= =========

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

   Long-term amounts restricted
        for debt service......         -      92.1           -          -         1.3          -          -           -        93.4
   Other long-term restricted
        amounts...............       0.1       2.5           -         2.0        8.3          -          -           -        12.9
                               ----------   -------    --------    --------   --------    ------    -------     --------- ---------
                                     0.1      94.6           -         2.0        9.6          -          -           -       106.3
                               ----------   -------    --------    --------   --------    ------    -------     --------- ---------
                               $    23.5    $209.0     $   0.2     $  63.7    $  29.2     $  9.0    $  54.3     $ 115.2   $   504.1
                               ==========   =======    ========    ========   ========    ======    =======     ========= =========
Changes in cash and cash
   equivalents
Capital expenditures:
   September 30, 2001......... $   150.0 (3)$  4.2     $   4.9     $   1.2    $ 133.0 (3) $  1.5    $     -     $   0.7   $   295.5
   September 30, 2000.........     153.6 (3)   6.1         3.3         1.6        4.0        4.2 (3)      -         0.4       173.2

Net proceeds from dispositions
     of property and invest-
     ments:
   September 30, 2001......... $   170.3    $    -     $     -     $    -     $     -     $    -    $    -      $   0.1   $   170.4
   September 30, 2000.........     139.5         -         0.3          -           -          -         -            -       139.8

Borrowings (repayments) of
     debt and credit facili-
     ties, net of financing
     costs:
   September 30, 2001......... $   (71.6)   $(14.2)(2) $ (19.2)(1) $    -     $ 124.9     $    -    $ (25.1)(2) $  (3.1)  $   (8.3)
   September 30, 2000.........     (13.3)    (11.3)       21.2        7.3         0.5       (0.3)     (13.1)       (5.1)     (14.1)

Dividends and advances
     received (paid):
   September 30, 2001......... $       -    $(77.4)(4) $  83.8 (4) $ (23.7)   $  (9.5)    $    -    $  17.1     $   9.7   $      -
   September 30, 2000.........         -         -        50.0      (158.4)(4)   (3.3)         - (4)   63.4 (4)    48.3          -

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

(1)     The increase in Kaiser's short-term borrowings and current maturities of
        long-term debt between December 31, 2000, and September 30, 2001,
        reflects the now current maturity of the KACC 9 7/8% Senior Notes. See
        Note 9 for additional information.
(2)     The decrease between December 31, 2000, and September 30, 2001, in
        Scotia LLC's long-term debt was the result of principal payments on the
        Timber Notes of $14.2 million during the nine months ended September 30,
        2001. The decrease in MGHI's long-term debt was due primarily to
        repurchases of debt. The increase in Real Estate long-term debt was due
        primarily to borrowings to purchase the Lake Pointe Plaza office
        complex.
(3)     Aluminum: capital expenditures for the nine months ended September 30,
        2001 and 2000, include $70.6 million and $159.0 million, respectively,
        spent with respect to rebuilding the Gramercy facility.  Real Estate:
        capital expenditures for the nine months ended September 30, 2001,
        include $131.3 million for the purchase of Lake Pointe Plaza.  Racing:
        capital expenditures for the nine months ended September 30, 2000,
        include $2.8 million for the acquisition of Valley Race Park.
(4)     For the nine months ended September 30, 2001, $77.4 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 $77.4 million of dividends from Scotia LLC, Pacific
        Lumber received $6.4 million from MGI related to repayment of
        intercompany debt. For the nine months ended September 30, 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.

   MAXXAM PARENT

      During the nine months ended September 30, 2001, the Company purchased
220,800 shares of its common stock for $2.9 million.

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

      With respect to the OTS and FDIC matters, 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 MAXXAM Parent's financial position, results of operations or liquidity. See
Note 10 for further discussion of the OTS and FDIC matters. Any adverse outcome
of the other litigation or the regulatory and environmental matters described in
Note 10 could materially adversely affect the Company's consolidated financial
position, results of operations or liquidity.

   MGHI

      MGHI expects that interest payments on the $88.2 million of MGHI Notes
outstanding as of September 30, 2001, will be paid with its existing cash.

