KAISER ALUMINUM CORP - 10-Q Quarterly Report

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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 JUNE 30, 2004

COMMISSION FILE NUMBER 1-9447

KAISER ALUMINUM CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 94-3030279
(State of incorporation) (I.R.S. Employer Identification No.)

5847 SAN FELIPE, SUITE 2500, HOUSTON, TEXAS 77057-3268
(Address of principal executive offices) (Zip Code)

(713) 267-3777
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

At July 31, 2004, the registrant had 79,826,028 shares of Common Stock
outstanding. The number of outstanding shares of Common Stock may not be
meaningful because, as part of a plan of reorganization for the registrant, it
is likely that the equity interests of the Company's existing stockholders will
be cancelled without consideration.

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
1

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

STATEMENTS OF CONSOLIDATED INCOME (LOSS)

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
2

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
(IN MILLIONS OF DOLLARS)

FOR THE SIX MONTHS ENDED JUNE 30, 2003

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
3

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

STATEMENTS OF CONSOLIDATED CASH FLOWS

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
4

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

1. REORGANIZATION PROCEEDINGS

Kaiser Aluminum Corporation ("Kaiser", "KAC" or the "Company"), its wholly
owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), and 24 of
KACC's subsidiaries have filed separate voluntary petitions in the United States
Bankruptcy Court for the District of Delaware (the "Court") for reorganization
under Chapter 11 of the United States Bankruptcy Code (the "Code"); the Company,
KACC and 15 of KACC's subsidiaries (the "Original Debtors") filed in the first
quarter of 2002 and nine additional KACC subsidiaries (the "Additional Debtors")
filed in the first quarter of 2003. The Original Debtors and Additional Debtors
are collectively referred to herein as the "Debtors" and the Chapter 11
proceedings of these entities are collectively referred to herein as the
"Cases." For purposes of this Report, the term "Filing Date" means, with respect
to any particular Debtor, the date on which such Debtor filed its Case. None of
KACC's non-U.S. joint ventures are included in the Cases. The Cases are being
jointly administered. The Debtors are managing their businesses in the ordinary
course as debtors-in-possession subject to the control and administration of the
Court.

Original Debtors. During the first quarter of 2002, the Original Debtors
filed separate voluntary petitions for reorganization. The wholly owned
subsidiaries of KACC included in such filings were: Kaiser Bellwood Corporation
("Bellwood"), Kaiser Aluminium International, Inc. ("KAII"), Kaiser Aluminum
Technical Services, Inc. ("KATSI"), Kaiser Alumina Australia Corporation
("KAAC") (and its wholly owned subsidiary, Kaiser Finance Corporation ("KFC"))
and ten other entities with limited balances or activities.

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

The outstanding principal of, and accrued interest on, all debt of the
Original Debtors became immediately due and payable upon commencement of the
Cases. However, the vast majority of the claims in existence at the Filing Date
(including claims for principal and accrued interest and substantially all legal
proceedings) are stayed (deferred) during the pendency of the Cases. In
connection with the filing of the Original Debtors' Cases, the Court, upon
motion by the Original Debtors, authorized the Original Debtors to pay or
otherwise honor certain unsecured pre-Filing Date claims, including employee
wages and benefits and customer claims in the ordinary course of business,
subject to certain limitations. In July 2002, the Court also issued a final
order authorizing the Company to fund the cash requirements of its foreign joint
ventures in the ordinary course of business and to continue using the Company's
existing cash management systems. The Original Debtors also have the right to
assume or reject executory contracts existing prior to the Filing Date, subject
to Court approval and certain other limitations. In this context, "assumption"
means that the Original Debtors agree to perform their obligations and cure
certain existing defaults under an executory contract and "rejection" means that
the Original Debtors are relieved from their obligations to perform further
under an executory contract and are subject only to a claim for damages for the
breach thereof. Any claim for damages resulting from the rejection of a
pre-Filing Date executory contract is treated as a general unsecured claim in
the Cases.

5

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Generally, pre-Filing Date claims, including certain contingent or
unliquidated claims, against the Original Debtors will fall into two categories:
secured and unsecured. Under the Code, a creditor's claim is treated as secured
only to the extent of the value of the collateral securing such claim, with the
balance of such claim being treated as unsecured. Unsecured and partially
secured claims do not accrue interest after the Filing Date. A fully secured
claim, however, does accrue interest after the Filing Date until the amount due
and owing to the secured creditor, including interest accrued after the Filing
Date, is equal to the value of the collateral securing such claim. The Court set
January 31, 2003 as the last date by which holders of pre-Filing Date claims
against the Original Debtors (other than asbestos-related personal injury claims
and certain hearing loss claims) could file their claims. Any holder of a claim
that was required to file such claim by January 31, 2003 and did not do so may
be barred from asserting such claim against any of the Original Debtors and,
accordingly, may not be able to participate in any distribution in any of the
Cases on account of such claim. The Company has not yet completed its analysis
of all of the proofs of claim to determine their validity. However, during the
course of the Cases, certain matters in respect of the claims have been
resolved. Material provisions in respect of claim settlements are included in
the accompanying financial statements and are fully disclosed elsewhere herein.
The January 31, 2003 bar date does not apply to asbestos-related personal injury
claims, for which the Original Debtors reserve the right to establish a separate
bar date at a later time. A separate bar date for certain hearing loss and coal
tar pitch volatiles claims was reset to February 29, 2004.

Additional Debtors. On January 14, 2003, the Additional Debtors filed
separate voluntary petitions for reorganization. The wholly owned subsidiaries
included in such filings were: Kaiser Bauxite Company ("KBC"), Kaiser Jamaica
Corporation ("KJC"), Alpart Jamaica Inc. ("AJI"), Kaiser Aluminum & Chemical of
Canada Limited ("KACOCL") and five other entities with limited balances or
activities. Ancillary proceedings in respect of KACOCL and two Additional
Debtors were also commenced in Canada simultaneously with the January 14, 2003
filings.

The Cases filed by the Additional Debtors were commenced, among other
reasons, to protect the assets held by these Debtors against possible statutory
liens that might have arisen and been enforced by the Pension Benefit Guaranty
Corporation ("PBGC") primarily as a result of the Company's failure to meet a
$17.0 accelerated funding requirement to its salaried employee retirement plan
in January 2003 (see Note 9 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2003 for additional
information regarding the accelerated funding requirement). The filing of the
Cases by the Additional Debtors had no impact on the Company's day-to-day
operations.

In connection with the Additional Debtors' filings, the Court authorized
the Additional Debtors to continue to pay or otherwise honor certain pre-Filing
Date claims, including employee wages and benefits, and customer and vendor
claims in the ordinary course of business. The Court also approved the
Additional Debtors' continued participation in the Company's existing cash
management systems and routine intercompany transactions involving, among other
transactions, the transfer of materials and supplies among subsidiaries and
affiliates.

In March 2003, the Court set May 15, 2003 as the last date by which holders
of pre-Filing Date claims against the Additional Debtors (other than
asbestos-related personal injury claims and certain hearing loss and coal tar
pitch volatiles claims) could file their claims. Any holder of a claim that was
required to file such claim by May 15, 2003 and did not do so may be barred from
asserting such claim against any of the Additional Debtors and, accordingly, may
not be able to participate in any distribution in any of the Cases on account of
such claim. The Company has not yet completed its analysis of all of the proofs
of claim to determine their validity. However, during the course of the Cases,
certain matters in respect of the claims have

6

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

been resolved. Material provisions in respect of claim settlements are included
in the accompanying financial statements and are fully disclosed elsewhere
herein.

All Debtors. Two creditors' committees, one representing the unsecured
creditors (the "UCC") and the other representing the asbestos claimants (the
"ACC"), have been appointed as official committees in the Cases and, in
accordance with the provisions of the Code, have the right to be heard on all
matters that come before the Court. In August 2003, the Court approved the
appointment of a committee of salaried retirees (the "1114 Committee" and,
together with the UCC and the ACC, the "Committees") with whom the Debtors have
negotiated necessary changes, including the modification or termination, of
certain retiree benefits (such as medical and insurance) under Section 1114 of
the Code. The Committees, together with the legal representatives for (a)
potential future asbestos claimants (the "Asbestos Futures' Representative") and
(b) potential future silica and coal tar pitch volatile claimants (the
"Silica/CTPV Futures' Representative" and, collectively with the Asbestos
Futures' Representative, the "Futures' Representatives") that have been
appointed in the Cases, will play important roles in the Cases and in the
negotiation of the terms of any plan or plans of reorganization. The Debtors are
required to bear certain costs and expenses for the Committees and the Futures'
Representatives, including those of their counsel and other advisors.

As provided by the Code, the Debtors had the exclusive right to propose a
plan of reorganization for 120 days following the initial Filing Date. The Court
has subsequently approved several extensions of the exclusivity period for all
Debtors. The Debtors have pending a motion to extend exclusivity through October
31, 2004 for all Debtors. By filing the motion to extend the exclusivity period,
the period is automatically extended until the August 23, 2004 Court hearing
date. The UCC and another party have filed objections to the Company's motion.
The objections are limited to the extension of exclusivity in respect of AJI,
KJC, KAAC, KBC and KFC past September 30, 2004 at this time. Discussions with
the UCC and others in respect of the Company's motion are continuing. Additional
extensions are likely to be sought. However, no assurance can be given that the
existing or any such future extension requests will be granted by the Court. If
the Debtors fail to file a plan of reorganization during the exclusivity period,
or if such plan is not accepted by the requisite numbers of creditors and equity
holders entitled to vote on the plan, other parties in interest in the Cases may
be permitted to propose their own plan(s) of reorganization for the Debtors.

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

In working toward one or more plans of reorganization, the Debtors have
been, and continue to be, engaged in discussions with each of their key
constituencies, including the Committees, the Futures' Representatives, the
PBGC, and the appropriate union representatives. The treatment of individual
groups of creditors in any such plan of reorganization cannot be determined
definitively at this time. The ultimate treatment of and recoveries to
individual creditors is dependent on, among other things, the total amount of
claims against the Debtors as ultimately determined by the Court, the priority
of the applicable claims, the outcome of ongoing discussions with the key
constituencies, the amount of value available for distribution in respect of
claims and the completion of the plan confirmation process consistent with
applicable bankruptcy law.

The Debtors' objective is to achieve the highest possible recoveries for
all stakeholders, consistent with the Debtors' abilities to pay, and to continue
the operations of their businesses. However, there can be no assurance that the
Debtors will be able to attain these objectives or achieve a successful
reorganization. While
7

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

valuation of the Debtors' assets and estimation of pre-Filing Date claims at
this stage of the Cases are subject to inherent uncertainties, the Debtors
currently believe that, in the aggregate, it is likely that their liabilities
will be found to significantly exceed the fair value of their assets. Therefore,
the Debtors currently believe that, with limited exceptions, it is likely that
substantially all pre-Filing Date claims will be settled at less than 100% of
their face value and the equity interests of the Company's stockholders will be
cancelled without consideration. Further, the Debtors believe that it is likely
that: (a) the claims of pre-petition creditors that are given certain priorities
by statute or have the benefit of guarantees or other contractual or structural
seniority will likely receive substantially greater recoveries than pre-petition
creditors that have no such priorities or seniority; and (b) all pending and
future asbestos-related personal injury claims are likely to be resolved through
the formation, pursuant to a plan of reorganization, of a statutory trust to
which all claims would be directed by a channeling injunction that would
permanently remove all asbestos liability from the Debtors. A similar trust
arrangement is anticipated in respect of pending and future silica, hearing loss
and coal tar pitch volatiles personal injury claims. The trusts would be funded
pursuant to statutory requirements and agreements with representatives of the
affected parties, using the Debtors' insurance assets and certain other
consideration that has yet to be agreed. No assurances can be provided that the
foregoing will ultimately be included in any plan(s) of reorganization the
Debtors may file. Further, while the Debtors believe it is possible to
successfully reorganize their operations and emerge from Chapter 11 in 2005,
their ability to do so is subject to inherent market- related risks as well as
successful negotiation and Court approval for the treatment of creditors
consistent with the applicable bankruptcy law.

The Debtors' Cases are being administered on a consolidated basis. In fact,
however, there are separate cases for each Debtor or twenty-six Cases in total.
The impacts of the Cases and any plans of reorganization proposed for individual
Debtors will depend on each Debtor's specific circumstances and the differing
interests that creditors have in respect of such entities.

A substantial majority of the claims in the Cases are against KACC. These
include claims in respect of substantially all of the Debtors' debt obligations,
obligations in respect of pension and retiree medical benefits, asbestos-related
and personal injury claims, and known environmental obligations. As such, all of
these claimholders will have claims against KACC that, except as further
described below, will have to be satisfied by KACC's assets, which generally
include the alumina refinery located at Gramercy, Louisiana ("Gramercy"), the
interests in Anglesey Aluminium Limited ("Anglesey"), the interests in Volta
Aluminium Company Limited ("Valco") and the fabricated products plants (other
than the London, Ontario, Canada and Richmond, Virginia extrusion facilities,
which are owned by separate subsidiaries that are also Debtors). KACC's assets
also include certain intercompany receivables from certain of its Debtor
subsidiaries for funding provided to its joint venture affiliates.

In general, except as described below, there are a relatively modest number
or amount of third party trade and other claims against KACC's other Debtor
subsidiaries. Sixteen of the Debtors (including KAC) have no material ongoing
activities or operations and have no material assets or liabilities other than
intercompany items. The Company believes that it is likely that most, if not
all, of these entities will ultimately be merged out of existence or dissolved
in some manner. The remaining Debtor subsidiaries (which include AJI, KJC, KAAC,
KAII, KACOCL, KBC, Bellwood, KATSI and KFC) own certain extrusion facilities or
act largely as intermediaries between KACC and certain of its other subsidiaries
and joint venture affiliates or interact with third parties on behalf of KACC
and its joint venture affiliates. As such, the vast majority of the pre-
petition claims against such entities are related to intercompany activities.
However, certain of those entities holding claims against KACC also have claims
against certain KACC subsidiaries that own or owned the Company's interests in
joint venture affiliates and which represent a significant portion of KACC's
consolidated asset value. For example, noteholders have claims against each of
AJI and KJC, which through
8

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

June 30, 2004, owned the Company's interests in Alumina Partners of Jamaica
("Alpart"), and KAAC, which owns the Company's interests in Queensland Alumina
Limited ("QAL"), as a result of AJI, KJC and KAAC having been subsidiary
guarantors of KACC's Senior Notes and Senior Subordinated Notes. Additionally,
the PBGC, pursuant to statute, has joint and several claims against KACC and all
entities which are 80% or more owned by KACC (referred to as "Controlled Group
Members"). Controlled Group Members include each of AJI, KJC and KAAC, as well
as all of the other Debtors. The only other significant claims against AJI, KJC
and KAAC are intercompany claims related to funding provided to these entities
by KACC. As such, it is likely that the vast majority of any value realized in
respect of the Company's interests in Alpart and QAL, either from their
disposition or realized upon emergence from such operations, is likely to be for
the benefit of the noteholders and the PBGC.

As discussed above, the Company has stated that it expects that pre-Filing
Date claims that have the benefit of contractual or structural seniority will
receive substantially greater recoveries than pre-Filing Date claims that have
no such seniority. Accordingly, it has been the Company's expectation that the
holders of the KACC's 9 7/8% Senior Notes and 10 7/8% Senior Notes
(collectively, the "Senior Notes") will receive substantially greater recoveries
than the holders of claims in respect of the KACC's 12 3/4% Senior Subordinated
Notes (the "Sub Notes"). However, a group of holders (the "Sub Note Group") of
the Sub Notes has formed an unofficial committee to represent all holders of Sub
Notes and retained its own legal counsel. The Sub Note Group is asserting that
the Sub Note holders' claims against the Subsidiary Guarantors (such as AJI, KJC
and KAAC) may not, as a technical matter, be contractually subordinate to the
claims of holders of the Senior Notes. The effect of such position, if
ultimately sustained, would be that the holders of Sub Notes would be on a par
with the holders of the Senior Notes in respect of proceeds from sales of the
Company's interests in and related to Alpart and QAL. This change would
materially increase the recoveries to the holders of the Sub Notes and
materially decrease the recoveries to the holders of the Senior Notes. The
Company believes that the intent of the indentures in respect of the Senior
Notes and the Sub Notes was to subordinate the claims of the Sub Note holders in
respect of the Subsidiary Guarantors. The Company cannot predict, however, the
ultimate resolution of the matters raised by the Sub Note Group, when any such
resolution will occur, or what impact any such resolution may have on the
Company, the Cases or distributions to affected noteholders.

In order to resolve the question of what consideration from any sale or
other disposition of AJI, KJC and/or KAAC, or their respective assets, should be
for the benefit of KACC and its claimholders (in respect of KACC's intercompany
claims against such entities), an intercompany settlement agreement is being
negotiated between the UCC and the Company (the "Intercompany Agreement"). The
proposed Intercompany Agreement would also resolve substantially all other
pre-and post-petition intercompany claims between the Debtors. The proposed
Intercompany Agreement if finalized substantially in its current form, would
provide, among other things, for payments of cash by AJI, KJC and KAAC to KACC
of $90.0 in respect of its intercompany claims against AJI, KJC and KAAC plus
any amounts up to $14.3 plus accrued and unpaid interest and fees paid by KACC
to retire Alpart-related debt. Under the proposed Intercompany Agreement, such
amount would be increased or decreased for (1) any net cash flows funded by or
collected by KACC related to: (a) the Company's interests in and related to
Alpart from January 1, 2004 through July 1, 2004 (estimated to be between
$20.0-$30.0 benefit received by the Company); (b) related to the Company's
interests in and related to QAL from July 1, 2004 through KAAC's emergence from
Chapter 11; and (c) the sale of AJI's, KJC's and KAAC's respective interests in
and related to Alpart and QAL and (2) any purchase price adjustments (other than
incremental amounts related to alumina sales contracts to be transferred)
pursuant to KACC's sale of its interests in Alpart. The proposed Intercompany
Agreement calls for such payments to become payable to KACC at the earlier of
the sale of the Company's interests in Alpart and QAL

9

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

or the emergence of AJI, KJC and KAAC from Chapter 11. The Company expects that
all such payments under the proposed Intercompany Agreement, other than $14.3
that was paid to KACC in July 2004 in respect of retiring the Alpart-related
debt and the $28.0 that is to be paid once the Intercompany Agreement is
finalized, are likely to be held in escrow for the benefit of KACC until KACC's
emergence from the Cases. In the interim, KACC's claims against these entities
are secured by liens. The Intercompany Agreement once finalized will be subject
to Court approval. Discussions are ongoing between the Company, the UCC, the ACC
and the Futures' Representatives in an attempt to make the terms of the proposed
Intercompany Agreement acceptable to each of the groups. However, no assurances
can be provided as to when the remaining issues can be resolved so that the
Company can submit the Intercompany Agreement to the Court.