      MGHI believes that its existing resources, together with the cash
available from subsidiaries, will be sufficient to fund its debt service and
working capital requirements for the next year. With respect to its long-term
liquidity, MGHI believes that its existing cash and cash resources, together
with payments by MAXXAM Parent on the Intercompany Note, should be sufficient to
meet its debt service and working capital requirements. However, there can be no
assurance that this will be the case. The regulatory and environmental matters
described under "--Trends" below have adversely affected cash available from
subsidiaries and therefore the distributions to MGHI. Distributions from MGHI's
subsidiaries may continue to be minimal, if any, over the next one to two years.

   ALUMINUM OPERATIONS

      At September 30, 2001, Kaiser had cash and cash equivalents of $212.1
million as compared to $23.4 million of cash and cash equivalents at December
31, 2000. At September 30, 2001, excluding the cash and cash equivalents and the
$206.2 million of maturities with respect to the KACC 9 7/8% Senior Notes, Kaiser
had working capital of $124.4 million, compared with working capital of $147.3
million at December 31, 2000. In addition to normal operating changes, the net
decrease in working capital primarily resulted from:

- -     a decrease in other receivables primarily due to receipt of proceeds from
      previously accrued power sales (see Note 4) and the collection of Gramercy
      related insurance recoveries (see Note 3).

- -     a decrease in the current portion of long-term debt due to Kaiser's
      repayment of $30.4 million of outstanding borrowings under the KACC
      Credit Agreement;

- -     a decrease in accrued salaries, wages and related expenses resulting
      primarily from the payment of previously accrued employee-related
      compensation applicable to job reductions as a part of the September 2000
      labor settlement or associated with workers at the curtailed Northwest
      smelters, offset by employee benefits and other costs accrued in the third
      quarter of 2001 in connection with Kaiser's performance improvement
      initiative.

      Kaiser uses the KACC Credit Agreement to provide short-term liquidity
requirements and for letters of credit to support operations. During the third
quarter of 2001, there were no borrowings under the KACC Credit Agreement.
During the first six months of 2001, month-end borrowings outstanding 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
the first six months of 2001 was approximately $23.8 million. Outstanding
letters of credit at September 30, 2001, were approximately $29.6 million. In
October 2001, the expiration date of the KACC Credit Agreement was extended from
November 2, 2001, to December 15, 2001. The extension provides Kaiser with
additional flexibility while it continues its ongoing work on a longer-term
solution for near-term debt maturities. Kaiser intends to extend, replace or
renew the KACC Credit Agreement prior to its expiration. However, in order for
the KACC Credit Agreement to be extended, on a short-term basis, beyond December
2001, Kaiser will have to have a demonstrable way to retire the remaining amount
of the KACC 9 7/8% Senior Notes ($177.4 million principal amount as of October
31, 2001) due February 2002. For the KACC Credit Agreement to be extended past
February 2003, both the KACC 9 7/8% Senior Notes and the $400.0 million of 12
3/4% KACC Senior Subordinated Notes, due February 2003, will have to be retired
and/or refinanced. Kaiser currently expects limited, if any, borrowings for the
balance of the KACC Credit Agreement term, except it is possible that Kaiser may
use a portion of the availability under the KACC Credit Agreement (or any
extension, replacement or renewal thereof) together with other cash resources
used to retire the KACC 9 7/8% Senior Notes. As of October 31, 2001, Kaiser had
purchased $47.6 million of the KACC 9 7/8% Senior Notes at a modest net gain. As
of October 31, 2001, Kaiser had approval from the KACC Credit Agreement lenders
to spend up to an aggregate of $100.0 million to purchase the KACC 9 7/8% Senior
Notes.

      Kaiser is working with financial advisors to review its options for
addressing its near-term debt maturities and its overall capital structure.
While Kaiser continues to consider potential asset transactions (beyond the
September 2001 sale of an 8.3% interest in QAL), Kaiser intends to pursue only
those transactions that would create long-term value through strategic
positioning and/or the generation of acceptable levels of earnings or cash.
Kaiser cannot predict if any such transactions will materialize.