At emergence from Chapter 11, KACC will have to pay or otherwise provide
for a material amount of claims. Such claims include accrued but unpaid
professional fees, priority tax and environmental claims, secured claims, and
certain post-petition obligations (collectively, "Exit Costs"). KACC currently
estimates that its Exit Costs will be in the range of $100.0 to $120.0. KACC
currently expects to fund such Exit Costs using the proceeds to be received
under the Intercompany Agreement together with existing cash resources and
available liquidity under an exit financing facility that will replace the
current Post-Petition Credit Agreement (see Note 5). If payments under the
Intercompany Agreement together with liquidity available under an exit financing
facility are not sufficient to pay or otherwise provide for all Exit Costs, KACC
and some or all of its other Debtor subsidiaries will not be able to emerge from
Chapter 11 unless and until sufficient funding can be obtained. Management
believes it will be able to successfully resolve any issues that may arise in
respect of the Intercompany Agreement or be able to negotiate a reasonable
alternative. However, no assurances can be given in this regard.

The Company expects that, when the Debtors ultimately file a plan or plans
of reorganization, it is likely to reflect the Company's strategic vision for
emergence from Chapter 11: (a) a standalone going concern with manageable
leverage and financial flexibility, improved cost structure and competitive
strength; (b) a company positioned to execute its long-standing vision of market
leadership and growth in fabricated products; (c) a company that delivers a
broad product offering and leadership in service and quality for its customers
and distributors; and (d) a company with continued ownership of those commodity
assets that have the potential to generate significant cash at steady-state
metal prices and/or which provide a strategic hedge against the fabricated
products business' needs for primary aluminum. While the Company intends to
continue to pursue a standalone fabricated products company emergence strategy,
from time to time the Debtors may also evaluate other reorganization strategies,
consistent with the Debtors' responsibility to maximize the recoveries for its
stakeholders.

The Company has previously reported that it has been in discussions with
the PBGC regarding the termination of certain of the hourly pension plans. In
connection with these discussions, the PBGC has raised issues regarding certain
of the follow-on pension plans that were proposed by the Company to replace the
USWA pension plan and certain smaller Kaiser sponsored plans as well as to the
appropriate amount of the PBGC's claim in respect of the pension plans. These
issues have, over the last two months, impeded the Company's ability to complete
the Intercompany Agreement (in its present form) and therefore delayed the
Company's reorganization efforts. While the Court previously ruled that the
requirements for the distress termination of these plans had been met, the PBGC
retained its regulatory right to review and approve any replacement pension
plans that might be adopted. The PBGC and the Company have been engaged in
discussions regarding the terms of such follow-on plans including in particular
the USWA pension plan. If the PBGC, the Company and the affected unions cannot
reach some mutually acceptable resolution with respect to the distress
termination and any required follow-on plan, the Company would have to either
formally renegotiate the agreements to terminate the existing retiree medical
benefits and pension plans or litigate
10

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

unresolved issues with either the union representatives or the PBGC or both.
There can be no assurances that the Company will be able to successfully
negotiate a settlement with the PBGC, or successfully negotiate and obtain
approval for a revised retiree medical benefit and pension termination agreement
with the unions or prevail in any potential litigation against the PBGC or the
unions. Even if the Company is successful in respect of the foregoing, it is
possible that pursuit of any of the stated alternatives could further delay the
Company's emergence from the Cases.

The Company had previously disclosed that it was possible that it could
emerge from the Cases as early as late in the third quarter of 2004. However,
given, among other things, the longer than expected negotiations in respect of
the Intercompany Agreement and the fact that the commodity asset sales process
has been taking longer than previously expected, the Company now believes that
it is not likely that it will emerge from the Cases until sometime in the first
half of 2005. The Company continues to push for an aggressive pace that would
allow it to file a Disclosure Statement proposing a plan or plans of
reorganization before the end of 2004. However, the Debtors' ability to do so
and to ultimately emerge from the Cases is subject to the confirmation of a plan
of reorganization in accordance with the applicable bankruptcy law and,
accordingly, no assurances can be given as to whether or when any plan or plans
of reorganization will ultimately be filed or confirmed.

In light of the Company's stated strategy and to further the Debtors'
ultimate planned emergence from Chapter 11, the Debtors, with the approval of
the Company's Board of Directors and in consultation with the UCC, the ACC and
the Futures' Representatives, began exploring the possible sale of one or more
of their commodities assets during the third quarter of 2003. In particular, the
Debtors began exploring the possible sale of their interests in and related to:
(a) Alpart, (b) Anglesey, and (c) KACC's Gramercy alumina refinery and Kaiser
Jamaica Bauxite Company ("KJBC"). The possible sale of the Debtors' interests in
respect of Gramercy and KJBC was explored jointly given their significant
integration. In March 2004, the Company announced that it also began the process
of exploring the possible sale of its 20% interest in and related to QAL. See
Note 4 for a discussion of the developments on each of these possible
transactions.

In exploring the sale of its interests in and related to the commodity
assets, the Debtors, through their advisors, surveyed the potential market and
initiated discussions with numerous parties believed to have an interest in such
assets. In addition, other parties contacted the Debtors and/or their investment
advisors to express an interest in purchasing the assets. The Debtors provided
(subject to confidentiality agreements) information regarding the applicable
interests to these parties, each of which was asked to submit a non-binding
expression of interest regarding the individual assets. After receiving these
initial expressions of interest from potential purchasers, the Debtors
determined which of the expressions of interest received represented reasonable
indications of value ("Qualified Bids"). Potential bidders ("Qualified Bidders")
that submitted Qualified Bids were then permitted to conduct due diligence in
respect of the assets for which they submitted a Qualified Bid and to submit
definitive proposals. The Debtors reviewed the definitive proposals submitted
and, in consultation with the UCC, the ACC and the Futures' Representatives, and
other key constituencies, determined with which Qualified Bidders the Debtors
would pursue further negotiations.

As previously disclosed, while the Company had stated that it was
considering the possibility of disposing of one or more of its commodity
facilities, through the third quarter of 2003, the Company still considered all
of its commodity assets as "held for use," as no definite decisions had been
made regarding the disposition of such assets. However, based on additional
negotiations with prospective buyers and discussions with key constituents, the
Company concluded that dispositions of Alpart, Valco and Gramercy/KJBC were
likely and, therefore, that recoverability should be evaluated differently at
December 31, 2003 and subsequent periods. The change in evaluation methodology
was required because, under generally accepted accounting principles

11

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

("GAAP"), assets to be held and used are evaluated for recoverability
differently than assets to be sold or disposed of. Assets to be held and used
are evaluated based on their expected undiscounted future net cash flows. So
long as the Company reasonably expects that such undiscounted future net cash
flows for each asset will exceed the recorded value of the asset being
evaluated, no impairment is required. However, if plans to sell or dispose of an
asset or group of assets meet a number of specific criteria, then, under GAAP,
such assets should be considered held for sale/disposition and their
recoverability should be evaluated, for each asset, based on expected
consideration to be received upon disposition. Sales or dispositions at a
particular time will be affected by, among other things, the existing industry
and general economic circumstances as well as the Company's own circumstances,
including whether or not assets will (or must) be sold on an accelerated or more
extended timetable. Such circumstances may cause the expected value in a sale or
disposition scenario to differ materially from the realizable value over the
normal operating life of assets, which would likely be evaluated on long-term
industry trends.

The Company ultimately concluded that no impairment of its interests in and
related to Alpart was appropriate based on its updated expectation that the sale
of the Company's interests in Alpart would result in a pre -tax gain (see Note
4). By contrast, based on the Company reaching a financial agreement in early
May 2004 with the Government of Ghana ("GoG") in respect of the sale of its
interests in and related to Valco, the Company determined that it should impair
its interests in and related to Valco to the amount of the expected proceeds to
be received from the GoG. As a result, in the first quarter of 2004, KACC
recorded a non-cash charge of approximately $33.0 (see Note 4). Additionally, in
evaluating the recoverability of the Company's basis in Gramercy/KJBC, the
Company recorded an impairment charge of approximately $368.0 in the fourth
quarter of 2003 because all offers received for such assets were substantially
below the carrying value of the assets (see Note 4). The actual amount of gain
or loss if and when the potential sales of Valco and Gramercy/KJBC are
consummated may differ from these amounts as a result of closing adjustments,
changes in economic circumstances and other matters.

Financial Statement Presentation. The accompanying consolidated financial
statements have been prepared in accordance with AICPA Statement of Position
90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, and on a going concern basis, which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business. However, as a result of the Cases, such realization of assets and
liquidation of liabilities are subject to a significant number of uncertainties.

Upon emergence from the Cases, the Company expects to apply "fresh start"
accounting to its consolidated financial statements as required by SOP 90-7.
Fresh start accounting is required if: (1) a debtor's liabilities are determined
to be in excess of its assets and (2) there will be a greater than 50% change in
the equity ownership of the entity. As previously disclosed, the Company expects
both such circumstances to apply. As such, upon emergence, the Company will
restate its balance sheet to equal the reorganization value as determined in its
plan(s) of reorganization and approved by the Court. Additionally, items such as
accumulated depreciation, accumulated deficit and accumulated other
comprehensive income (loss) will be reset to zero. The Company will allocate the
reorganization value to its individual assets and liabilities based on their
estimated fair value at the emergence date. Typically such items as current
liabilities, accounts receivable, and cash will be reflected at values similar
to those reported prior to emergence. Items such as inventory, property, plant
and equipment, long-term assets and long-term liabilities are more likely to be
significantly adjusted from amounts previously reported. Because fresh start
accounting will be adopted at emergence, and because of the significance of the
pending and completed asset sales and liabilities subject to compromise (that
will be relieved upon emergence), meaningful comparisons between the current
historical financial statements and the financial statements upon emergence may
be difficult to make.
12

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Financial Information. Condensed consolidating financial statements of the
Debtors and non-Debtors are set forth below:

CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2004

13

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2003

14

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED JUNE 30, 2004

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED JUNE 30, 2003

15

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2004

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED JUNE 30, 2003

16

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003

Classification of Liabilities as "Liabilities Not Subject to Compromise"
Versus "Liabilities Subject to Compromise." Liabilities not subject to
compromise include: (1) liabilities incurred after the Filing Date of the Cases;
(2) pre-Filing Date liabilities that the Debtors expect to pay in full,
including priority tax and employee claims and certain environmental
liabilities, even though certain of these amounts may not be paid until a plan
of reorganization is approved; and (3) pre-Filing Date liabilities that have
been approved for payment by the Court and that the Debtors expect to pay (in
advance of a plan of reorganization) over the next twelve-month period in the
ordinary course of business, including certain employee related items (salaries,
vacation and medical benefits), claims subject to a currently existing
collective bargaining
17

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

agreement, and certain postretirement medical and other costs associated with
retirees (however, see Note (2) to the table below).

Liabilities subject to compromise refer to all other pre-Filing Date
liabilities of the Debtors. The amounts of the various categories of liabilities
that are subject to compromise are set forth below. These amounts represent the
Company's estimates of known or probable pre-Filing Date claims that are likely
to be resolved in connection with the Cases. Such claims remain subject to
future adjustments. Further, the Debtors currently believe that, with limited
exceptions, it is likely that substantially all pre-Filing Date claims will be
settled at less than 100% of their face value and the equity interests of the
Company's stockholders will be cancelled without consideration.

The amounts subject to compromise at June 30, 2004 and December 31, 2003
consisted of the following items:

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

(1) Accrued salaries, wages and related expenses represent estimated minimum
pension contributions that, absent the Cases, would have otherwise been
payable. Amounts as of June 30, 2004 and December 31, 2003 include
approximately $100.0 associated with estimated special liquidity and other
pension contributions that were not made. As previously disclosed, the
Company does not currently expect to make any pension contributions in
respect of its domestic pension plans. See Note 9 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December
31, 2003 for additional information about non-payment of pension
contributions.

(2) In February 2004, the Company concluded an agreement with the 1114 Committee
and union representatives that represent the vast majority of the hourly
employees that provides for the termination of the existing salaried and
hourly postretirement benefit plans, subject to certain conditions. The
Company included postretirement medical obligations expected to be paid in
respect of periods through May 31, 2004 in the accompanying balance sheet at
June 30, 2004 and December 31, 2003, as liabilities

18

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

not subject to compromise. Such amounts total $8.1 at June 30, 2004 and
$32.5 at December 31, 2003 (see Note 9 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2003
for additional information about termination of postretirement benefit
plans). While the Company is no longer making payments in respect of retiree
medical (other than VEBA payments), the participants of the retiree medical
benefit plan retain claims that will be resolved in any plan(s) of
reorganization that are ultimately filed and approved by the Court. See Note
11 for additional discussions regarding the retiree medical plan.

(3) Long-term liabilities include hearing loss claims of $15.8 at June 30, 2004
and December 31, 2003 (see Note 7), environmental liabilities of $50.0 at
June 30, 2004 and December 31, 2003 (see Note 7) and asbestos liabilities of
$480.1 at June 30, 2004 and December 31, 2003 (see Note 7).

The classification of liabilities "not subject to compromise" versus
liabilities "subject to compromise" is based on currently available information
and analysis. As the Cases proceed and additional information and analysis is
completed or, as the Court rules on relevant matters, the classification of
amounts between these two categories may change. The amount of any such changes
could be significant. Additionally, as the Company evaluates the proofs of claim
filed in the Cases, adjustments will be made for those claims that the Company
believes will probably be allowed by the Court. The amount of such claims could
be significant.

Reorganization Items. Reorganization items under the Cases are expense or
income items that are incurred or realized by the Company because it is in
reorganization. These items include, but are not limited to, professional fees
and similar types of expenses incurred directly related to the Cases, loss
accruals or gains or losses resulting from activities of the reorganization
process, and interest earned on cash accumulated by the Debtors because they are
not paying their pre-Filing Date liabilities. For the quarter and six month
periods ended June 30, 2004 and 2003, reorganization items were as follows:

2. GENERAL

This Quarterly Report on Form 10-Q should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.

Going Concern. The interim consolidated financial statements of the
Company have been prepared on a "going concern" basis which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business; however, as a result of the commencement of the Cases, such
realization of assets and liquidation of liabilities are subject to a
significant number of uncertainties. Specifically, the interim consolidated
financial statements do not present: (a) the realizable value of assets on a
liquidation basis or the availability of such assets to satisfy liabilities, (b)
the amount which will ultimately be paid to settle liabilities and contingencies
which may be allowed in the Cases, or (c) the effect of any changes that may
occur in connection with the Debtors' capitalizations or operations of the
Debtors as a result of a plan of reorganization.

19

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Because of the ongoing nature of the Cases, the discussions and consolidated
financial statements contained herein are subject to material uncertainties.

Additionally, as discussed above (see Financial Statement Presentation in
Note 1), the Company believes that it would, upon emergence, apply fresh start
accounting to its consolidated financial statements which would also adversely
impact the comparability of the June 30, 2004 financial statements to the
financial statements of the entity upon emergence.

Principles of Consolidation. The Company is a subsidiary of MAXXAM Inc.
("MAXXAM") and conducts its operations through its wholly owned subsidiary,
KACC.

The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with GAAP for interim financial information and the
rules and regulations of the Securities and Exchange Commission. Accordingly,
these financial statements do not include all of the disclosures required by
GAAP for complete financial statements. In the opinion of management, the
unaudited interim consolidated financial statements furnished herein include all
adjustments, all of which are of a normal recurring nature unless otherwise
noted, necessary for a fair statement of the results for the interim periods
presented.

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

Operating results for the quarter and six month period ended June 30, 2004,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004.

Discontinued Operations. As part of the Company's plan to divest certain
of its commodity assets, as more fully discussed in Notes 1 and 4, the Company
completed the sale of its interests in and related to Alpart on July 1, 2004 and
the sale of the Mead facility and certain related property (the "Mead Facility")
in June 2004. In accordance with Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No.
144"), the assets and liabilities in respect of the Company's interest in and
related to Alpart and the Mead Facility as of June 30, 2004 and December 31,
2003 and the operating results in respect of the Company's interest in and
related to Alpart and the Mead Facility for the quarter and six month periods
ended June 30, 2004 and 2003 and the gain from the sale of the Mead Facility
have been reported as discontinued operations in the accompanying financial
statements.

Under SFAS No. 144, only those assets, liabilities and operating results
that are being sold/discontinued are treated as "discontinued operations". In
the case of the sale of the Mead Facility, the buyer did not assume such items
as workers compensation, pension or postretirement benefit obligations in
respect of the former employees of the Mead Facility. As discussed more fully in
Note 1, the Company expects that retained obligations will be resolved in the
context of any plan or plans of reorganization. As such, the balances and
operating results related to such items are still included in the consolidated
financial statements. Because the Company owned a 65% interest in Alpart,
Alpart's balances and results of operations were fully consolidated into the
Company's consolidated financial statements. Accordingly, the amounts reflected
below for Alpart

20

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

include the 35% interest in Alpart owned by Hydro Aluminium a.s. ("Hydro").
Hydro's share of the net investment in Alpart is reflected as minority interest.

The balances and operating results associated with the Company's interest
in and related to Alpart were previously included in the Bauxite and Alumina
business segment and the balances and operating results associated with the Mead
Facility were previously included in the Primary Aluminum business segment.

The carrying amounts as of June 30, 2004 and December 31, 2003 of the
assets and liabilities in respect of the Company's interest in and related to
Alpart and the Mead Facility included in discontinued operations were as
follows:

Income statement information in respect of the Company's interest in and
related to Alpart and the Mead Facility for the quarter and six month periods
ended June 30, 2004 and 2003 included in income (loss) from discontinued
operations was as follows:

21

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Earnings per Share. Basic earnings (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares of Common
Stock outstanding during the period including the weighted average impact of the
shares of Common Stock issued during the year from the date(s) of issuance.
However, earnings (loss) per share may not be meaningful, because as a part of a
plan of reorganization, it is likely that the equity interests of the Company's
existing stockholders will be cancelled without consideration.

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

See Notes 2 and 12 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2003 for additional
information regarding derivative financial instruments.

22

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

3. INVENTORIES

The classification of inventories is as follows:

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.

Inventories at June 30, 2004, have been reduced by a net charge of $1.2 in
the first quarter of 2004 (included in Other operating charges (benefits),
net -- see Note 10) to write-down certain alumina inventories to their estimated
net realizable value as a result of the Company's possible sale of its interests
in and related to Valco (see Note 4). Discontinued operations' inventories at
June 30, 2004 consisted of Bauxite and alumina of $29.7 and Operating supplies
and repairs and maintenance parts of $32.5 and, at December 31, 2003 consisted
of Bauxite and alumina of $22.0, Work in process of $.5 and Operating supplies
and repairs and maintenance parts of $35.9.

23

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

4. PROPERTY, PLANT, AND EQUIPMENT

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

The following discusses the divestiture activities of certain of the
Company's commodity assets during the six month periods ended June 30, 2004 and
2003.

2004 --

- As previously disclosed, in March 2004, the Court ordered that an auction
be held during April 2004 in respect of the possible sale of the
Company's interests in and related to Alpart. As a result of the auction
and after consultation with the UCC and others, the Company entered into
an agreement with the successful bidder to sell its interest in Alpart
for a base purchase price of $295.0 plus certain adjustments of
approximately $20.0. The agreement was approved by the Court in April
2004. However, in May 2004, Hydro, the Company's partner in the existing
partnership arrangement, exercised its right to purchase the Company's
interest in Alpart at the same price and terms included in the successful
bidder's agreement. The sale closed on July 1, 2004. The transaction
resulted in a gross sales price of approximately $315.0, subject to
certain post-closing adjustments, and a pre-tax gain of approximately
$100.0. As the transaction closed on July 1, 2004, the gain amount will
be reflected (as a part of discontinued operations) in the Company's
financial statements for the quarter ended September 30, 2004. Offsetting
the proceeds were approximately $14.5 of payments made by KACC to fund
the prepayment of KACC's share of the Alpart-related debt (see Note 5)
and $3.3 of transactions related costs. The balance of the proceeds will
be held in escrow pending the completion of the amendment to the DIP
Facility (see Note 5) and the Intercompany Agreement (see Note 1).
Because Court approval and all conditions precedent to the sale were met
as of June 30, 2004, and because such amounts were material, the assets
and liabilities as of June 30, 2004 and December 31, 2003 and the
operating results for the quarter and six month periods ended June 30,
2004 and 2003 of Alpart have been reported as discontinued operations
(see Note 2).

- In May 2004, the Company entered into an agreement to sell its interests
in and related to the Gramercy facility and KJBC. Net proceeds from the
sale are expected to be approximately $23.0, subject to various closing
adjustments. A substantial portion of the proceeds may be used to satisfy
transaction related costs and obligations. In June 2004, the Court
approved the Company's motion to

24

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

hold an auction in respect of the sale of its interests in and related to
Gramercy/KJBC. However, there were no additional competing bids and, as a
result, the May 2004 agreement was approved by the Court on July 19,
2004. The sale is expected to close in the latter part of the third
quarter of 2004. As previously reported, the Company had determined that
the fair value of its interests in Gramercy/ KJBC was below the carrying
value of the assets because all offers that had been received for such
assets were substantially below the carrying value of the assets.
Accordingly, in the fourth quarter of 2003, KACC adjusted the carrying
value of its interest in and related to Gramercy/KJBC to the estimated
fair value, which resulted in a non-cash impairment charge of
approximately $368.0. Final adjustments to the carrying value of the
Gramercy facility and KJBC assets may cause the actual loss from the sale
of the Company's interest in and related to Gramercy/KJBC, if
consummated, to vary from the impairment charge. As the Court's approval
to sell the Gramercy facility and KJBC was not obtained until after June
30, 2004, the assets, liabilities and results of operations associated
with the Company's interest in and related to these facilities has not
been reflected as "held for sale" or "discontinued operations" in the
accompanying consolidated financial statements as of June 30, 2004.
However, the Company believes that it is likely that such a
reclassification of the balances will be made in its Form 10-Q for the
quarter ending September 30, 2004.

- As more fully discussed in Note 14 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31,
2003, during 2003, the Company and Valco participated in extensive
negotiations with the GoG and the Volta River Authority ("VRA") regarding
the power situation and other matters. Such negotiations did not result
in a resolution of such matters. However, as an outgrowth of such
negotiations, the Company and the GoG entered into a Memorandum of
Understanding ("MOU") in December 2003 pursuant to which KACC would sell
its 90% interest in and related to Valco to the GoG for consideration of
between $35.0 and $100.0, plus assumption of all of the Company's related
liabilities and obligations. The MOU contemplated that the transaction
would close by April 30, 2004. However, as of April 30, 2004, the GoG had
only paid $5.0 of $18.0 that was due to Valco under the MOU and a $7.0
escrow payment to the Company required by the MOU had not been funded.
The Company met with the GoG in early May 2004 and reached a new
financial agreement. Under the revised financial terms, $13.0 was paid
into escrow by the GoG. The $13.0 amount is to be paid to the Company as
full and final consideration for the transaction at closing. The Company
also agreed to fund certain end of service benefits of Valco employees
(estimated to be approximately $9.0) which the GoG was to assume under
the original MOU. The Company and the GoG are currently in the process of
finalizing a purchase agreement for the Company's interests in and
related to Valco. The sale is expected to close in the latter part of the
third quarter or the fourth quarter of 2004, but is subject to a number
of conditions including approval by the Ghanaian Parliament, negotiation
and signing of a definitive agreement, and Court and DIP lender approval.
No assurance can be made as to when or if the transaction will close
under the revised terms. However, as the revised purchase price is well
below the Company's recorded value for Valco and given the increased
likelihood of a closing and the payment by the GoG of the escrow amount,
the Company determined that it should impair its interests in and related
to Valco at March 31, 2004 to the amount of the expected proceeds. As
such, KACC recorded a non-cash impairment charge the first quarter of
2004 of approximately $33.0 (included in Other operating charges
(benefits), net -- see Note 9). The actual amount of loss if and when the
potential sale of the Company's interests in and related to Valco is
consummated may differ from the above amount as a result of closing
adjustments, changes in economic circumstances and other matters.

25

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

- In February 2004, the Company entered into an agreement to sell the Mead
Facility in connection with which it would receive net cash proceeds of
approximately $3.0 and the buyer would assume certain site-related
liabilities. The sale of the Mead Facility was subject to an auction to
determine if a higher value could be obtained. As a result of the
auction, the Company entered into an agreement with the successful bidder
to sell the Mead Facility for approximately $7.4 plus assumption of
certain site-related liabilities. The sale, which was approved by the
Court, closed in June 2004. The sale resulted in net proceeds of
approximately $6.2 and a pre-tax gain of approximately $23.4. The pre-tax
gain includes the impact from the sale of certain non-operating land in
the first quarter of 2004 that was adjacent to the Mead Facility. The
pre-tax gain on the sale of this property had been deferred pending the
finalization of the sale of the Mead Facility and transfer of the
site-related liabilities. Proceeds from the sale of the Mead Facility
totaling $4.0 are being held in escrow until the value of the secured
claim of the holders of the 7.6% solid waste disposal revenue bonds is
determined by the Court (see Note 5). Because such amounts were material,
the assets, liabilities and operating results of the Mead Facility have
been reported as discontinued operations in the accompanying financial
statements (see Note 2).

- As previously disclosed, the Company has explored the possible sale of
its interests in and related to QAL (see Note 1). Initially, as required
under an agreement with one of its partners, the Company offered to sell
its interests to the partner. In May 2004, the partner rejected the
Company's offer. On July 19, 2004, the Court approved the Company's
motion to hold an auction in August 2004 in respect of the Company's
interests in and related to QAL and approved certain bidding procedures.
A minimum purchase price of at least $525.0, plus the assumption of
KACC's share of the QAL debt (see Note 7), was approved by the Court.
However, no qualified bids were received by the August 10, 2004 deadline
contained in the Court approved bidding procedures. The Company is
reviewing its options with respect to the possible disposition of its
interests in and related to QAL. No assurances can be given as to when or
if a sale will actually occur. Any transaction would be subject to a
number of conditions including approval by the Court, the DIP lenders and
the Australian government. The Company's investment in QAL at June 30,
2004 and December 31, 2003, was $38.3 and $37.8, respectively.

2003 --

- In January 2003, the Court approved the sale of the Tacoma facility to
the Port of Tacoma (the "Port"). Gross proceeds from the sale, before
considering approximately $4.0 of proceeds being held in escrow pending
the resolution of certain environmental and other issues, were
approximately $12.1. The Port also agreed to assume the on-site
environmental remediation obligations. The sale closed in February 2003.
The sale resulted in a pre-tax gain of approximately $9.5 (which amount
was reflected in Other operating charges (benefits), net -- see Note 9).
The operating results of the Tacoma facility for 2004 and 2003 have not
been reported as discontinued operations in the accompanying Statements
of Consolidated Income (Loss) because such amounts were not material. The
Tacoma facility's operating loss for the quarter ended March 31, 2003
before considering the gain on the sale and any income tax impact was not
material.

- KACC had a long-term liability, net of estimated subleases income, on an
office complex in Oakland, California, in which KACC had not maintained
offices for a number of years, but for which it was responsible for lease
payments as master tenant through 2008 under a sale-and-leaseback
agreement. The Company also held an investment in certain notes issued by
the owners of the building (which were included in Other Assets). In
October 2002, the Company entered into a contract to sell its interests
and obligations in the office complex. As the contract amount was less
than the asset's net
26

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

carrying value (included in Other assets), the Company recorded a
non-cash impairment charge in 2002 of approximately $20.0. The sale was
approved by the Court in February 2003 and closed in March 2003. Net cash
proceeds were approximately $61.1.

5. LONG-TERM DEBT

Debt consists of the following:

Post-Petition Credit Agreement. On February 12, 2002, the Company and KACC
entered into the DIP Facility with a group of lenders for debtor-in-possession
financing. In March 2003, certain of the Additional Debtors were added as
co-guarantors and the DIP Facility lenders received super-priority status with
respect to certain of the Additional Debtors' assets. The DIP Facility provides
for a secured, revolving line of credit through the earlier of February 13,
2005, the effective date of a plan of reorganization or voluntary termination by
the Company. Under the DIP Facility, KACC is able to borrow amounts by means of
revolving credit advances and to have issued for its benefit letters of credit
(up to $125.0) in an aggregate amount equal to the lesser of $285.0 or a
borrowing base relating to eligible accounts receivable, eligible inventory and
an amortizing fixed asset subcomponent, reduced by certain reserves, as defined
in the DIP Facility agreement. The DIP Facility is guaranteed by the Company and
certain significant subsidiaries of KACC. Interest on any outstanding borrowings
will bear a spread over either a base rate or LIBOR, at KACC's option. As of
June 30, 2004, $145.7 was available to the Company under the DIP Facility (of
which up to $79.3 could be used for additional letters of credit) and no
borrowings were outstanding under the revolving credit facility.

The DIP Facility requires KACC to comply with certain covenants and places
restrictions on the Company's, KACC's and KACC's subsidiaries' ability to, among
other things, incur debt and liens, make

27

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

investments, pay dividends, sell assets, undertake transactions with affiliates,
make capital expenditures, and enter into unrelated lines of business.

During March 2004, the Company received a waiver from the DIP Facility
lenders in respect of a financial covenant, for the quarter ended December 31,
2003 and for all measurement periods through May 31, 2004. In May 2004, the
Company received a limited consent and waiver from the DIP Facility lenders
because the amendment discussed below had been delayed. The May 2004 limited
consent and waiver, among other things (1) allowed the Company to complete the
sale of its interests in and related to Alpart with the proceeds escrowed and
subject to the lenders' administrative super priority claim and lien until the
amendment is completed, (2) extended the waiver of the financial covenant
through July 31, 2004 and (3) waived the current DIP Facility requirement that
any proceeds from the sale of Alpart reduce the fixed asset subcomponent of the
borrowing base. During late July 2004, the Company received another limited
consent and an extension of the May 2004 waiver, as a result of continuing
delays in completing the amendment discussed below. The July 2004 limited
consent and waiver, among other things, extended the waiver of the financial
covenant through September 30, 2004 and provided approval for the Company to
complete the sale of its interests in Gramercy/KJBC.

The Company is currently working with the DIP Facility lenders to complete
an amendment that is anticipated, among other things, to: (1) reset the
financial covenant based on more recent forecasts; (2) authorize the sale of the
Company's interests in Alpart, QAL, Gramercy/KJBC and Valco within certain
parameters and (3) reduce the availability of the fixed asset subcomponent of
the borrowing base to a level that, by emergence will be based on advances
solely in respect of machinery and equipment at the fabricated products
facilities. While the effect of the amendment will be to reduce overall
availability, assuming the previously mentioned commodity assets are sold, the
Company currently anticipates that once amended, availability under the DIP
Facility will likely be in the $50.0-$100.0 range and that such amount should be
adequate to support the Company's liquidity requirements through the remainder
of the Cases. This belief is based on the fact that it was the commodities'
assets and operations that subjected the Company to the most variability and
exposure both from a price risk basis as well as from an operating perspective.
While the Company anticipates that it will ultimately be successful in
completing an amendment to the DIP Facility along the lines outlined above, the
Company cannot currently predict when such amendment will be completed as the
amendment likely will not be completed until issues in respect of the
Intercompany Agreement that affect the DIP Facility can be finalized. Until such
amendment is completed, the Company is likely to continue to seek limited
consents and waivers as and when necessary to maintain compliance with the terms
of the DIP Facility. However, no assurances can be provided that any/all such
future limited consent and waiver requests will ultimately be approved by the
DIP lenders or the Court.

The DIP Facility is currently scheduled to expire in February 2005. As
discussed in Note 1, the Company currently believes it is unlikely that it will
emerge from the Cases until sometime in the first half of 2005. As such, it may
be necessary for the Company to extend the DIP Facility or make alternative
financing arrangements. While the Company believes that if necessary, it would
be successful in negotiating an extension to the DIP Facility or adequate
alternative financing arrangements, no assurances can be given in this regard.

8 1/4% Alpart CARIFA Loans. In December 1991, Alpart entered into a loan
agreement with the Caribbean Basin Projects Financing Authority ("CARIFA"). As
of June 30, 2004, Alpart's obligations under the loan agreement were secured by
two letters of credit aggregating $23.5. KACC was a party to one of the two
letters of credit in the amount of $15.3 in respect of its 65% ownership
interest in Alpart. Alpart also

28

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

agreed to indemnify bondholders of CARIFA for certain tax payments that could
result from events, as defined, that adversely affect the tax treatment of the
interest income on the bonds.

Pursuant to the CARIFA loan agreement, the Alpart CARIFA financing is being
repaid in connection with the sale of the Company's interests in and related to
Alpart, which were sold on July 1, 2004 (see Notes 1 and 4). Upon such payment
(which is scheduled to occur in August 2004), the Company's letter of credit
obligation under the DIP Facility securing the loans will be cancelled.

In accordance with SFAS No. 144, the CARIFA loans balance of $22.0 as of
June 30, 2004 and December 31, 2003 has been reported as discontinued operations
in the accompanying Consolidated Balance Sheets (see Note 2).

7.6% Solid Waste Disposal Revenue Bonds. The 7.6% solid waste disposal
revenue bonds (the "Solid Waste Bonds") were secured by certain (but not all) of
the facilities and equipment at the curtailed Mead Facility which was sold in
June 2004 (see Note 4). The Company believes that the value of the collateral
that secured the Solid Waste Bonds was in the $1.0 range and, as a result, has
reclassified $18.0 of the Solid Waste Bonds balance to Liabilities subject to
compromise (see Note 1). However, in connection with the sale of the Mead
Facility, $4.0 of the proceeds were placed in escrow for the benefit of the
holders of the Solid Waste Bonds until the value of the secured claim of the
bondholders is determined by the Court. The Company expects that the value of
the secured claim will be resolved during the fourth quarter of 2004 either
through a negotiated resolution or a process of litigation. As the Solid Waste
Bonds were not a part of the Mead Facility sale transaction, they were not
reported as discontinued operations in the accompanying Consolidated Balance
Sheets.

6. INCOME TAXES

The income tax (provision) benefit for the quarter and six-month periods
ended June 30, 2004 and 2003, which related primarily to foreign income taxes,
were as follows:

For the quarter and six month periods ended June 30, 2004 and 2003, as a
result of the Cases, the Company did not recognize any U.S. income tax benefit
for the losses incurred from its domestic operations (including temporary
differences) or any U.S. income tax benefit for foreign income taxes. Instead,
the increases in federal and state deferred tax assets as a result of additional
net operating losses and foreign tax credits generated in 2004 and 2003 were
fully offset by increases in valuation allowances. See Note 8 of Notes to
Consolidated Financial Statements in the Company's Form 10-K for the year ended
December 31, 2003 for additional information regarding the Deferred Tax Assets
and Valuation Allowances.

7. COMMITMENTS AND CONTINGENCIES

Impact of Reorganization Proceedings. During the pendency of the Cases,
substantially all pending litigation, except certain environmental claims and
litigation, against the Debtors is stayed. Generally, claims

29

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

against a Debtor arising from actions or omissions prior to its Filing Date will
be settled in connection with its plan of reorganization.