      In addition to being impacted by normal operating items, Kaiser's
near-term liquidity and cash flow will be affected by the restart of the
Gramercy facility and the amount of net payments for asbestos-related
liabilities (see Notes 3 and 10).

      Kaiser will continue to incur abnormal start-up costs until full
production volume and efficiency at the Gramercy facility is restored. Kaiser
expects the Gramercy facility to reach its full production rate and full
efficiency by the end of 2001 or early 2002.

      Kaiser's total consolidated capital expenditures, excluding capital
expenditures related to the Gramercy, Louisiana, facility, are expected to be
between $80.0 million and $95.0 million per year in each of 2001 and 2002 (of
which approximately 15% is expected to be funded by minority partners in certain
foreign joint ventures). Kaiser's management continues to evaluate numerous
projects, all of which would require substantial capital, both in the United
States and overseas. The level of capital expenditures may be adjusted from time
to time depending on Kaiser's price outlook for primary aluminum and other
products, Kaiser's ability to assure future cash flows through hedging or other
means, Kaiser's financial position and other factors.

       During the nine months ended September 30, 2001, Kaiser paid $86.9
million of asbestos-related settlement and defense costs and received insurance
reimbursements of $77.3 million for asbestos-related matters. Kaiser's 2001 and
2002 cash payments, prior to insurance recoveries, for asbestos-related costs
are estimated to be between $125.0 million and $150.0 million per year. Kaiser
believes that it will continue to recover a substantial portion of asbestos
payments from insurance. However, insurance reimbursements have historically
lagged Kaiser's payments. Delays in receiving future insurance repayments would
have an adverse impact on Kaiser's liquidity. 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. The rulings did not result in any change
to Kaiser's estimates of its current and future asbestos-related recoveries.
Additional issues may be heard by the court from time to time. Given the
significance of expected asbestos-related payments in 2001 and 2002 based on
settlement agreements in place at September 30, 2001, the receipt of timely and
appropriate reimbursements from such insurers is critical to Kaiser's liquidity.

      Absent an improvement in the markets in which Kaiser operates or faster
than expected improvement in the operating performance of the Gramercy refinery
(as a result of its completion) and other facilities (as a result of Kaiser's
performance improvement initiative), Kaiser's operations and working capital and
other commitments (before considering near-term debt maturities), including
interest and expected tax payments, the funding of pension, post-retirement
medical and net asbestos-related liabilities, capital spending and other
previously accrued obligations may cause near-term cash flows to be negative.
Kaiser expects its cash flow in mid-2002 to improve substantially over expected
near-term cash flows as a result of the Gramercy alumina refinery reaching its
full operating rate and full efficiency, operating improvements resulting from
Kaiser's performance improvement initiative and as certain of its other
previously accrued, non-recurring, near-term obligations are satisfied. However,
such changes are subject to prevailing market and economic conditions and, as
such, no assurances can be given in this regard.

      Kaiser's management believes that Kaiser's existing cash resources,
together with cash flows from operations as well as borrowings under the KACC
Credit Agreement (which Kaiser intends to extend, replace or renew as discussed
above), will be sufficient to satisfy its working capital, debt maturities and
capital expenditure requirements for the next year. However, no assurance can be
given that existing and anticipated cash sources will be sufficient to meet
Kaiser's short-term liquidity requirements or that additional sources of cash
will not be required.

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

   FOREST PRODUCTS OPERATIONS

      On August 14, 2001, the Pacific Lumber Credit Agreement was renewed. 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, and subject to the consent of the lender, the Pacific Lumber
Credit Agreement may be extended by one year. The other terms and conditions are
substantially the same as those under the expired facility. At September 30,
2001, $18.0 million of borrowings and $11.5 million in letters of credit were
outstanding under the Pacific Lumber Credit Agreement. Unused availability was
limited to $14.8 million at September 30, 2001.

      The Scotia LLC Line of Credit allows Scotia LLC to borrow up to one year's
interest on the Timber Notes. On June 1, 2001, this facility was extended for an
additional year to July 12, 2002.