Commitments. KACC has a variety of financial commitments, including
purchase agreements, tolling arrangements, forward foreign exchange and forward
sales contracts (see Note 8), letters of credit, and guarantees. Such purchase
agreements and tolling arrangements include long-term agreements for the
purchase and tolling of bauxite into alumina in Australia by QAL. These
obligations are scheduled to expire in 2008. Under the agreements, KACC is
unconditionally obligated to pay its proportional share (20%) of debt, operating
costs, and certain other costs of QAL. KACC's share of the aggregate minimum
amount of required future principal payments as of June 30, 2004, was $60.0
which amount matures in varying amounts during the 2005 to 2008 period. KACC's
share of QAL's debt increased by approximately $8.0 during 2003 as additional
drawdowns on QAL financing (KACC's share $40.0) more than offset KACC's share
($32.0) of QAL's debt principal payment. During July 2002, KACC made payments of
approximately $29.5 to QAL to fund KACC's share of QAL's scheduled debt
maturities. KACC's share of payments, including operating costs and certain
other expenses under the agreements, has generally ranged between $70-$100 over
the past three years. However, as discussed more fully in Note 1, the Company is
considering the possibility of selling its interests in QAL. If KACC's interest
in QAL were to be sold, the Company believes that KACC's obligations in respect
of its share of QAL's debt would be assumed by the buyer (see Note 4). KACC also
has agreements to supply alumina to and to purchase aluminum from Anglesey.

Minimum rental commitments under operating leases at December 31, 2003, are
as follows: years ending December 31, 2004 -- $7.5; 2005 -- $4.7; 2006 -- $2.1;
2007 -- $.3; 2008 -- $.2; thereafter -- $.7. Pursuant to the Code, the Debtors
may elect to reject or assume unexpired pre-petition leases. At this time, no
final decisions have been made as to which significant pre-petition leases will
be accepted or rejected (see Note 1). Rental expenses were $15.2, $38.3 and
$41.0, for the years ended December 31, 2003, 2002 and 2001, respectively.

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

Based on the Company's evaluation of these and other environmental matters,
the Company has established environmental accruals, primarily related to
potential solid waste disposal and soil and groundwater remediation matters. At
June 30, 2004, the balance of such accruals was $91.6 (of which $50.0 was
included in Liabilities subject to compromise -- see Note 1). These
environmental accruals represent the Company's estimate of costs reasonably
expected to be incurred in the ordinary course of business based on presently
enacted laws and regulations, currently available facts, existing technology,
and the Company's assessment of the likely remediation action to be taken. In
the ordinary course, the Company expects that these remediation actions would be
taken over the next several years and estimates that annual expenditures to be
charged to these environmental accruals will be approximately $25.4 in 2004,
$2.2 to $4.3 per year for the years 2005 through 2008 and an aggregate of
approximately $45.7 thereafter. Approximately $20.2 of the adjustments to the
environmental liabilities in 2003 (see below) that applied to non-owned property
sites has been included in the after 2008 balance because such amounts are
expected to be settled solely in connection with the Debtors' plan or plans of
reorganization.

30

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

The June 30, 2004 accrual balance includes approximately $23.2 that was
provided during the third quarter of 2003. Approximately $20.2 of the amount
provided in the third quarter of 2003 relates to the previously disclosed
multi-site settlement agreement with various federal and state governmental
regulatory authorities and other parties in respect of KACC's environmental
exposure at a number of non-owned sites. Under this agreement, among other
things, KACC agreed to claims at such sites totaling $25.6 ($20.2 greater than
amounts that had previously been accrued for these sites) and, in return, the
governmental regulatory authorities have agreed that such claims would be
treated as pre-Filing Date unsecured claims (i.e. liabilities subject to
compromise). The Company recorded in the third quarter of 2003 the portion of
the $20.2 accrual that relates to locations with active operations ($15.7) in
Other operating charges, net. The remainder of the accrual ($4.5), which relates
to locations that have not operated for a number of years was recorded in the
third quarter of 2003 in Other income (expense).

During June 2004 and September 2003, the Company also provided additional
accruals totaling approximately $1.4 and $3.0, respectively, associated with
certain KACC-owned properties with no current operations (recorded in Other
income (expense)). The June 2004 accrual resulted from facts and circumstances
determined in the ordinary course of business. The additional September 2003
accruals resulted primarily from additional cost estimation efforts undertaken
by the Company in connection with its reorganization efforts. Both the June 2004
and September 2003 additional accruals were recorded as liabilities not subject
to compromise as they relate to properties owned by the Company.

The Company has previously disclosed that it is possible that its
assessment of environmental accruals could increase because it may be in the
interests of all stakeholders to agree to increased amounts to, among other
things, achieve a claim treatment that is favorable and to expedite the
reorganization process. The September 2003 multi-site settlement is one example
of such a situation. The Company is currently involved in negotiations with a
number of parties that, if agreements are ultimately reached with the parties
and approved by the Court, could settle or otherwise resolve a substantial
portion of the environmental claims currently considered not subject to
compromise. As a part of such agreements, it is possible that the Company may
have to pay amounts in the range of $25.0-$30.0 during the fourth quarter of
2004 or early 2005. At June 30, 2004, the Company has accrued liabilities
(included in Long-term liabilities) of approximately $27.0 in respect of these
properties. Because the agreements have not been approved by the Court and are
still subject to material modification, the Company does not believe that such
potential future settlements should be considered "probable" (which is the
criteria for recognition under GAAP). The amount ultimately agreed in respect of
these transactions may differ from the amount currently contemplated and the
amounts accrued. Such amounts could be significant. Any costs paid in respect of
these potential settlements prior to emergence would reduce the amount of Exit
Costs that the Company would likely have to pay at emergence (see Note 1).

As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. The
Company believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $30.0 (a majority of which are estimated to
relate to owned sites that are likely not subject to compromise). As the
resolution of these matters is subject to further regulatory review and
approval, no specific assurance can be given as to when the factors upon which a
substantial portion of this estimate is based can be expected to be resolved.
However, the Company is currently working to resolve certain of these matters.

31

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

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

Other Environmental Matters. During April 2004, KACC was served with a
subpoena for documents and has been notified by Federal authorities that they
are investigating certain environmental compliance issues with respect to KACC's
Trentwood facility in the State of Washington. KACC is undertaking its own
internal investigation of the matter through specially retained counsel to
ensure that it has all relevant facts regarding Trentwood's compliance with
applicable environmental laws. KACC believes it is in compliance with all
applicable environmental laws and requirements at the Trentwood facility and
intends to defend any claims or charges, if any should result, vigorously. The
Company cannot assess what, if any, impacts this matter may have on the
Company's or KACC's financial statements.

Asbestos Contingencies. KACC has been one of many defendants in a number
of lawsuits, some of which involve claims of multiple persons, in which the
plaintiffs allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their employment or
association with KACC or exposure to products containing asbestos produced or
sold by KACC. The lawsuits generally relate to products KACC has not sold for
more than 20 years. As of the initial Filing Date, approximately 112,000 claims
were pending. The lawsuits are currently stayed by the Cases.

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

The Company has accrued a liability for estimated asbestos-related costs
for claims filed to date and an estimate of claims to be filed through 2011. At
June 30, 2004, the balance of such accrual was $610.1, all of which was included
in Liabilities subject to compromise (see Note 1). The Company's estimate is
based on the Company's view, at June 30, 2004, 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, P.A., with respect to the current
state of the law related to asbestos claims. However, there are inherent
uncertainties involved in estimating asbestos-related costs and the Company's
actual costs could exceed the Company's estimates due to changes in facts and
circumstances after the date of each estimate. Further, while the Company does
not presently believe there is a reasonable basis for estimating
asbestos-related costs beyond 2011 and, accordingly, no accrual has been
recorded for any costs which may be incurred beyond 2011, the Company expects
that the plan of reorganization process may require an estimation of KACC's
entire asbestos-related liability, which may go beyond 2011, and that such costs
could be substantial.

The Company believes that KACC has insurance coverage available to recover
a substantial portion of its asbestos-related costs. Although the Company has
settled asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements and disputes with
carriers exist. The timing and amount of future recoveries from these insurance
carriers will depend on the pendency of the Cases and on the resolution of any
disputes regarding coverage under the applicable insurance policies. The Company
believes that substantial recoveries from the insurance carriers are probable
and additional amounts may be recoverable in the future if additional claims are
added. The Company reached this conclusion after considering its prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Heller Ehrman White & McAuliffe LLP with
respect to applicable insurance
32

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

coverage law relating to the terms and conditions of those policies. During
2000, KACC filed suit in San Francisco Superior Court against a group of its
insurers, which suit was thereafter split into two related actions. Additional
insurers were added to the litigation in 2000 and 2002. During October 2001,
June 2003 and February 2004, the court ruled favorably on a number of policy
interpretation issues. Additionally, one of the favorable October 2001 rulings
was affirmed in February 2002 by an intermediate appellate court in response to
a petition from the insurers. The rulings did not result in any changes to the
Company's estimates of its current or future asbestos-related insurance
recoveries. The trial court may hear additional issues from time to time. Given
the expected significance of probable future asbestos-related payments, the
receipt of timely and appropriate payments from its insurers is critical to a
successful plan of reorganization and KACC's long-term liquidity.

The following tables present historical information regarding KACC's
asbestos-related balances and cash flows:

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

(1) The asbestos-related receivable was determined on the same basis as the
asbestos-related cost accrual. However, no assurances can be given that KACC
will be able to project similar recovery percentages for future
asbestos-related claims or that the amounts related to future
asbestos-related claims will not exceed KACC's aggregate insurance coverage.
As of June 30, 2004 and December 31, 2003, $3.8 and $6.1, respectively, of
the receivable amounts relate to costs paid. The remaining receivable
amounts relate to costs that are expected to be paid by KACC in the future.

(2) Excludes certain amounts paid by insurers into a separate escrow account (in
respect of future settlements) more fully disclosed below.

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

Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. Additional asbestos-related claims are likely
to be asserted as a part of the Chapter 11 process. Management cannot at this
time reasonably predict the ultimate number of such claims or the amount of the
associated liability. However, it is likely that such amounts could exceed,
perhaps significantly, the liability amounts reflected in the Company's
consolidated financial statements, which (as previously

33

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

stated) is only reflective of an estimate of claims through 2011. KACC's
obligations in respect of the currently pending and future asbestos-related
claims will ultimately be determined (and resolved) as a part of the overall
Chapter 11 proceedings. It is anticipated that resolution of these matters could
be a lengthy process. Management will continue to periodically reassess its
asbestos-related liabilities and estimated insurance recoveries as the Cases
proceed. However, absent unanticipated developments such as asbestos-related
legislation, material developments in other asbestos-related proceedings or in
the Company's or KACC's Chapter 11 proceedings, it is not anticipated that the
Company will have sufficient information to reevaluate its asbestos-related
obligations and estimated insurance recoveries until later in the Cases. Any
adjustments ultimately deemed to be required as a result of any reevaluation of
KACC's asbestos-related liabilities or estimated insurance recoveries could have
a material impact on the Company's future financial statements.

KACC has entered into settlement agreements with several of the insurers
whose asbestos-related obligations are primarily in respect of future asbestos
claims. These settlement agreements were approved by the Court. In accordance
with the Court approval, the insurers are to pay certain amounts, pursuant to
the terms of an escrow agreement, into a fund (the "Escrow Fund") in which KACC
has no interest, but which amounts will be available for the ultimate settlement
of KACC's asbestos-related claims. Because the Escrow Fund is under the control
of the escrow agent, who will make distributions only pursuant to a Court order,
the Escrow Fund is not included in the accompanying consolidated balance sheet
at June 30, 2004. In addition, since neither the Company nor KACC received any
economic benefit or suffered any economic detriment and have not been relieved
of any asbestos-related obligation as a result of the receipt of the escrow
funds, neither the asbestos-related receivable or the asbestos-related liability
have been adjusted as a result of these transactions. As of June 30, 2004, the
insurers had paid $10.0 into the Escrow Fund. It is possible that settlements
with additional insurers will occur. However, no assurance can be given that
such settlements will occur.

Labor Matters. In connection with the United Steelworkers of America (the
"USWA") strike and subsequent lock-out by KACC, which was settled in September
2000, certain allegations of unfair labor practices ("ULPs") were filed with the
National Labor Relations Board ("NLRB") by the USWA. As previously disclosed,
KACC responded to all such allegations and believed that they were without
merit. Twenty-two of twenty-four allegations of ULPs previously brought against
KACC by the USWA have been dismissed. A trial before an administrative law judge
for the two remaining allegations concluded in September 2001. In May 2002, the
administrative law judge ruled against KACC in respect of the two remaining ULP
allegations and recommended that the NLRB award back wages, plus interest, less
any earnings of the workers during the period of the lockout. The administrative
law judge's ruling did not contain any specific amount of proposed award and was
not self-executing. The USWA filed a proof of claim for $240.0 in the Cases in
respect of this matter.

In January 2004, as part of its settlement with the USWA with respect to
pension and retiree medical benefits, KACC and the USWA agreed to settle their
case pending before the NLRB, subject to approval of the NLRB General Counsel
and the Court and ratification by union members. The settlement was subsequently
ratified by the union members in February 2004. Further, the settlement with
respect to retiree medical and pension benefits and the NLRB case has been
approved by the Court subject to certain conditions. The agreement may be
terminated by either the USWA or the Company in certain circumstances (see Note
9 of Notes of Consolidated Financial Statements in the Company's Form 10-K for
the year ended December 31, 2003). Under the terms of the agreement, solely for
the purposes of determining distributions in connection with the reorganization,
an unsecured pre-petition claim in the amount of $175.0 will be allowed. The
agreement to settle this matter was contingent on NLRB and Court approval and
ratification by union members. This amount was not reflected in the Company's
consolidated financial statements at June 30, 2004.
34

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

However, the charge and an offsetting liability associated with the settlement
of this matter will be reflected in the Company's consolidated financial
statements if and when the agreement with the USWA is ultimately approved by the
Court. Also, as part of the agreement, the Company agreed to adopt a position of
neutrality regarding the unionization of any employees of the reorganized
company.

Settled Hearing Loss Claims. During February 2004, the Company reached a
settlement in respect of 400 claims, which alleged that certain individuals who
were employees of the Company, principally at a facility previously owned and
operated by KACC in Louisiana, suffered hearing loss in connection with their
employment. Under the terms of the settlement, which is still subject to Court
approval, the claimants will be allowed claims totaling $15.8. As such, the
Company recorded a $15.8 charge (in Other operating charges (benefits), net) in
the fourth quarter of 2003 and a corresponding obligation (included in
Liabilities subject to compromise -- see Note 1). However, no cash payments by
the Company are required in respect of these amounts. Rather the settlement
agreement contemplates that, at emergence, these claims will be transferred to a
separate trust along with certain rights against certain corresponding insurance
policies of the Company and that such insurance policies will be the sole source
of recourse to the claimants. While the Company believes that the insurance
policies are of value, no amounts have been reflected in the Company's financial
statements at June 30, 2004 in respect of such policies as the Company could not
with the level of certainty necessary determine the amount of recoveries that
were probable.

Other Personal Injury Claims. The Company has received other personal
injury claims related to noise induced hearing loss (approximately 2,900 claims)
and exposure to silica and coal tar pitch volatiles (approximately 3,900 claims
and 300 claims, respectively). The Company believes that all such claims are
pre-petition claims that will be resolved by the Cases. The Company cannot
presently determine the impact or value of these claims. However, the Company
currently expects that all such claims will be transferred, along with certain
rights against certain corresponding insurance policies, to a separate trust
along with (similar to) the settled hearing loss cases discussed above, whether
or not such claims are settled prior to the Company's emergence from the Cases.

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

8. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

In conducting its business, KACC uses various instruments, including
forward contracts and options, to manage the risks arising from fluctuations in
aluminum prices, energy prices and exchange rates. KACC enters into hedging
transactions from time to time to limit its exposure resulting from (1) its
anticipated sales of alumina, primary aluminum, and fabricated aluminum
products, net of expected purchase costs for items that fluctuate with aluminum
prices, (2) the energy price risk from fluctuating prices for natural gas, fuel
oil and diesel oil used in its production process, and (3) foreign currency
requirements with respect to its cash commitments with foreign subsidiaries and
affiliates. As KACC's hedging activities are generally designed to lock-in a
specified price or range of prices, gains or losses on the derivative contracts
utilized in the hedging activities generally offset at least a portion of any
losses or gains, respectively, on the transactions being hedged.

35

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

Assuming that the Company's interests in QAL, Gramercy/KJBC, and Valco are
sold (and that Anglesey remains a part of the emerging entity), the Company
would no longer be a net seller of alumina and aluminum. Rather, net sales of
primary aluminum by Anglesey (reduced by the equivalent primary aluminum impact
of alumina requirements) would offset a portion of the primary aluminum
requirements of the fabricated products business. As such, the emerging entity
would be a net consumer of primary aluminum. However, the Company's pricing of
fabricated aluminum products is generally intended to lock-in a conversion
margin (representing the value added from the fabrication process(es)) and to
pass metal price risk on to its customers. The fabricated aluminum products
business does, however, from time to time enter into fixed price arrangements
(that include the primary aluminum price component). In such instances, the
Company may use third party hedging instruments to eliminate price exposure or
may consider such fixed price arrangements as a notional (internal) hedge of
primary aluminum to be produced at Anglesey. At June 30, 2004, the fabricated
products business held contracts for the delivery of fabricated aluminum
products that have the effect of fixing or capping the metal price component of
those contracts during the second half of 2004 and for the period 2005 -- 2008
totaling approximately (in 000 pounds of primary aluminum): 2004: 66,000, 2005:
59,000, 2006: 35,000, 2007: 34,000, and 2008: 10,000.

The following table summarizes KACC's material derivative positions at June
30, 2004.

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

* All references to tons in this report refer to metric tons of 2,204.6
pounds.

(a) The percentage hedged will depend on when and if the possible dispositions
of the Company's interest in and related to QAL, and KJBC actually occur.

(b) As a result of the Company's physical supply agreement, its exposure to
increases in natural gas prices has been substantially limited for July 2004
and August 2004.

The Company anticipates that, subject to prevailing economic conditions, it
may enter into additional hedging transactions with respect to primary aluminum
prices, natural gas and fuel oil prices and foreign currency values to protect
the interests of its constituents. However, no assurance can be given as to when
or if the Company will enter into such additional hedging activities.

As of June 30, 2004, KACC had sold forward a vast majority of the alumina
available to it in excess of its projected internal smelting requirements for
the remainder of 2004 and for 2005 and 2006 at prices indexed to future prices
of primary aluminum. The Company anticipates that such contracts will be
sold/transferred or otherwise mitigated as a part of the ongoing commodity asset
disposition process. However, no assurance can be provided in this respect.