      During the nine months ended September 30, 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 $77.4 million to its parent, Pacific Lumber, $63.9 million of
which was made using funds from the December 2000 sale of the Owl Creek grove
and $13.5 million of which was made using excess funds released from the SAR
Account.

      Due to its highly leveraged condition, MGI is more sensitive than less
leveraged companies to factors affecting its operations, including governmental
regulation and litigation affecting its timber harvesting practices (see
"--Trends" below and Note 10), increased competition from other lumber producers
or alternative building products and general economic conditions. MGI and its
subsidiaries anticipate that existing cash, cash equivalents, marketable
securities, funds available from the SAR Account and available sources of
financing will be sufficient to fund their working capital, debt service and
capital expenditure requirements for the next year. With respect to Pacific
Lumber, its liquidity improved significantly as a result of $78.7 million in
distributions paid by Scotia LLC, and $6.4 million in repayments on an
intercompany loan by MGI during the period from January 1, 2001 to October 31,
2001. Nevertheless, Pacific Lumber expects that near-term cash flows from
operations will be adversely affected by lower lumber prices, an inadequate
supply of logs and a related slowdown in lumber production. Pacific Lumber may
require funds available under Pacific Lumber's revolving 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 their long-term
liquidity, MGI and its subsidiaries believe that their existing cash and cash
equivalents should provide sufficient funds to meet their debt service and
working capital requirements. However, until such time as Pacific Lumber has
adequate cash flows from operations and/or dividends from Scotia LLC, there can
be no assurance that this will be the case.

   REAL ESTATE OPERATIONS

      In June 2001, Lakepointe Assets purchased Lake Pointe Plaza, an office
complex located in Sugarland, Texas, for a purchase price of $131.3 million. The
transaction was financed with proceeds of $122.5 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.

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

   RACING OPERATIONS

      With respect to short-term and long-term liquidity, SHRP, Ltd's management
expects that SHRP, Ltd. will generate cash flows from operations.


TRENDS

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

      The Company's forest products operations are conducted by MGI through
Pacific Lumber and Britt. Regulatory and environmental matters play a
significant role in Pacific Lumber's operations. See Note 10 and Item 1.
"Business--Regulatory and Environmental Matters" of the Form 10-K 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 on March 1, 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
have thus far failed to approve THPs in a timely manner. The rate of approvals
of THPs during the nine months ended September 30, 2001, has improved over the
prior year; however, it continues to be below what Pacific Lumber requires to
meet its targeted harvest levels under the SYP. 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.

      There can be no assurance that Pacific Lumber will not continue to
experience difficulties in receiving approvals of its THPs similar to those it
has been experiencing. Furthermore, there can be no assurance that certain
pending legal, regulatory and environmental matters or future governmental
regulations, legislation or judicial or administrative decisions, or adverse
weather conditions, would not have a material adverse effect on the Company's
financial position, results of operations or liquidity. See Part II. Item 1.
"Legal Proceedings" and Note 10 for further information regarding regulatory and
legal proceedings affecting the Company's operations.

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. See Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for cautionary information with respect to
such forward-looking statements.

      Kaiser's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold. As discussed
more fully in Notes 1 and 12, Kaiser utilizes hedging transactions to lock-in a
specified price or range of prices for certain products which it sells or
consumes in its production process and to mitigate its exposure to changes in
foreign currency exchange rates. The following sets forth the impact on future
earnings of adverse market changes related to Kaiser's hedging positions with
respect to commodity, foreign exchange and energy contracts described more fully
in Note 12.

      The hypothetical amounts and impacts discussed below are versus what
Kaiser's results would have been without the derivative or fixed price customer
contracts. It should be noted however, that, since the hedging positions and
fixed price customer contracts lock-in a specific price, a range of prices or
specific rates, increases or decreases in earnings attributable to Kaiser's
hedging positions, fixed price customer contracts or hedging instruments would
be significantly offset by a corresponding decrease or increase in the proceeds
to be realized on the underlying physical transactions or in the value of the
hedged commitments.

      Alumina and Primary Aluminum
      Alumina and primary aluminum production in excess of internal requirements
is sold in domestic and international markets, exposing Kaiser to commodity
price opportunities and risks. Kaiser's hedging transactions are intended to
provide price risk management in respect of the net exposure of earnings
resulting from (i) anticipated sales of alumina, primary aluminum and fabricated
aluminum products, less (ii) expected purchases of certain items, such as
aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with the
price of primary aluminum. On average, before consideration of hedging
activities, any fixed price contracts with fabricated aluminum products
customers, variations in production and shipment levels, and timing issues
related to price changes, Kaiser estimates that each $.01 increase (decrease) in
the market price per price-equivalent pound of primary aluminum increases
(decreases) Kaiser's annual pre-tax earnings by approximately $10.0 million to
$15.0 million, based on recent fluctuations in operating levels.

      Based on the average September 2001 LME cash price for primary aluminum of
approximately $.61 per pound, Kaiser estimates that it would realize
approximately $61.0 million of net aggregate pre-tax benefits from its hedging
positions and fixed price customer contracts during the remainder of 2001 and
the period from 2002 through 2003. Kaiser estimates that a hypothetical $.10
increase from the above stated September 2001 price would result in a net
aggregate pre-tax reduction in operating income of approximately $38.0 million
being realized during the remainder of 2001 and the period from 2002 through
2003 from its hedging positions and fixed price customer contracts. Conversely,
Kaiser estimates that a hypothetical $.10 decrease from the above stated
September 2001 price level would result in an aggregate pre-tax increase in
operating income of approximately $192.0 million being realized during the
remainder of 2001 and the period from 2002 through 2003 from Kaiser's hedging
positions and fixed price customer contracts.

      As stated in Note 12, Kaiser has certain hedging positions which do not
qualify for treatment as a "hedge" under current accounting guidelines and thus
must be marked-to-market each period. Fluctuations in forward market prices for
primary aluminum would likely result in additional earnings volatility as a
result of these positions. Kaiser estimates that a hypothetical $.10 change in
spot market prices from the September 30, 2001 LME cash price of $.60 per pound
would, depending on the shape of the forward curve, result in additional
aggregate mark-to-market impacts of between $5.0 million and $20.0 million
during any period through 2003.

      In addition to having an impact on Kaiser's earnings, a hypothetical
$.10-per-pound change in primary aluminum prices would also impact Kaiser's cash
flows and liquidity through changes in possible margin advance requirements. At
September 30, 2001, Kaiser had received margin advances of $42.7 million.
Increases in primary aluminum prices subsequent to September 30, 2001, could
result in Kaiser having to refund and, depending on the amount of the increase,
make margin advances. Such amounts could be significant. If primary aluminum
prices increased by $.10 per pound (from the September 30, 2001 price) by
December 31, 2001 and the forward curve were as described above, it is estimated
that Kaiser could be required to pay in the range of $40.0 million to $60.0
million in respect of both refunds of margin advances from brokers and to make
margin advances to the brokers. Kaiser's management considers credit risk
related to possible failure of the counterparties to perform their obligations
pursuant to the derivative contracts to be minimal.

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

      Based on the September 30, 2001 US$ to A$ exchange rate of $.49, Kaiser's
foreign currency hedges would result in a net aggregate pre-tax reduction of
operating income of approximately $9.7 million for the remainder of 2001 and for
the period from 2002 through 2005. Kaiser estimates that a hypothetical 10%
decrease in the A$ exchange rate would result in Kaiser recognizing a net
aggregate pre-tax reduction of operating income of approximately $10.4 million
for the remainder of 2001 and for the period from 2002 through 2005 from its
foreign currency hedging positions. Conversely, Kaiser estimates that a
hypothetical 10% increase in the A$ exchange rate (from $.49) would result in
Kaiser realizing a net pre-tax aggregate reduction of operating income of
approximately $8.7 million during the remainder of 2001 and for the period from
2002 through 2005.