9. OTHER OPERATING CHARGES (BENEFITS), NET AND OTHER INCOME (EXPENSE)

Other Operating (Charges) Benefits, Net. For the six month period ended
June 30, 2004, the primary components of Other operating (charges) benefits, net
were an impairment charge totaling $33.0 in respect of the write-down of KACC's
interest in and related to Valco (property, plant and equipment of $31.8 and
36

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

alumina inventories of $1.2 -- see Notes 2 and 4 -- Primary Aluminum Business
Unit) and a $1.1 gain related to a cash settlement received in respect of
certain alumina contract claims that the Company had against a Bauxite and
alumina business unit customer. Total proceeds from the settlement were
approximately $1.6, but were offset by $.5 of related expenses.

For the six month period ended June 30, 2003, the primary component of
Other operating (charges) benefits, net was a pre-tax gain of approximately $9.5
from the sale of the Tacoma facility (see Note 4).

Other Income (Expense). Other income (expense) for the quarter and six
month periods ended June 30, 2004 includes a gain of approximately $6.3 which
resulted from the settlement of outstanding obligations of a former affiliate
offset, in part, by a $1.4 adjustment to the environmental liabilities (see Note
7). Other income (expense) for the six month period ended June 30, 2003 included
approximately $1.7 of adverse foreign currency exchange impacts associated with
a foreign tax settlement.

10. OPERATING SEGMENT INFORMATION

The Company has historically used a portion of its bauxite and alumina
production for additional processing at its downstream facilities. Transfers
between business units are made at estimated market prices. The accounting
policies of the segments are the same as those described in Note 2 of Notes to
Consolidated Financial Statements in the Company's Form 10-K for the year ended
December 31, 2003. Business unit results are evaluated internally by management
before any allocation of corporate overhead and without any charge for income
taxes or interest expense. See Note 16 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2003.

As a result of the completed sales of the Company's interests in and
related to Alpart and the Mead Facility, the balances and results of operations
in respect of such assets/interests are now considered discontinued operations
(see Note 2). The presentation below restates the Bauxite and Alumina and
Primary Aluminum segments related amounts for such reclassifications. A
different presentation is provided in the Selected Operational and Financial
Information table in Management's Discussion and Analysis of Financial Condition
and Results of Operations which shows the "gross" amounts before the
discontinued operations'

37

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

reclassification and the amounts of the discontinued operations'
reclassification. Financial information by operating segment for the quarter and
six month periods ended June 30, 2004 and 2003 is as follows:

38

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

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

(a) Depreciation and amortization expense excludes depreciation and
amortization expense of discontinued operations (related to Alpart)
reported separately of $4.4 and $4.0 for the quarters ended June 30, 2004
and 2003, respectively, and $8.8 and $8.1 for the six month periods ended
June 30, 2004 and 2003, respectively.

(b) Discontinued operations did not pay any income taxes during the quarter and
six month periods ended June 30, 2004 and 2003.

The decline in 2004 depreciation and amortization expense in the Bauxite
and Alumina segment is primarily the result of the significant impairment charge
of Gramercy/KJBC recorded in the fourth quarter of 2003. The decline in the
year-to-date 2004 depreciation and amortization expense in the Primary Aluminum
segment is primarily due to the impairment charge of Valco recorded in the first
quarter of 2004.

The decrease in taxes paid in 2004 was primarily due to the payment in the
first quarter of 2003 of $22.0 of foreign income taxes related to prior years.

11. EMPLOYEE BENEFIT AND INCENTIVE PLANS

Historical Pension Plans. As more fully discussed in Note 9 of Notes to
Consolidated Financial Statements in the Company's Form 10-K for the year ended
December 31, 2003, in December 2003, the PBGC assumed responsibility for the
Company's Salaried Employees Retirement Plan. The PBGC's assumption of the
Salaried Employees Retirement Plan resulted in the Company recognizing a
non-cash pension charge of approximately $121.2 in the fourth quarter of 2003.
The Company has also previously disclosed that upon the termination of the
hourly pension plans, the Company expected that it would record similar charges
in the range of $130.0.

On July 28, 2004, the Company was informed by the PBGC that it was assuming
responsibility for the Company's Inactive Pension Plan, which covers certain
former hourly employees at locations that were sold or discontinued a number of
years ago, retroactive to June 30, 2004. The PBGC's assumption of the Inactive
Pension Plan was not unexpected as it was consistent with (i) negotiated
settlements previously reached in 2004 with union representatives to modify and
significantly reduce pension and post retirement obligations and (ii) a ruling
from the Court earlier in 2004 that the Inactive Pension Plan, as well as all of
the other material Company-sponsored pension plans, met the criteria for
distress termination of such plans. The PBGC has appealed some portions of that
ruling but not with respect to the Inactive Pension Plan. The Company and the
PBGC continue to be in discussions concerning the status of the other plans.

Although the PBGC statement indicates that the assumption of the Inactive
Pension Plan is retroactive to June 30, 2004, the Company has concluded that the
termination should be treated as a third quarter 2004

39

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

event given the timing of the notice and other factors. Accordingly, no
provision in respect of the termination of the Inactive Pension Plan is included
in the June 30, 2004 Statement of Consolidated Income (Loss). The Company
currently estimates that it will be required to record a charge in the third
quarter of 2004 in the range of $20.0 -$25.0 related to the Inactive Pension
Plan termination. Such change will be required to reflect certain net losses
that were previously deferred in accordance with GAAP. However, the Company does
not expect the termination of the Inactive Pension Plan to have a material
impact on the Company's consolidated balance sheet since the Company had
previously recorded a minimum pension liability, as also required under GAAP,
which amount was offset by a charge to Stockholders' equity.

If the remaining material hourly pension plans are ultimately terminated,
the Company expects that it would be required to record additional settlement
charges in connection with such plan terminations and that such amounts would
likely be in the range of $100.0 -- $110.0.

The amount of the charges recorded or expected to be recorded in respect of
pension plan terminations and the expected liability to the PBGC that will have
to be settled as a part of any plan of reorganization, have been determined by
the Company based on assumptions that are consistent with the GAAP criteria for
valuing ongoing plans. The Company believes this represents a reasonable
estimation methodology. The Company does, however, believe that there are
reasonable scenarios under which the final allowed claim amounts would be less
than that reflected in the financial statements. However, as previously
disclosed, the Company also expects that certain constituents will assert that
the value of the obligations is in excess of the amounts determined by the
Company. The amount of pension liability related to the terminated Salaried
Employee Retirement Plan and Inactive Pension Plan that was recorded in the
consolidated balance sheet at June 30, 2004 was approximately $230.0. This
compares to the claims filed by the PBGC in early 2003 in respect of these plans
of approximately $275.00. However, as the PBGC's claim was made at the beginning
of 2003, such amounts would have to be adjusted for activity in 2003 and the
first half of 2004 (return on assets, pension payments, accrued service, etc.)
for the amounts to be comparable to the amounts reflected in the June 30, 2004
financial statements.

The PBGC has not completed its review of the replacement pension plans or
the defined contribution plans.

New Accounting Pronouncement. Statement of Financial Accounting Standards
No. 132 (revised), Employers' Disclosure about Pensions and Other Postretirement
Benefits ("SFAS No. 132 (revised)") was issued and was effective in the fourth
quarter of 2003. SFAS No. 132 (revised) requires, beginning with the first
quarter of 2004, the disclosure of (1) the amount of the net periodic pension
and other postretirement benefits costs recognized during the quarter and
year-to-date periods and (2) the total amount of employers' contributions paid,
and expected to be paid during 2004.

40

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

COMPONENTS OF NET PERIODIC BENEFIT COSTS --

The following table presents the components of net periodic benefit costs
for the quarter and six month periods ended June 30, 2004 and 2003:

The periodic benefit costs for the quarter and six month periods ended June 30,
2003 associated with the Salaried Employees Retirement Plan, that was terminated
in December 2003, were approximately $5.7 and $11.4, respectively. The periodic
benefit costs associated with the Inactive Pension Plan that was assumed by the
PBGC as of June 30, 2004, as discussed above, were $.6 for the quarters ended
June 30, 2004 and 2003 and $1.1 for the six month periods ended June 30, 2004
and 2003.

As discussed more fully below, on June 1, 2004, the Court approved, subject
to certain conditions, the Company's termination of its postretirement medical
plan as of May 31, 2004 and approved the Company's plan to make advance payments
to one or more Voluntary Employee Beneficiary Associations (each a "VEBA"). In
the interim, pending the resolution of all contingencies in respect of the
termination of the existing postretirement medical benefit plan, the Company has
continued to accrue costs based on the existing plan and has treated the VEBA
contribution as a reduction of its liability under the plan.

See Note 9 of Notes to Consolidated Financial Statements in the Company's
Form 10-K for the year ended December 31, 2003 for key assumptions with respect
to the Company's pension plans and other postretirement benefit plans.

CASH FLOW --

Domestic Plans. As previously discussed, the Company since filing the
Chapter 11 proceedings has not made and does not intend to make any further
significant contributions to any of its domestic pension plans.

Upon emergence from Chapter 11 proceedings, the Company anticipates that it
will provide some form of yet to be determined defined contribution pension plan
in respect of its salaried employees. Any such plans ultimately adopted will be
subject to a number of approvals. The Company currently estimates that the total
annual cash cost of such plans would be less than $5.0 and, if approved, would
likely be required to be funded some time in 2005.

Pursuant to the terms of the USWA agreement, the Company will be required
to make annual contributions into the Steelworkers Pension Trust on the basis of
one dollar per USWA employee hour

41

KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

worked. In addition, the Company will institute a defined contribution pension
plan for active USWA employees. Company contributions to the plan will range
from eight hundred dollars to twenty-four hundred dollars per employee per year,
depending on age and years of service. The Company believes that similar defined
contribution pension plans will be established for non-USWA hourly employees
subject to collective bargaining agreements. The Company currently estimates
that contributions to all such plans will range from $3.0 to $6.0 per year.

As a replacement for the Company's current postretirement benefit plans,
the Company agreed to contribute certain amounts to one or more VEBA's. Such
contributions are to include:

- An amount not to exceed $36.0 and payable on emergence from the Chapter
11 proceedings so long as the Company's liquidity is at least $50.0 after
considering such payments. To the extent that less than the full $36.0 is
paid and the Company's interests in Anglesey are subsequently sold, a
portion of such sales proceeds, in certain circumstances, will be used to
pay the shortfall.

- On an annual basis, 10% of the first $20.0 of annual cash flow, as
defined, plus 20% of annual cash flow, as defined, in excess of $20.0.
Such annual payments shall not exceed $20.0 and will also be limited
(with no carryover to future years) to the extent that the payments do
not cause the Company's liquidity to be less than $50.0.

- Advances of $3.1 in June 2004 and $1.9 per month thereafter until the
Company emerges from the Cases. Any advances made pursuant to such
agreement will constitute a credit toward the $36.0 maximum contribution
due upon emergence.

On June 1, 2004, the Court approved an order making the agreements
regarding pension and postretirement medical benefits effective on June 1, 2004
notwithstanding that the Intercompany Agreement was not effective as of that
date. However, the Court order provided that if the Debtors and the UCC had not
signed the Intercompany Agreement and filed a motion seeking the approval of
such agreement by June 30, 2004, the UCC would have the right (but not the
requirement) at any time thereafter to direct the Debtors to terminate the USWA
agreement and other agreements to terminate postretirement medical benefits 60
days from the date of the UCC notice. Although the Company considers it
unlikely, if such notice were received and a new arrangement with the USWA, the
UCC or others were not reached during the 60 day period, the Debtors could have
to reinstate the postretirement medical plan. The Intercompany Agreement was not
signed on June 30, 2004. To date, no motion has been filed by the Company to
approve the Intercompany Agreement. However, the UCC has not exercised its right
to cause the Debtors to terminate the USWA agreement or other postretirement
medical benefit obligations.

Foreign Plans. Contributions to foreign pension plans were approximately
$9.8 and $9.0 during 2003 and 2002, respectively, and primarily related to the
Company's interests in commodity assets being considered for sale. As a result
of the potential sales of the Company's investments in such assets, future
contributions to foreign pension plans could decline to a nominal amount.

42

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

This section should be read in conjunction with the response to Part I,
Item 1, of this Report.

This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements appear in a number of places in this section (see, for
example, "Recent Events and Developments," "Results of Operations," and
"Liquidity and Capital Resources"). Such statements can be identified by the use
of forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans" or "anticipates" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in the
forward-looking statements as a result of various factors. These factors include
the effectiveness of management's strategies and decisions, general economic and
business conditions, developments in technology, new or modified statutory or
regulatory requirements, and changing prices and market conditions. This section
and Part I, Item 1. "Business -- Factors Affecting Future Performance" in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003, each
identify other factors that could cause actual results to vary. 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.

REORGANIZATION PROCEEDINGS

Kaiser Aluminum Corporation ("Kaiser", "KAC" or the "Company"), its wholly
owned subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), and 24 of
KACC's subsidiaries have filed separate voluntary petitions with United States
Bankruptcy Court for the District of Delaware (the "Court") for reorganization
under Chapter 11 of the United States Bankruptcy Code (the "Code"). The Company,
KACC and 15 of KACC's subsidiaries (the "Original Debtors") filed in the first
quarter of 2002 and nine additional KACC subsidiaries (the "Additional Debtors")
filed in the first quarter of 2003. The Original Debtors and Additional Debtors
are collectively referred to herein as the "Debtors" and the Chapter 11
proceedings of these entities are collectively referred to herein as the
"Cases." For purposes of this Report, the term "Filing Date" shall mean, with
respect to any particular Debtor, the date on which such Debtor filed its Case.
None of KACC's non-U.S. joint ventures are included in the Cases. The Cases are
being jointly administered. The Debtors are managing their businesses in the
ordinary course as debtors-in-possession subject to the control and
administration of the Court.

As provided by the Code, the Debtors had the exclusive right to propose a
plan of reorganization for 120 days following the initial Filing Date. The Court
has subsequently approved several extensions of the exclusivity period for all
Debtors. The Debtors have pending a motion to extend exclusivity through October
31, 2004 for all Debtors. By filing the motion to extend the exclusivity period,
the period is automatically extended until the August 23, 2004 Court hearing
date. The UCC and another party have filed objections to the Company's motion.
The objections are limited to the extension of exclusivity in respect of AJI,
KJC, KAAC, KBC AND KFC past September 30, 2004 at this time. Discussions with
the UCC and others in respect of the Company's motion are continuing. Additional
extensions are likely to be sought. However, no assurance can be given that the
existing or any such future extension requests will be granted by the Court. If
the Debtors fail to file a plan of reorganization during the exclusivity period,
or if such plan is not accepted by the requisite numbers of creditors and equity
holders entitled to vote on the plan, other parties in interest in the Cases may
be permitted to propose their own plan(s) of reorganization for the Debtors.

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

In working toward one or more plans of reorganization, the Debtors have
been, and continue to be, engaged in discussions with each of their key
constituencies, including the UCC, the asbestos claimants
43

committee (the "ACC") and a committee of salaried retirees (the "1114 Committee"
and, together with the UCC and the ACC, the "Committees"), the legal
representatives for potential future asbestos claimants (the "Asbestos Futures'
Representative") and potential future silica and coal tar pitch volatile
claimants (the "Silica/CTPV Futures' Representative" and, collectively with the
Asbestos Futures' Representative, the "Futures' Representatives"), the Pension
Benefit Guaranty Corporation (the "PBGC") and the appropriate union
representatives. The treatment of individual groups of creditors in any such
plan of reorganization cannot be determined definitively at this time. The
ultimate treatment of and recoveries to individual creditors is dependent on,
among other things, the total amount of claims against the Debtors as ultimately
determined by the Court, the priority of the applicable claims, the outcome of
ongoing discussions with the key constituencies, the amount of value available
for distribution in respect of claims and the completion of the plan
confirmation process consistent with applicable bankruptcy law.

The Debtors' objective is to achieve the highest possible recoveries for
all stakeholders, consistent with the Debtors' abilities to pay, and to continue
the operations of their businesses. However, there can be no assurance that the
Debtors will be able to attain these objectives or achieve a successful
reorganization. While valuation of the Debtors' assets and estimation of
pre-Filing Date claims at this stage of the Cases are subject to inherent
uncertainties, the Debtors currently believe that, in the aggregate, it is
likely that their liabilities will be found to significantly exceed the fair
value of their assets. Therefore, the Debtors currently believe that, with
limited exceptions, it is likely that substantially all pre-Filing Date claims
will be settled at less than 100% of their face value and the equity interests
of the Company's stockholders will be cancelled without consideration. Further,
the Debtors believe that it is likely that: (a) the claims of pre-petition
creditors that are given certain priorities by statute or have the benefit of
guarantees or other contractual or structural seniority will likely receive
substantially greater recoveries than pre-petition creditors that have no such
priorities or seniority; and (b) all pending and future asbestos-related
personal injury claims are likely to be resolved through the formation, pursuant
to a plan of reorganization, of a statutory trust to which all claims would be
directed by a channeling injunction that would permanently remove all asbestos
liability from the Debtors. A similar trust arrangement is anticipated in
respect of pending and future silica, hearing loss and coal tar pitch volatiles
personal injury claims. The trusts would be funded pursuant to statutory
requirements and agreements with representatives of the affected parties, using
the Debtors' insurance assets and certain other consideration that has yet to be
agreed. No assurances can be provided that the foregoing will ultimately be
included in any plan(s) of reorganization the Debtors may file. Further, while
the Debtors believe it is possible to successfully reorganize their operations
and emerge from Chapter 11 in 2005, their ability to do so is subject to
inherent market-related risks as well as successful negotiation and Court
approval for the treatment of creditors consistent with the applicable
bankruptcy law.

The Debtors' Cases are being administered on a consolidated basis. In fact,
however, there are separate cases for each Debtor or twenty-six Cases in total.
The impacts of the Cases and any plans of reorganization proposed for individual
Debtors will depend on each Debtor's specific circumstances and the differing
interests that creditors have in respect of such entities.

A substantial majority of the claims in the Cases are against KACC. These
include claims in respect of substantially all of the Debtors' debt obligations,
obligations in respect of pension and retiree medical benefits, asbestos-related
and personal injury claims, and known environmental obligations. As such, all of
these claimholders will have claims against KACC that, except as further
described below, will have to be satisfied by KACC's assets, which generally
include the alumina refinery located at Gramercy, Louisiana ("Gramercy"), the
interests in Anglesey Aluminium Limited ("Anglesey"), the interests in Volta
Aluminium Company Limited ("Valco") and the fabricated products plants (other
than the London, Ontario, Canada and Richmond, Virginia extrusion facilities,
which are owned by separate subsidiaries that are also Debtors). KACC's assets
also include certain intercompany receivables from certain of its Debtor
subsidiaries for funding provided to its joint venture affiliates.

In general, except as described below, there are a relatively modest number
or amount of third party trade and other claims against KACC's other Debtor
subsidiaries. Sixteen of the Debtors (including KAC) have no material ongoing
activities or operations and have no material assets or liabilities other than
intercompany items. The Company believes that it is likely that most, if not
all, of these entities will ultimately be merged
44

out of existence or dissolved in some manner. The remaining Debtor subsidiaries
(which include AJI, KJC, KAAC, Kaiser Aluminium International, Inc., ("KAII"),
Kaiser Aluminum & Chemical of Canada Limited ("KACOCL"), Kaiser Bauxite Company
("KBC"), Kaiser Bellwood Corporation ("Bellwood"), Kaiser Aluminum Technical
Services, Inc. ("KATSI") and Kaiser Financial Corporation ("KFC")) own certain
extrusion facilities or act largely as intermediaries between KACC and certain
of its other subsidiaries and joint venture affiliates or interact with third
parties on behalf of KACC and its joint venture affiliates. As such, the vast
majority of the pre-petition claims against such entities are related to
intercompany activities. However, certain of those entities holding claims
against KACC also have claims against certain KACC subsidiaries that own or
owned the Company's interests in joint venture affiliates and which represent a
significant portion of KACC's consolidated asset value. For example, noteholders
have claims against each of AJI and KJC, which through June 30, 2004 owned the
Company's interests in Aluminum Partners of Jamaica ("Alpart"), and KAAC, which
owns the Company's interests in Queensland Alumina Limited ("QAL"), as a result
of AJI, KJC and KAAC having been subsidiary guarantors of KACC's Senior Notes
and Senior Subordinated Notes. Additionally, the PBGC, pursuant to statute, has
joint and several claims against KACC and all entities which are 80% or more
owned by KACC (referred to as "Controlled Group Members"). Controlled Group
Members include each of AJI, KJC and KAAC, as well as all of the other Debtors.
The only other significant claims against AJI, KJC and KAAC are intercompany
claims related to funding provided to these entities. As such, it is likely that
the vast majority of any value realized in respect of the Company's interests in
Alpart and QAL, either from their disposition or realized upon emergence from
such operations, is likely to be for the benefit of the noteholders and the
PBGC.

As discussed above, the Company has stated that it expects that pre-Filing
Date claims that have the benefit of contractual or structural seniority will
receive substantially greater recoveries than pre-Filing Date claims that have
no such seniority. Accordingly, it has been the Company's expectation that the
holders of the KACC's 9 7/8% Senior Notes and 10 7/8% Senior Notes
(collectively, the "Senior Notes") will receive substantially greater recoveries
than the holders of claims in respect of the KACC's 12 3/4% Senior Subordinated
Notes (the "Sub Notes"). However, a group of holders (the "Sub Note Group") of
the Sub Notes has formed an unofficial committee to represent all holders of Sub
Notes and retained its own legal counsel. The Sub Note Group is asserting that
the Sub Note holders' claims against the Subsidiary Guarantors (such as AJI, KJC
and KAAC) may not, as a technical matter, be contractually subordinate to the
claims of holders of the Senior Notes. The effect of such position, if
ultimately sustained, would be that the holders of the Sub Notes would be on a
par with the holders of the Senior Notes in respect of proceeds from sales of
the Company's interests in and related to Alpart and QAL. This change would
materially increase the recoveries to the holders of the Sub Notes and
materially decrease the recoveries to the holders of the Senior Notes. The
Company believes that the intent of the indentures in respect of the Senior
Notes and the Sub Notes was to subordinate the claims of the Sub Note holders in
respect of the Subsidiary Guarantors. The Company cannot predict, however, the
ultimate resolution of the matters raised by the Sub Note Group, when any such
resolution will occur, or what impact such resolution may have on the Company,
the Cases or distributions to affected noteholders.

In order to resolve the question of what consideration from any sale or
other disposition of AJI, KJC and/or KAAC, or their respective assets, should be
for the benefit of KACC and its claimholders (in respect of KACC's intercompany
claims against such entities), an intercompany settlement agreement is being
negotiated between the UCC and the Company (the "Intercompany Agreement"). The
proposed Intercompany Agreement would also resolve substantially all other
pre-and post-petition intercompany claims between the Debtors. The proposed
Intercompany Agreement if finalized substantially in its current form, would
provide, among other things, for payments of cash by AJI, KJC and KAAC to KACC
of $90.0 million in respect of its intercompany claims against AJI, KJC and KAAC
plus any amounts up to $14.3 million plus accrued and unpaid interest and fees
paid by KACC to retire Alpart-related debt. Under the proposed Intercompany
Agreement, such amount would be increased or decreased for (1) any net cash
flows funded by or collected by KACC (a) related to the Company's interests in
and related to Alpart from January 1, 2004 through July 1, 2004 (estimated to be
between $20.0 million -- $30.0 million benefit received by the Company); (b)
related to the Company's interests in and related to QAL from July 1, 2004
through KAAC's emergence from Chapter 11; and (c) the sale of AJI's, KJC's and
KAAC's respective interests in and related
45

to Alpart and QAL and (2) any purchase price adjustments (other than incremental
amounts related to alumina sales contracts to be transferred) pursuant to KACC's
sale of its interests in Alpart. The proposed Intercompany Agreement calls for
such payments to become payable to KACC at the earlier of the sale of the
Company's interests in Alpart and QAL or the emergence of AJI, KJC and KAAC from
Chapter 11. The Company expects that all such payments under the proposed
Intercompany Agreement, other than $14.3 million that was paid to KACC in July
2004 upon the sale of Alpart and any amounts paid by KACC in respect of retiring
the Alpart-related debt and the $28.0 million that is to be paid once the
Intercompany Agreement is finalized, are likely to be held in escrow for the
benefit of KACC until KACC's emergence from the Cases. In the interim, KACC's
claims against these entities are secured by liens. The Intercompany Agreement
once finalized will be subject to Court approval. Discussions are ongoing
between the Company, the UCC, the ACC and the Futures' Representatives in an
attempt to make the terms of the proposed Intercompany Agreement acceptable to
each of the groups. However, no assurances can be provided as to when the
remaining issues can be resolved so that the Company can submit the Intercompany
Agreement to the Court.

At emergence from Chapter 11, KACC will have to pay or otherwise provide
for a material amount of claims. Such claims include accrued but unpaid
professional fees, priority tax and environmental claims, secured claims, and
certain post-petition obligations (collectively, "Exit Costs"). KACC currently
estimates that its Exit Costs will be in the range of $100.0 million to $120.0
million. KACC currently expects to fund such Exit Costs using the proceeds to be
received under the Intercompany Agreement together with existing cash resources
and available liquidity under an exit financing facility that will replace the
current Post-Petition Credit Agreement (see Note 5 of Notes to Interim
Consolidated Financial Statements). If payments under the Intercompany Agreement
together with liquidity available under an exit financing facility are not
sufficient to pay or otherwise provide for all Exit Costs, KACC and some or all
of its other Debtor subsidiaries will not be able to emerge from Chapter 11
unless and until sufficient funding can be obtained. Management believes it will
be able to successfully resolve any issues that may arise in respect of the
Intercompany Agreement or be able to negotiate a reasonable alternative.
However, no assurances can be given in this regard.

The Company expects that, when the Debtors ultimately file a plan or plans
of reorganization, it is likely to reflect the Company's strategic vision for
emergence from Chapter 11: (a) a standalone going concern with manageable
leverage and financial flexibility, improved cost structure and competitive
strength; (b) a company positioned to execute its long-standing vision of market
leadership and growth in fabricated products; (c) a company that delivers a
broad product offering and leadership in service and quality for its customers
and distributors; and (d) a company with continued ownership of those commodity
assets that have the potential to generate significant cash at steady-state
metal prices and/or which provide a strategic hedge against the fabricated
products business' needs for primary aluminum. While the Company intends to
continue to pursue a standalone fabricated products company emergence strategy,
from time to time the Debtors may also evaluate other reorganization strategies,
consistent with the Debtors' responsibility to maximize the recoveries for its
stakeholders.

The Company has previously reported that it has been in discussions with
the PBGC regarding the termination of certain of the hourly pension plans. In
connection with these discussions, the PBGC has raised issues regarding certain
of the follow-on pension plans that were proposed by the Company to replace the
USWA pension plan and certain smaller Kaiser sponsored plans as well as to the
appropriate amount of the PBGC's claim in respect of these plans. These issue
have, over the last two months, impeded the Company's ability to complete the
Intercompany Agreement (in its present form) and therefore delayed the Company's
reorganization efforts. While the Court previously ruled that the requirements
for the distress termination of these plans has been met, the PBGC retained its
regulatory right to review and approve any replacement pension plans that might
be adopted. The PBGC and the Company have been engaged in discussions regarding
the terms of such follow-on plans including in particular, the USWA pension
plan. If the PBGC, the Company and the affected unions cannot reach some
mutually acceptable resolution with respect to the distress termination and any
required follow-on plan, the Company would have to either formally renegotiate
the agreements to terminate the existing retiree medical benefits and pension
plans or litigate unresolved issues with either the union representatives or the
PBGC or both. There can be no assurances that the Company will be able to
successfully negotiate a settlement with the PBGC, or successfully negotiate and

46

obtain approval for a revised retiree medical benefit and pension termination
agreement with the unions, or prevail in any potential litigation against the
PBGC or the unions. Even if the Company is successful in respect of the
foregoing, it is possible that pursuit of any of the stated alternatives could
further delay the Company's emergence from the Cases.

The Company had previously disclosed that it was possible that it could
emerge from the Cases as early as late in the third quarter of 2004. However,
given, among other things, the longer than expected negotiations in respect of
the Intercompany Agreement and the fact that the commodity asset sale process
has been taking longer than previously expected, the Company now believes that
it is not likely that it will emerge from the Cases until sometime in the first
half of 2005. The Company continues to push for an aggressive pace that would
allow it to file a Disclosure Statement proposing a plan or plans of
reorganization before the end of 2004. However, the Debtors' ability to do so
and to ultimately emerge from the Cases is subject to the confirmation of a plan
of reorganization in accordance with the applicable bankruptcy law and,
accordingly, no assurances can be given as to whether or when any plan or plans
of reorganization will ultimately be filed or confirmed.

In light of the Company's stated strategy and to further the Debtors'
ultimate planned emergence from Chapter 11, the Debtors, with the approval of
the Company's Board of Directors and in consultation with the UCC, the ACC and
the Futures' Representatives, began exploring the possible sale of one or more
of their commodities assets during the third quarter of 2003. In particular, the
Debtors began exploring the possible sale of their interests in and related to:
(a) Alpart, (b) Anglesey, and (c) KACC's Gramercy alumina refinery and Kaiser
Jamaican Bauxite Company ("KJBC"). The possible sale of the Debtors' interests
in respect of Gramercy and KJBC was explored jointly given their significant
integration. In March 2004, the Company announced that it also began the process
of exploring the sale of its 20% interest in and related to QAL. See Note 4 of
Notes to Interim Consolidated Financial Statements for a discussion of the
developments on each of these possible transactions.

In exploring the sale of its interests in and related to the commodity
assets, the Debtors, through their advisors, surveyed the potential market and
initiated discussions with numerous parties believed to have an interest in such
assets. In addition, other parties contacted the Debtors and/or their investment
advisors to express an interest in purchasing the assets. The Debtors provided
(subject to confidentiality agreements) information regarding the applicable
interests to these parties, each of which was asked to submit a non-binding
expression of interest regarding the individual assets. After receiving these
initial expressions of interest from potential purchasers, the Debtors
determined which of the expressions of interest received represented reasonable
indications of value ("Qualified Bids"). Potential bidders ("Qualified Bidders")
that submitted Qualified Bids were then permitted to conduct due diligence in
respect of the assets for which they submitted a Qualified Bid and to submit
definitive proposals. The Debtors reviewed the definitive proposals submitted
and, in consultation with the UCC, the ACC and the Futures' Representatives, and
other key constituencies, determined with which Qualified Bidders the Debtors
would pursue further negotiations.

As previously disclosed, while the Company had stated that it was
considering the possibility of disposing of one or more of its commodity
facilities, through the third quarter of 2003, the Company still considered all
of its commodity assets as "held for use," as no definite decisions had been
made regarding the disposition of such assets. However, based on additional
negotiations with prospective buyers and discussions with key constituents, the
Company concluded that dispositions of Alpart, Valco and Gramercy/KJBC were
likely and, therefore, that recoverability should be evaluated differently at
December 31, 2003 and subsequent periods. The change in evaluation methodology
was required because, under GAAP, assets to be held and used are evaluated for
recoverability differently than assets to be sold or disposed of. Assets to be
held and used are evaluated based on their expected undiscounted future net cash
flows. So long as the Company reasonably expects that such undiscounted future
net cash flows for each asset will exceed the recorded value of the asset being
evaluated, no impairment is required. However, if plans to sell or dispose of an
asset or group of assets meet a number of specific criteria, then, under GAAP,
such assets should be considered held for sale/ disposition and their
recoverability should be evaluated, for each asset, based on expected
consideration to be received upon disposition. Sales or dispositions at a
particular time will be affected by, among other things, the existing industry
and general economic circumstances as well as the Company's own circumstances,
including
47

whether or not assets will (or must) be sold on an accelerated or more extended
timetable. Such circumstances may cause the expected value in a sale or
disposition scenario to differ materially from the realizable value over the
normal operating life of assets, which would likely be evaluated on long-term
industry trends.

The Company ultimately concluded that no impairment of its interest in and
related to Alpart was appropriate based on its updated expectations that the
sale of the Company's interests in Alpart would result in a pre-tax gain (see
Note 4 of Notes to Interim Consolidated Financial Statements). By contrast,
based on the Company reaching a financial agreement in early May 2004 with the
Government of Ghana ("GoG") in respect of the sale of its interests in and
related to Valco, the Company determined that it should impair its interests in
and related to Valco to the amount of the expected proceeds to be received from
the GoG. As a result, as of in the first quarter of 2004, KACC recorded a
non-cash charge of approximately $33.0 million (see Note 4 of Notes to Interim
Consolidated Financial Statements). Additionally, in evaluating the
recoverability of the Company's basis in Gramercy/KJBC, the Company recorded an
impairment charge of approximately $368.0 million in fourth quarter of 2003 as
there were no offers that were anywhere near the carrying value of the assets
(see Note 4 of Notes to Interim Consolidated Financial Statements for a
discussion of the impairment charge). The actual amount of gain or loss if and
when the potential sales of Valco and Gramercy/KJBC are consummated may differ
from the foregoing amounts as a result of closing adjustments, changes in
economic circumstances and other matters.

RECENT EVENTS AND DEVELOPMENTS

Liquidity/Negative Cash Flow. Cash and cash equivalents decreased by $9.1
million during the first six months of 2004. The net decrease resulted from cash
used by operating activities ($17.2 million) and financing activities ($.2
million) offset by net cash generated from investing activities of $8.3 million.
The cash used by operating activities during the first six months of 2004 was
primarily the result of increases in working capital requirements (primarily
inventory) associated with improving demand for fabricated aluminum products and
primary aluminum price increases. These increases were offset by cash generated
from operating results including operating results of discontinued operations
(see Results of Operations and Liquidity and Capital Resources for further
discussions).

During the first six months of 2003, cash and cash equivalents increased
$5.2 million. The net increase resulted from cash generated from investing
activities of $55.9 million (see Note 4 of Notes to Interim Consolidated
Financial Statements) offset by cash used in operating activities ($49.3
million) and financing activities ($1.4 million). The $49.3 million of cash and
cash equivalents used by operating activities included the following significant
items: (a) asbestos-related insurance recoveries of $15.1 million, (b) a foreign
income tax payment related to prior periods of $22.0 million and (c) end of
service benefit payments totaling approximately $12.8 million in connection with
Valco potline curtailments. The balance of the cash and cash equivalents used in
operating activities in 2003 (approximately $29.6 million) resulted from a
combination of adverse market factors in the business segments in which the
Company operates including (a) primary aluminum prices that were below long term
averages, (b) a weak demand for fabricated metal products, particularly
aerospace products, and (c) higher than average power, fuel oil and natural gas
prices.

At July 31, 2004, the Company had cash and cash equivalents of
approximately $45.0 million and availability under the DIP Facility's borrowing
base of approximately $145.7 million. At July 31, 2004, there were no
outstanding borrowings under the revolving credit facility and there were
outstanding letters of credit of approximately $45.7 million.

As discussed fully in Note 5 of Notes to Interim Consolidated Financial
Statements, the Company has been working for some time on an amendment to the
DIP Facility that would among, other things: (1) reset the financial covenant
based on more recent forecasts; (2) authorize the sale of the Company's
interests in and related to Alpart, QAL, Gramercy/KJBC and Valco within certain
parameters, and (3) reduce the availability of the fixed asset subcomponent to a
level that, by emergence will be based on advances solely in respect of
machinery and equipment at the fabricated products facilities. While the effect
of the amendment will be to reduce overall availability, assuming the previously
mentioned commodity assets are sold, the

48

Company currently anticipates that once amended, availability under the DIP
Facility will likely be in the $50.0 million -- $100.0 million range and that
amount should be adequate to support the Company's liquidity requirements
through the remainder of the Cases. This belief is based on the fact that it was
the commodities' assets and operations that subjected the Company to the most
variability and exposure both from a price risk basis as well as from an
operating perspective. While the Company anticipates that it will ultimately be
successful in completing an amendment to the DIP Facility along the lines
outlined above, the Company cannot currently predict when such amendment will be
completed as the amendment likely will not be completed until issues in respect
of the Intercompany Agreement that affect the DIP Facility can be finalized.
Until such amendment is completed, the Company is likely to continue to seek
limited consents and waivers as and when necessary to maintain compliance with
the terms of the DIP Facility. However, no assurances can be provided that
any/all such future limited consent and waiver requests will ultimately be
approved by the DIP lenders or the Court.