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

      Kaiser from time to time in the ordinary course of business enters into
hedging transactions with major suppliers of energy and energy related financial
instruments. Based on the average September 2001 price (per mcf) of
approximately $2.53, Kaiser expects to realize a pre-tax reduction of operating
income of approximately $5.0 million for the period from October 2001 through
March 2002 associated with these hedging positions. Kaiser estimates that
a hypothetical $1.00 decrease from an average September 2001 price would result
in Kaiser recognizing a net aggregate pre-tax reduction of operating income of
$8.0 million. Conversely, Kaiser estimates that a hypothetical $1.00 increase
from the average September 2001 price would result in Kaiser realizing a net
pre-tax aggregate reduction of operating income of approximately $2.0 million
during the same period.

      Based on the average September 2001 fuel oil price (per barrel) of
approximately $19.79, Kaiser estimates the hedges would result in a net
aggregate pre-tax increase to its operating income of approximately $1.3 million
in the fourth quarter of 2001.


                           PART II. OTHER INFORMATION

ITEM 1.         LEGAL PROCEEDINGS

      Reference is made to Item 3 of the Form 10-K for information concerning
material legal proceedings with respect to the Company. The following material
developments have occurred with respect to such legal proceedings subsequent to
the filing of the Form 10-K.

MAXXAM INC. LITIGATION

   USAT MATTERS

      With respect to the OTS action, 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.

      With respect to the FDIC action, the FDIC may not pursue its claims under
the FDIC action if the OTS Director accepts the judge's recommended decision.

      With respect to the Kahn lawsuit, the parties have agreed to an indefinite
extension of the defendants' obligations to respond to the plaintiffs' claims.

 KAISER LITIGATION

   MEAD ENVIRONMENTAL PENALTY

      In May 2001, Kaiser agreed to pay a penalty of $150,000 and to deposit
into a fund an additional $125,000 to implement a supplemental environmental
project in the community in order to settle certain alleged environmental
violations with respect to its Mead, Washington, aluminum smelter.

PACIFIC LUMBER LITIGATION

      With respect to the EPIC-SYP Permits lawsuit and the USWA lawsuit, the
November 2001 trial date for each of these lawsuits has been postponed, and no
new trial date for either of these lawsuits has been set.

      With respect to a February 2001 notice of intent to sue Pacific Lumber, on
July 24, 2001, 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 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.

      With respect to the Hunsaker Action, on July 9, 2001, the U.S. Ninth
Circuit Court of Appeals affirmed the District Court's dismissal of the case.

ITEM 6.         EXHIBITS AND REPORTS ON FORM 8-K

A.    EXHIBITS:

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

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

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

        *23     Acknowledgment letter from Arthur Andersen L.L.P.

      * Included with this filing.

B.      REPORTS ON FORM 8-K:

      On September 13, 2001, the Company filed a current report on Form 8-K
(under Item 5), related to the recommended decision in favor of the Company in
connection with the OTS action.

                                   SIGNATURES


      Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who have signed this report on behalf of
the Registrant and as the principal financial and accounting officers of the
Registrant, respectively.



                                                     MAXXAM INC.





Date: November 13, 2001           By:         /S/      PAUL N. SCHWARTZ
                                      ------------------------------------------
                                                Paul N. Schwartz
                                       President, Chief Financial Officer
                                                 and Director
                                          (Principal Financial Officer)



Date: November 13, 2001           By:       /S/      ELIZABETH D. BRUMLEY
                                      ------------------------------------------
                                             Elizabeth D. Brumley
                                                   Controller
                                         (Principal Accounting Officer)


                                                                      APPENDIX A


                            GLOSSARY OF DEFINED TERMS


Alpart:  Alumina Partners of Jamaica, a majority subsidiary of KACC

AMT Price:  Average Midwest United States transaction price for primary aluminum

Bear Creek lawsuit: An action entitled Environmental Protection Information
Association v. Pacific Lumber, Scotia Pacific Company LLC (No. C01-2821), filed
July 24, 2001, in the U.S. District Court in the Northern District of California

BOA: Bank of America, N.A.