Pending completion of the DIP Facility amendment, the Company has completed
a series of limited consents and waivers, the combined impact of which has been,
subject to certain conditions, to (1) approve the sale of the Company's
interests in and related to Alpart, Gramercy and KJBC, (2) maintain liquidity
and (3) extend a waiver granted in respect of a financial covenant through
September 30, 2004.

The DIP Facility is currently scheduled to expire in February 2005. As
discussed in Note 1 of Notes to Interim Consolidated Financial Statements, the
Company currently believes it is unlikely that it will emerge from the Cases
until sometime in the first half of 2005. As such, it may be necessary for the
Company to extend the DIP Facility or make alternative financing arrangements.
While the Company believes that if necessary, it would be successful in
negotiating an extension to the DIP Facility or adequate alternative financing
arrangements, no assurances can be given in this regard.

Valco. In May 2003, Valco's operations were completely curtailed. During
2003, the Company and Valco met regularly with the GoG and the Volta River
Authority ("VRA") in respect of the current and future power situation and other
matters including appropriate compensation for power curtailments. The
continuation of the negotiations and arbitration ultimately led to a Memorandum
of Understanding ("MOU") in December 2003, whereby the Company agreed to sell
its 90% interest in and related to Valco to the GoG for consideration of between
$35.0 million and $100.0 million, plus assumption of all of the Company's
related liabilities and obligations. The MOU contemplated that the transaction
would close by April 30, 2004. However, as of April 30, 2004, the GoG had only
paid $5.0 million of $18.0 million that was due to Valco under the MOU and a
$7.0 million escrow payment required by the MOU to the Company had not been
funded. The Company met with the GoG in early May 2004 and reached a new
financial agreement. Under the revised financial terms, $13.0 million was paid
into escrow by the GoG. The $13.0 million amount is to be paid to the Company as
full and final consideration for the transaction at closing. The Company also
agreed to fund certain end of service benefits of Valco employees (estimated to
be approximately $9.0 million) which the GoG was to assume under the original
MOU. The Company and the GoG are currently in the process of finalizing a
purchase agreement for the sale of the Company's interests in and related to
Valco. The sale is expected to close in the latter part of the third quarter or
the fourth quarter of 2004, but is subject to a number of conditions including
approval by the Ghanaian Parliament, negotiation and signing of a definitive
agreement, and Court approval. No assurance can be made as to when or if the
transaction will close under the revised terms. However, as the revised purchase
price is well below the Company's recorded value for Valco and given the
increased likelihood of a closing and the payment by the GoG of the escrow
amount, the Company determined that it should impair its interests in and
related to Valco at March 31, 2004 to the amount of the expected proceeds. As
such, KACC recorded a non-cash impairment charge in the first quarter of 2004 of
approximately $33.0 million (included in Other operating charges (benefits),
net -- see Note 9 of Notes to Interim Consolidated Financial Statements). The
actual amount of loss if and when the potential sale of the Company's interests
in and related to Valco is consummated may differ from the above amount as a
result of closing adjustments, changes in economic circumstances and other
matters.

Under the terms of the MOU, upon the execution of the MOU and the payout by
the GoG of the $13.0 million into escrow, the parties suspended the arbitration
process. Upon the closing of the transaction,

49

the parties will dismiss the arbitration with prejudice. If the transaction does
not close, the arbitration will resume.

Benefit (Legacy) Cost Matters. The Company has previously disclosed since
the Filing Date that pension and retiree medical obligations were significant
factors that would have to be addressed during the reorganization process.

As more fully discussed in Note 9 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2003, in
December 2003 the PBGC assumed responsibility for the Company's Salaried
Employees Retirement Plan. The PBGC's assumption of the Salaried Employees
Retirement Plan resulted in the Company recognizing a charge of approximately
$121.2 million in the fourth quarter of 2003. The Company has also previously
disclosed that upon the termination of the hourly pension plans, the Company
expected that it would record similar charges in the range of $130.0 million.

On July 28, 2004, the Company was informed by the PBGC that it was assuming
responsibility for the Company's Inactive Pension Plan, which covers certain
former hourly employees at locations that were sold or discontinued a number of
years ago, retroactive to June 30, 2004. The PBGC's assumption of the Inactive
Pension Plan was not unexpected as it was consistent with (i) negotiated
settlements previously reached in 2004 with union representatives to modify and
significantly reduce pension and post retirement obligations and (ii) a ruling
from the Court earlier in 2004 that the Inactive Pension Plan, as well as all of
the other material Company-sponsored hourly pension plans, met the criteria for
distress termination of such plans. The PBGC has appealed some portions of the
ruling but not with respect to the Inactive Pension Plan. The Company and the
PBGC continue to be in discussions concerning the status of the other plans.

Although the PBGC statement indicates that the assumption of the Inactive
Pension Plan is retroactive to June 30, 2004, the Company has concluded that the
termination should be treated as a third quarter 2004 event given the timing of
the notice and other factors. Accordingly, no provision in respect of the
termination of the Inactive Pension Plan is included in the June 30, 2004
Statement of Consolidated Income (Loss). The Company currently estimates that it
will be required to record a charge in the third quarter of 2004 in the range of
$20.0 million -$25.0 million related to the Inactive Pension Plan termination.
Such charge will be required to reflect certain net losses that were previously
deferred in accordance with GAAP. However, the Company does not expect the
termination of the Inactive Pension Plan to have a material impact on the
Company's consolidated balance sheet since the Company had previously recorded a
minimum pension liability, as also required under GAAP, which amount was offset
by a charge to Stockholders' equity.

If the remaining material hourly pension plans are ultimately terminated,
the Company expects that it would be required to record additional settlement
charges in connection with such plan terminations and that such amounts would
likely be in the range of $100.0 million -- $110.0 million.

The amount of the charges recorded or expected to be recorded in respect of
pension plan terminations and the expected liability to the PBGC that will have
to be settled as a part of any plan of reorganization, have been determined by
the Company based on assumptions that are consistent with the GAAP criteria for
valuing ongoing plans. The Company believes this represents a reasonable
estimation methodology. The Company does, however, believe that there are
reasonable scenarios under which the final allowed claim amounts would be less
than that reflected in the financial statements. However, as previously
disclosed, the Company also expects that certain constituents will assert that
the value of the obligations is in excess of the amounts determined by the
Company. The amount of pension liability related to the terminated Salaried
Employee Retirement Plan and Inactive Pension Plan that was recorded in the
consolidated balance sheet at June 30, 2004 was approximately $229.9 million.
This compares to the claims filed by the PBGC in early 2003 in respect of these
plans of approximately $275.0 million. However, as the PBGC's claim was made at
the beginning of 2003, such amounts would have to be adjusted for activity in
2003 and the first half of 2004 (return on assets, pension payments, accrued
service, etc.) for the amounts to be comparable to the amounts reflected in the
June 30, 2004 financial statements.

In January 2004, the Company filed motions with the Court to terminate or
substantially modify postretirement medical obligations for both salaried and
certain hourly employees and for a distress

50

termination of substantially all domestic hourly pension plans. The Company
subsequently reached agreements with the 1114 Committee and union
representatives that represent the vast majority of the Company's hourly
employees. The agreements provide for the termination of existing salaried and
hourly postretirement benefit plans, such as medical, and the termination of
substantially all existing hourly pension plans. Under the agreements, salaried
and hourly retirees would be provided an opportunity for continued medical
coverage through COBRA or a proposed Voluntary Employee Beneficiary Association
(a "VEBA") and active hourly employees would be provided with an opportunity to
participate in one or more replacement pension plans and/or defined contribution
plans. The agreements with the 1114 Committee and certain of the unions have
been approved by the Court, but are subject to certain conditions, including
Court approval of the Intercompany Agreement in a form acceptable to the Debtors
and the UCC.

On June 1, 2004, the Court approved an order making the agreements
regarding pension and postretirement medical benefits effective on June 1, 2004
notwithstanding that the Intercompany Agreement was not effective as of that
date. However, the Court order provided that if Debtor and the UCC had not
signed the Intercompany Agreement and filed a motion seeking the approval of
such agreement by June 30, 2004, the UCC would have the right (but not the
requirement) at any time thereafter to direct the Debtors to terminate the USWA
agreement and other agreements to terminate postretirement medical benefits 60
days from the date of the UCC notice. Although the Company considers it
unlikely, if such notice were received and a new arrangement with the USWA, the
UCC and others were not reached during the 60 day period, the Debtors could have
to reinstate the postretirement medical plan. The Intercompany Agreement was not
signed on June 30, 2004. To date, no motion has been filed by the Company to
approve the Intercompany Agreement. However, the UCC has not exercised its right
to cause the Debtors to terminate the USWA agreement or other postretirement
medical benefit obligations.

As a replacement for the Company's current postretirement benefit plans,
the Company agreed to contribute certain amounts to one or more VEBAs. Such
contributions are to include:

- An amount not to exceed $36.0 million and payable on emergence from the
Chapter 11 proceedings so long as the Company's liquidity is at least
$50.0 million after considering such payments. To the extent that less
than the full $36.0 million is paid and the Company's interests in
Anglesey are subsequently sold, a portion of such sales proceeds, in
certain circumstances, will be used to pay the shortfall.

- On an annual basis, 10% of the first $20.0 million of annual cash flow,
as defined, plus 20% of annual cash flow, as defined, in excess of $20.0
million. Such annual payments shall not exceed $20.0 million and will
also be limited (with no carryover to future years) to the extent that
the payments do not cause the Company's liquidity to be less than $50.0
million.

- Advances of $3.1 million in June 2004 and $1.9 million per month
thereafter until the Company emerges from the Cases. Any advances made
pursuant to such agreement will constitute a credit toward the $36.0
million maximum contribution due upon emergence.

The Company has previously reported that it has been in discussions with
the PBGC regarding the termination of certain of the hourly pension plans. In
connection with these discussions, the PBGC has raised issues regarding certain
of the follow-on pension plans that were proposed by the Company to replace the
USWA pension plan and certain smaller Kaiser sponsored plans as well as to the
appropriate amount of the PBGC's claim in respect of these plans. These issues
have, over the last two months, impeded the Company's ability to complete the
Intercompany Agreement (in its present form) and therefore delayed the Company's
reorganization efforts. While the Court previously ruled that the requirements
for the distress termination of these plans has been met, the PBGC retained its
regulatory right to review and approve any follow-on pension plans that might be
adopted. The PBGC and the Company have been engaged in discussions regarding the
terms of such follow-on plans, including in particular, the USWA pension plan.
If the PBGC, the Company and the affected unions cannot reach some mutually
acceptable resolution with respect to the distress termination and any required
follow-on plan, the Company would have to either formally renegotiate the
agreements to terminate the existing retiree medical benefits and pension plans
or litigate unresolved issues with either the union representatives or the PBGC
or both. There can be no assurances that the Company will be able to
successfully negotiate a settlement with the PBGC, or successfully negotiate and
obtain approval for
51

a revised retirees medical benefit and pension termination agreement with the
unions or prevail in any potential litigation against the PBGC or the unions.
Even if the Company is successful in respect of the foregoing, it is possible
that pursuit of any of the stated alternatives could further delay the Company's
emergence from the Cases.

Environmental Matters. The Company has previously disclosed that it is
possible that its assessment of environmental accruals could increase because it
may be in the interests of all stakeholders to agree to increased amounts to,
among other things, achieve a claim treatment that is favorable and to expedite
the reorganization process. The September 2003 multi-site settlement is one
example of such a situation (see Note 7 of Notes to Interim Financial Statement
for a discussion of the multi-site settlement). The Company is currently
involved in negotiations with a number of parties that, if agreements are
ultimately reached with the parties and approved by the Court, could settle or
otherwise resolve a substantial portion of the environmental claims currently
considered not subject to compromise. As a part of such agreements, it is
possible that the Company may have to pay amounts in the range of $25.0
million -- $30.0 million during the fourth quarter of 2004 or early 2005. At
June 30, 2004, the Company has accrued liabilities (included in Long-term
liabilities) of approximately $27.0 million in respect of these properties.
Because the agreements have not been approved by the Court and are still subject
to material modification, the Company does not believe that such settlements
should be considered "probable" (which is the criteria for recognition under
GAAP). The amount ultimately agreed in respect of these transactions may differ
from the amount currently contemplated and the amounts accrued. Such amounts
could be significant. Any costs paid in respect of these potential settlements
prior to emergence would reduce the Exit Costs that the Company would likely
have to pay at emergence (See Note 1 of Notes to Interim Consolidated Financials
Statements).

RESULTS OF OPERATIONS

As an integrated aluminum producer, the Company has historically used a
portion of its bauxite, alumina, and primary aluminum production for additional
processing at certain of its downstream facilities. However, as previously
disclosed, as a part of a plan of reorganization, the Company expects that it
will emerge from its Chapter 11 proceedings primarily as a fabricated products
company. Intersegment transfers are valued at estimated market prices. The
following table provides selected operational and financial information on a
consolidated basis with respect to the Company for the quarter and six month
periods ended June 30, 2004 and 2003. The following data should be read in
conjunction with the Company's interim consolidated financial statements and the
notes thereto contained elsewhere herein. See Note 16 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December 31,
2003, for further information regarding segments.

Interim results are not necessarily indicative of those for a full year.
Average realized prices for the Company's Fabricated products segment are not
presented in the following table as such prices are subject to fluctuations due
to changes in product mix.

52

SELECTED OPERATIONAL AND FINANCIAL INFORMATION

OVERVIEW

The Company's operating results are sensitive to changes in 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 KACC's
hedging strategies. Primary aluminum prices have historically been subject to
significant cyclical price fluctuations. See Notes 2 and 8 of Notes to Interim
Consolidated Financial Statements for a discussion of KACC'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 the Company'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 what the Company sometimes refers
to as the "upstream" products: alumina and primary aluminum.

During the six months ended June 30, 2003, the average London Metal
Exchange transaction price ("LME price") per pound of primary aluminum was $.63
per pound. During the six months ended June 30, 2004, the average LME price was
$.75 per pound. The average LME price for primary aluminum for the week ended
July 30, 2004 was $.76 per pound.

QUARTER AND SIX MONTHS ENDED JUNE 30, 2004, COMPARED TO QUARTER AND SIX MONTHS
ENDED JUNE 30, 2003

SUMMARY

The Company reported net income of $24.2 million, or $.30 of basic income
per common share, for the quarter ended June 30, 2004, compared to a net loss of
$61.4 million, or $.76 of basic loss per common share, for the same period in
2003. For the six months ended June 30, 2004, the Company reported a net loss of
$39.8 million, or $.50 of basic loss per common share, compared to a net loss of
$126.5 million or $1.58 of basic loss per common share, for the same period in
2003. However, loss per common share information may not be meaningful, because
as a part of a plan of reorganization, it is likely that the equity interests of
the Company's existing stockholders will be cancelled without consideration.

54

Net sales in the second quarter of 2004 totaled $345.1 million compared to
$296.0 million in the second quarter of 2003. Net sales for the six-month period
ended June 30, 2004, totaled $658.4 million compared to $574.9 million for the
six-month period ended June 30, 2003.

As discussed in Note 4 of Notes to Interim Consolidated Financial
Statements, the Company sold its interests in and related to Alpart as of July
1, 2004 and the Mead facility and related property in June 2004. In accordance
with Statement of Financial Accounting Standards No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"), the operating
results of Alpart and the Mead facility for the quarter and six month periods
ended June 30, 2004 and 2003 have been reported as discontinued operations in
the accompanying Statements of Consolidated Income (Loss). However, for purposes
of the following Bauxite and Alumina and Primary Aluminum segment discussions,
third party net sales of alumina, intersegment net sales of alumina and
operating income (loss) results include the operating activities Alpart and the
Mead facility.

Fabricated Products. Net sales of fabricated products increased by 30%
during the second quarter of 2004 as compared to the same period in 2003,
primarily due to a 19% increase in shipments and a 9% increase in average
realized prices. For the six-month period ended June 30, 2004, net sales of
fabricated products increased by approximately 26% as compared to the same
period in 2003, primarily due to a 20% increase in shipments and a 5% increase
in average realized prices. Current period shipments were higher than comparable
2003 periods' shipments as a result of improving demand for fabricated aluminum
products. The increases in the average realized prices reflects increased
product prices due to increases in primary aluminum prices and improving margins
offset, in part, by changes in the mix of products sold.

Segment operating results for the quarter and six month periods ended June
30, 2004, improved over the comparable periods in 2003 primarily due to the
improved market conditions and improved cost performance offset, in part, by
modestly increased natural gas prices.

Bauxite and Alumina. Third party net sales of alumina increased by 38%
during the second quarter of 2004, as compared to the same period in 2003,
primarily due to a 37% increase in third party average realized prices. For the
six month period ended June 30, 2004, third party net sales of alumina increased
by approximately 20% as compared to the same period in 2003, primarily due to a
27% increase in third party average realized prices offset by a 6% decrease in
third party shipments. Approximately $40 per ton of the increase in average
realized prices during the quarter and six month periods ended June 30, 2004 was
due to an increase in primary aluminum market prices to which the Company's
third-party alumina sales contracts are linked. The balance of the increases in
average realized prices was the result of a 35,000 ton spot sale at over $400
per ton in April 2004 and improved contract price terms associated with certain
alumina sales contract cancellations and renegotiations in connection with the
Company's reorganization efforts. However, most of the financial benefit
associated with the spot sale and the improved alumina contract terms are
attributable to production from the Company's interests in and related to
Alpart. Accordingly, most of such benefit is classified in the primary financial
statements as "discontinued operations". Also under the latest terms of the
Intercompany Agreement, all net cash flows from the operation of the Company's
interests in and related to Alpart from January 1, 2004 through July 1, 2004, is
to be for the benefit of those parties holding claims against AJI and KJC (e.g.
primarily the noteholders and the PBGC). As such, all of the financial benefits
collected by the Company in respect of these items will offset payments that are
otherwise payable to the Company under the Intercompany Agreement. Shipments in
the first six months of 2004 were lower than the comparable prior year period
due to normal fluctuations in the timing of shipments.

Intersegment net sales of alumina for the six month period ended June 30,
2004 decreased 51%, as compared to the same period in 2003 primarily as the
result of reduced shipments to the Primary aluminum business unit due to the
Valco potline curtailments in 2003.