BPA:  Bonneville Power Administration

Britt:  Britt Lumber Co., Inc., a wholly owned subsidiary of MGI

CARIFA:  Carribean Basin Projects Financing Authority

CDF:  California Department of Forestry and Fire Protection

CERCLA: Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended by the Superfund Amendments and Reauthorization Act of 1986

CESA:  California Endangered Species Act

Class A Preferred Stock: Class A $.05 Non-Cumulative Participating Convertible
Preferred Stock of the Company

Common Stock:  $0.50 par value common stock of the Company

Company:  MAXXAM Inc.

Custodial Trust Agreement: Term loan due October 22, 2001 that bears interest at
LIBOR plus 2% per annum and is secured by 7,915,000 shares of Kaiser common
stock

CWA:  Federal Clean Water Act

Environmental Plans:  The HCP and the SYP

EPA:  Environmental Protection Agency

EPIC-SYP/Permits lawsuit: 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) filed March 31, 1999 in the Superior Court of Sacramento County

Equity Fund Partnership: A partnership investing in equity securities in which
the Company holds a limited partnership interest

ERF lawsuit: An action entitled Ecological Rights Foundation, Mateel
Environmental v. Pacific Lumber (No. 97-0292) which was filed in the U.S.
District Court in the Northern District of California on January 28, 1997

ESA:  The federal Endangered Species Act

FDIC:  Federal Deposit Insurance Corporation

FDIC action: An action filed by the FDIC on August 2, 1995 entitled Federal
Deposit Insurance Corporation, as manager of the FSLIC Resolution Fund v.
Charles E. Hurwitz (No. H-95-3956) in the U.S. District Court for the Southern
District of Texas

FDIC Counterclaim: A counterclaim to the FDIC action filed on May 31, 2000, by
the Company, Federated and Mr.
Hurwitz

Federated:  Federated Development Company, a principal stockholder of the Company

FERC: Federal Energy Regulatory Commission

Form 10-K: The Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 2000

HCP: The habitat conservation plan covering multiple species approved on March
1, 1999, in connection with the consummation of the Headwaters Agreement

Headwaters Agreement: The September 28, 1996, agreement between Pacific Lumber,
Scotia LLC, Salmon Creek, the United States and California which provided the
framework for the acquisition by the United States and California of the
Headwaters Timberlands

Headwaters Timberlands: Approximately 5,600 acres of Pacific Lumber timberlands
consisting of two forest groves commonly referred to as the Headwaters Forest
and the Elk Head Springs Forest which were sold to the United States and
California on March 1, 1999

Hunsaker Action: An action entitled William Hunsaker, et al. v. Charles E.
Hurwitz, Pacific Lumber, MAXXAM Group Inc., MXM Corp., Federated Development
Company and Does I-50 (No. C 98-4515) filed in the United States District Court
for the Northern District of California on November 24, 1998

Intercompany Note: Intercompany note issued by MAXXAM Parent to MGHI for an
initial principal amount of $125.0 million

KACC: Kaiser Aluminum & Chemical Corporation, Kaiser's principal operating
subsidiary

KACC 9 7/8 % Senior Notes:  KACC's $225.0 million senior notes due February 2002

KACC Credit Agreement: The revolving credit facility with KACC and a bank under
which KACC is able to borrow by means of revolving credit advances and letters
of credit (up to $125.0 million) in an aggregate amount equal to the lesser of
$300.0 million or a borrowing base relating to eligible accounts receivable plus
eligible inventory

KACC Senior Subordinated Notes: KACC's 12 3/4% Senior Subordinated Notes due
February 2003

Kahn lawsuit: An action entitled Alan Russell Kahn v. Federated Development Co.,
MAXXAM Inc., et. al. (Civil Action 18623NC) filed in the Court of Chancery in
the state of Delaware on January 16, 2001

Kaiser: Kaiser Aluminum Corporation, a subsidiary of the Company engaged in
aluminum operations

Lakepointe Assets: Lakepointe Assets Holdings LLC, a limited liability company,
and its subsidiaries, all of which are indirect wholly owned subsidiaries of
MGHI

Lakepointe Notes: Lakepointe Assets' $122.5 million of 7.56% notes due June 8,
2021

LME: London Metal Exchange

MGHI:  MAXXAM Group Holdings Inc., a wholly owned subsidiary of the Company

MGHI Notes:  MGHI's 12% Senior Secured Notes due August 1, 2003

MGI:  MAXXAM Group Inc., a wholly owned subsidiary of MGHI

MPC:  MAXXAM Property Company, a wholly-owned subsidiary of the Company

NLRB:  National Labor Relations Board

North Coast Water Board: North Coast Regional Water Quality Control Board

Notice: A Notice of Charges filed on December 26, 1995 by the OTS against the
Respondents, including the Company and others with respect to the failure of
USAT

OTS:  The United States Department of Treasury's Office of Thrift Supervision

OTS Action: A formal administrative proceeding initiated by the OTS against the
Company and others on December 26, 1995

Pacific Lumber:  The Pacific Lumber Company, a wholly-owned subsidiary of MGI

Pacific Lumber Credit Agreement: The revolving credit agreement between Pacific
Lumber and a bank which provides for borrowings of up to $50.0 million

PDMPI:  Palmas del Mar Properties, Inc., a wholly owned subsidiary of the Company

Permits: The incidental take permits issued by the United States and California
pursuant to the HCP

QAL: Queensland Alumina Limited, an aluminum refinery in Queensland, Australia,
in which Kaiser owns a 28.3% interest

Redeemable Preference Stock: KACC's Cumulative (1985 Series A) Preferred Stock
and its Cumulative (1985 Series B) Preference Stock

Respondents:  The Company, Federated, Mr. Charles Hurwitz and others

Salmon Creek:  Salmon Creek LLC, a wholly owned subsidiary of Pacific Lumber

SAR Account: Funds held in a reserve account to support principal payments on
the Timber Notes

Scheduled Amortization: The amount of principal which Scotia LLC must pay
through each Timber Note payment date in order to avoid prepayment or deficiency
premiums

Scotia LLC: Scotia Pacific Company LLC, a limited liability company wholly owned
by Pacific Lumber

Scotia LLC Line of Credit: The agreement between a group of lenders and Scotia
LLC pursuant to which it may borrow in order to pay up to one year's interest on
the Timber Notes

SFAS No. 133: Statement of Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities"

SFAS No. 141: Statement of Financial Accounting Standard No. 141, "Business
Combinations"

SFAS No. 142: Statement of Financial Accounting Standard No. 142, "Goodwill and
Other Intangible Assets"

SFAS No. 143: Statement of Financial Accounting Standard No. 143, "Accounting
for Asset Retirement Obligations"

SHRP, Ltd.: Sam Houston Race Park, Ltd., a 99.9%-owned subsidiary of the Company

SYP: The sustained yield plan approved on March 1, 1999, in connection with the
consummation of the Headwaters Agreement

THP: Timber harvesting plan required to be filed with and approved by the CDF
prior to the harvesting of timber

Timber Notes: Scotia LLC's $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 due July 20, 2028

Timber Notes Indenture:  The indenture governing the Timber Notes

TMDLs:  Total maximum daily load limits

UFG:  United Financial Group, Inc.

ULPs:  Unfair labor practices

USAT:  United Savings Association of Texas

USWA:  United Steelworkers of America

USWA lawsuit: 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) filed March 31, 1999 in the Superior Court of Sacramento County

Wrigley lawsuit: 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 and
Federated Development Company (No. 9700399) filed December 2, 1997 in the
Superior Court of Humboldt County

EX-23

November 12, 2001

To MAXXAM Inc.:

We are aware that MAXXAM Inc. has incorporated by reference in its Registration
Statement No. 33-54479 its Form 10-Q for the quarter ended September 30, 2001,
which includes our report dated November 12, 2001 covering the unaudited interim
financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, that report is not considered a part of the registration
statement prepared or certified by our firm or a report prepared or certified by
our firm within the meaning of Sections 7 and 11 of the Act. It should be noted
that we have not performed any procedures subsequent to November 12, 2001.

Very truly yours,

ARTHUR ANDERSEN LLP