Segment operating results for the quarter ended June 30, 2004 were
approximately $50.0 million better than the comparable period in 2003. The vast
majority of the improvement in the results was due to the improvement in third
party average realized prices discussed above. The segment also benefited by
lower depreciation expense (approximately $4.4 million) as a result of the
December year end 2003 impairment charges taken in respect of the Gramercy
facility and the Company's investment in KJBC. These benefits
55

were only partially offset by higher fuel oil and natural gas prices
(approximately $3.0 million) and adverse changes in the foreign exchange rate in
respect of the Company's interests in and related to QAL (approximately $2.0
million).

Segment operating results for the six month period ended June 30, 2004
improved by approximately $80.0 million compared to the same period in 2003. As
in the second quarter of 2004, the vast majority of the improvement was
attributable to the increase in average realized prices as well as lower
depreciation expense (approximately $9.8 million). For the year-to-date period
ended June 30, 2004, fuel oil and natural gas prices were roughly the same as
those experienced in 2003. Changes in the foreign exchange rates in respect of
the Company's interest in and related to QAL had an approximate $7.0 million
adverse impact on the year-to-date period as compared to the comparable period
in the prior year.

Primary Aluminum. Third party net sales of primary aluminum decreased 29%
for the second quarter of 2004 as compared to the same period in 2003 as a
result of an 42% decrease in third party shipments offset by a 22% increase in
third party average realized prices. For the six month period ended June 30,
2004, third party net sales decreased 19% as compared to the same period in 2003
as a result of a 32% decrease in third party shipments offset by a 21% increase
in third party average realized prices. The decreases in third party shipments
were primarily due to the curtailments in 2003 of the Valco potlines. The
increases in the average realized prices were primarily due to the increases in
primary aluminum market prices.

Segment operating results (before other operating charges, net) for the
quarter and six month periods ended June 30, 2004, were better than the
comparable periods in 2003. The primary reasons for the increases were (a) the
increase in average realized prices and (b) because operating results for 2003
included charges for end-of-service benefits at Valco associated with the
potline curtailments of approximately $3.8 million in the second quarter and
$8.1 million in the six month period.

Segment operating results for the six-month period ended June 30, 2004
(discussed above) excludes non-cash charges of approximately $33.0 million
resulting from the write-down of the Company's interests in and related to Valco
(which is included in Operating charges (benefits), net). Segment operating
results for the six month period ended June 30, 2003 excludes a $9.5 million
pre-tax gain on the sale of the Tacoma facility which is included in Other
operating charges (benefits), net.

Commodities Marketing. Net sales for this segment represent net
settlements with third-party brokers. Operating income represents the combined
effect of such net settlements and any premium costs associated with maturing
options. The minimum and (maximum) price of the hedges in any given period is
primarily the result of the timing of the execution of the hedges contract.

Segment operating results for the quarter and six month periods ended June
30, 2004, were worse than the comparable periods in 2003 primarily due to (a)
hedging net gains from first quarter 2002 that were being amortized over the
original hedging periods as the underlying purchases/sales occurred becoming
fully amortized by year end 2003 and (b) hedging premiums related to hedging
positions in respect of quarter and six month periods in 2004 being higher than
net hedging revenues realized.

Eliminations. Eliminations of Intersegment profit vary from period to
period depending on fluctuations in market prices as well as the amount and
timing of the affected segments' production and sales.

Corporate and Other. Corporate operating expenses represent corporate
general and administrative expenses which are not allocated to the Company's
business segments. Corporate operating expenses in the quarter and six month
periods in 2004 were lower than in the comparable periods in 2003 due to the
termination in December 2003 of the salaried employees retirement plan as well
as a reduction in payroll-related costs and various other overhead costs as a
result of cost reduction initiatives.

LIQUIDITY AND CAPITAL RESOURCES

As a result of the filing of the Cases, claims against the Debtors for
principal and accrued interest on secured and unsecured indebtedness existing on
the Filing Date are stayed while the Debtors continue business operations as
debtors-in-possession, subject to the control and supervision of the Court. See
Note 1 of

56

Notes to Interim Consolidated Financial Statements for additional discussion of
the Cases. At this time, it is not possible to predict the effect of the Cases
on the businesses of the Debtors.

Operating Activities. In the first six months of 2004, Fabricated products
operating activities provided $3.7 million of cash. This amount compares with
the first six months of 2003 when Fabricated products operating activities
provided $8.9 million of cash. The reduction in cash provided by Fabricated
products in 2004 was primarily due to increases in working capital associated
with improving demand for fabricated aluminum products offset by improved
operating results. Cash provided by Fabricated products operations in 2003 was
largely due to cost cutting initiatives which offset reduced product prices and
shipments. All of the foregoing exclude consideration of pension and retiree
cash payments made by the Company on behalf of current and former employees of
the Fabricated products facilities. Such amounts are part of the "legacy" costs
that the Company internally categorizes as a corporate cash outflow. As more
fully discussed in Benefit (Legacy) Cost Matters, the Company expects that
substantially all such benefits related to previously existing benefit plans are
likely to be cancelled as part of the reorganization process.

In the first six months of 2004, Commodities and Corporate operating
activities used $20.9 million of cash. This amount compares with the first six
months of 2003 when Commodities and Corporate operating activities used $38.5
million of cash, which amount includes the following significant items: (a)
asbestos-related insurance recoveries of $15.1 million; (b) a foreign income tax
payment related to prior periods of $22.0 million; and (c) end of service
benefits payments totaling approximately $12.8 million in connection with the
Valco potline curtailments. The reduction in net cash used by Commodities and
Corporate operating activities in 2004 over 2003 resulted primarily from
improved results in the Bauxite and alumina segment (approximately $70.0
million) as a result of the operating factors discussed above. This improvement
was partially offset by: (a) less cash generated by the Primary aluminum segment
(approximately $25.0 million), primarily as a result of Valco being fully
curtailed in the first six months of 2004 versus having had partial operations
during the first six months of 2003; and (b) increased cash outflow in the
Corporate and other segment of approximately $25.0 million attributable to
higher hedging related costs, reorganization costs and other miscellaneous
costs.

Net cash used by Commodities and Corporate operating activities in 2003
resulted from a combination of adverse market factors, primarily in the
commodities business segments, including: (a) primary aluminum prices that were
below long-term averages, (b) higher than average fuel oil and natural gas
prices, and (c) significant expenditures in respect of reorganization costs.

Investing Activities. Total capital expenditures for Fabricated products
during the first six months ended June 30, 2004 were $2.6 million. Total capital
expenditures for Commodities (including Alpart reported as discontinued
operations) and Corporate during the first six months ended June 30, 2004 were
$3.2 million. The capital expenditures during the six months ended June 30, 2004
were made primarily to improve production efficiency, reduce operating costs and
expand capacity at existing facilities.

Total capital expenditures for Fabricated products are currently expected
to be between $7.0 million and $12.0 million per year in each of 2004 and 2005.
The level of capital expenditures may be adjusted from time to time depending on
the Company's price outlook for metal and other products, KACC's ability to
assure future cash flows through the Company's financial position and other
factors.

Financing Activities and Liquidity. On February 12, 2002, the Company and
KACC entered into the DIP Facility which provides for a secured, revolving line
of credit through the earlier of February 13, 2005, the effective date of a plan
of reorganization or voluntary termination by the Company. In March 2003,
certain of the Additional Debtors were added as co-guarantors and the DIP
Facility lenders received super priority status with respect to certain of the
Additional Debtors' assets. KACC is able to borrow under the DIP Facility by
means of revolving credit advances and to issue letters of credit (up to $125.0
million) in an aggregate amount equal to the lesser of $285.0 million or a
borrowing base relating to eligible accounts receivable, eligible inventory and
eligible fixed assets reduced by certain reserves, as defined in the DIP
Facility agreement. The DIP Facility is guaranteed by the Company and certain
significant subsidiaries of KACC. Interest on any outstanding borrowings will
bear a spread over either a base rate or LIBOR, at KACC's option.

57

The DIP Facility requires KACC to comply with certain covenants and places
restrictions on the Company's, KACC's and KACC's subsidiaries' ability to, among
other things, incur debt and liens, make investments, pay dividends, sell
assets, undertake transactions with affiliates, make capital expenditures, and
enter into unrelated lines of business.

As discussed more fully in Note 5 of Notes to Interim Consolidated
Financial Statements, the Company has been working some time on an amendment to
the DIP Facility that would, among other things: (1) reset the financial
covenant based on more recent forecasts; (2) authorize the sale of the Company's
interests in Alpart, QAL, Gramercy/KJBC and Valco within certain parameters, and
(3) reduce the availability of the fixed asset subcomponent of the borrowing
base to a level that, by emergence will be based on advances solely in respect
of machinery and equipment at the fabricated products facilities. While the
effect of the amendment will be to reduce overall availability, assuming the
previously mentioned commodity assets are sold, the Company currently
anticipates that once amended, availability under the DIP Facility will likely
be in the $50.0 million -- $100.0 million range and that such amount should be
adequate to support the Company's liquidity requirements through the remainder
of the Cases. This belief is based on the fact that it was the commodities'
assets and operations that subjected the Company to the most variability and
exposure both from a price risk basis as well as from an operating perspective.
While the Company anticipates that it will ultimately be successful in
completing an amendment to the DIP Facility along the lines outlined above, the
Company cannot currently predict when such amendment will be completed as the
amendment likely will not be completed until issues in respect of the
Intercompany Agreement that affect the DIP Facility can be finalized. Until such
amendment is completed, the Company is likely to use limited consents and
waivers as and when necessary to maintain compliance with the terms of the DIP
Facility. However, no assurances can be provided that any/all such future
limited consent and waiver requests will ultimately be approved by the DIP
lenders or the Court.

Pending completion of the DIP Facility amendment, the Company has completed
a series of limited consents and waivers, the combined impact of which has been,
subject to certain conditions, to (1) approve the sale of the Company's
interests in and related to Alpart, Gramercy and KJBC, (2) maintain liquidity
and (3) extend a waiver granted in respect of a financial covenant through
September 30, 2004.

The DIP Facility is currently scheduled to expire in February 2005. As
discussed in Note 1 of Notes to Interim Consolidated Financial Statements, the
Company currently believes it is unlikely that it will emerge from the Cases
until sometime in the first half of 2005. As such, it may be necessary for the
Company to extend the DIP Facility or make alternative financing arrangements.
While the Company believes that if necessary, it would be successful in
negotiating an extension to the DIP Facility or adequate alternative financing
arrangements, no assurances can be given in this regard.

The Company and KACC currently believe that the cash and cash equivalents
of $26.5 million at June 30, 2004, cash flows from operations, cash proceeds
from the sale of assets that are ultimately determined not to be an important
part of the reorganized entity and availability under the DIP Facility or
alternative financing arrangements will provide sufficient liquidity to allow
the Company to meet its obligations during the pendency of the Cases. At July
31, 2004, there were no outstanding borrowings under the revolving credit
facility and there were outstanding letters of credit of approximately $45.7
million. As of July 31, 2004, $145.7 million (of which $79.3 million could be
used for additional letters of credit) was available to the Company under the
DIP Facility.

CAPITAL STRUCTURE

MAXXAM Inc. ("MAXXAM") and one of its wholly owned subsidiaries
collectively own approximately 63% of the Company's Common Stock, with the
remaining approximately 37% of the Company's Common Stock being publicly held.
At this time, it is not possible to predict the outcome of the Cases, in
general, or the effect of the Cases on the interests of the stockholders.
However, it is likely that MAXXAM's equity interests will be cancelled without
consideration as a part of a plan of reorganization.

58

In accordance with the Code and the DIP Facility, the Company and KACC are
not permitted to pay any dividends or purchase any of their common or preference
stock.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that are both very important to the
portrayal of the Company's financial condition and results, and require
management's most difficult, subjective, and/or complex judgments. Typically,
the circumstances that make these judgments difficult, subjective and/or complex
have to do with the need to make estimates about the effect of matters that are
inherently uncertain. While the Company believes that all aspect of its
financial statements should be studied and understood in assessing its current
(and expected future) financial condition and results, the Company believes that
the accounting policies that warrant additional attention include:

1. The consolidated financial statements as of and for the quarter and
six month periods ending June 30, 2004 have been prepared on a "going
concern" basis in accordance with AICPA Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code, ("SOP 90-7"), and do not include possible impacts arising in respect
of the Cases. The interim consolidated financial statements included
elsewhere in this Report do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amount
and classification of liabilities or the effect on existing stockholders'
equity that may result from any plans, arrangements or other actions
arising from the Cases, or the possible inability of the Company to
continue in existence. Adjustments necessitated by such plans, arrangements
or other actions could materially change the interim consolidated financial
statements included elsewhere in this Report. For example,

a. If the Company were to decide to sell certain assets not deemed
a critical part of a reorganized Kaiser, such asset sales could result
in gains or losses (depending on the asset sold) and such gains or
losses could be significant. This is because, under generally accepted
accounting principles ("GAAP"), assets to be held and used are evaluated
for recoverability differently than assets to be sold or disposed of.
Assets to be held and used are evaluated based on their expected
undiscounted future net cash flows. So long as the Company reasonably
expects that such undiscounted future net cash flows for each asset will
exceed the recorded value of the asset being evaluated, no impairment is
required. However, if plans to sell or dispose of an asset or group of
assets meet a number of specific criteria, then, under GAAP, such assets
should be considered held for sale/disposition and their recoverability
should be evaluated, for each asset, based on expected consideration to
be received upon disposition. Sales or dispositions at a particular time
will be affected by, among other things, the existing industry and
general economic circumstances as well as the Company's own
circumstances, including whether or not assets will (or must) be sold on
an accelerated or more extended timetable. Such circumstances may cause
the expected value in a sale or disposition scenario to differ
materially from the realizable value over the normal operating life of
assets, which would likely be evaluated on long-term industry trends.

As previously disclosed, while the Company had stated that it was
considering the possibility of disposing of one or more of its commodity
facilities, the Company, through the third quarter of 2003, still
considered all of its commodity assets as "held for use," as no definite
decisions had been made regarding the disposition of such assets.
However, based on additional negotiations with prospective buyers and
discussions with key constituents, the Company concluded that
dispositions of Gramercy/KJBC and Valco were possible and, therefore,
that recoverability should be considered differently as of December 31,
2003 and subsequent periods. As a result of the change in status, the
Company recorded impairment charges of approximately $33.0 million in
the first quarter of 2004 and $368.0 million in the fourth quarter of
2003. The actual amount of gain or loss if and when the sales are
consummated may differ from these amounts as a result of closing
adjustments and other matters. Management cannot conclude that the sale
of the Company's interests in one or all of the above noted facilities
is "probable" due to numerous uncertainties including that Court
approval is required and was not yet obtained as of June 30, 2004.

59

b. Additional pre-Filing Date claims may be identified through the
proof of claim reconciliation process and may arise in connection with
actions taken by the Debtors in the Cases. For example, while the
Debtors consider rejection of the Bonneville Power Administration
("BPA") contract to have been in the Company's best long-term interests,
such rejection may increase the amount of pre-Filing Date claims by
approximately $75.0 million based on the BPA's proof of claim filed in
connection with the Cases in respect of the contract rejection.

c. As more fully discussed below, the amount of pre-Filing Date
claims ultimately allowed by the Court in respect of contingent claims
and benefit obligations may be materially different from the amounts
reflected in the Consolidated Financial Statements.

While valuation of the Company's assets and pre-Filing Date claims at
this stage of the Cases is subject to inherent uncertainties, the
Company currently believes that it is likely that its liabilities will
be found in the Cases to exceed the fair value of its assets. Therefore,
the Company currently believes that, with limited exceptions, it is
likely that substantially all pre-Filing Date claims will be paid at
less than 100% of their face value and the equity interests of the
Company's stockholders will be cancelled without consideration.

Additionally, upon emergence from the Cases, the Company expects to
apply "fresh start" accounting to its consolidated financial statements
as required by SOP 90-7. Fresh start accounting is required if: (1) a
debtor's liabilities are determined to be in excess of its assets and
(2) there will be a greater than 50% change in the equity ownership of
the entity. As previously disclosed, the Company expects both such
circumstances to apply. As such, upon emergence, the Company will
restate its balance sheet to equal the reorganization value as
determined in its plan of reorganization and approved by the Court.
Additionally, items such as accumulated depreciation, accumulated
deficit and accumulated other comprehensive income (loss) will be reset
to zero. The Company will allocate the reorganization value to its
individual assets and liabilities based on their estimated fair value at
the emergence date. Typically such items as current liabilities,
accounts receivable, and cash will be reflected at values similar to
those reported prior to emergence. Items such as inventory, property,
plant and equipment, long-term assets and long-term liabilities are more
likely to be significantly adjusted from amounts previously reported.
Because fresh start accounting will be adopted at emergence, and because
of the significance of the pending and completed asset sales and
liabilities subject to compromise (that will be relieved upon
emergence), meaningful comparison between the current historical
financial statements and the financial statements upon emergence may be
to difficult to make.

2. The Company's judgments and estimates with respect to commitments
and contingencies, in particular: (a) future asbestos related costs and
obligations as well as estimated insurance recoveries, and (b) possible
liability in respect of claims of unfair labor practices ("ULPs") which
were not resolved as a part of the Company's September 2000 labor
settlement.

Valuation of legal and other contingent claims is subject to a great
deal of judgment and substantial uncertainty. Under GAAP, companies are
required to accrue for contingent matters in their financial statements
only if the amount of any potential loss is both "probable" and the
amount (or a range) of possible loss is "estimatable." In reaching a
determination of the probability of an adverse ruling in respect of a
matter, the Company typically consults outside experts. However, any
such judgments reached regarding probability are subject to significant
uncertainty. The Company may, in fact, obtain an adverse ruling in a
matter that it did not consider a "probable" loss and which, therefore,
was not accrued for in its financial statements. Additionally, facts and
circumstances in respect of a matter can change causing key assumptions
that were used in previous assessments of a matter to change. It is
possible that amounts at risk in respect of one matter may be "traded
off" against amounts under negotiations in a separate matter. Further,
in estimating the amount of any loss, in many instances a single
estimation of the loss may not be possible. Rather, the Company may only
be able to estimate a range for possible losses. In such event, GAAP
requires that a liability be established for at least the minimum end of
the range.

60

The Company has had two potentially material contingent obligations that
are subject to significant uncertainty and variability in their outcome:
(a) the United Steelworkers of America's ("USWA") ULP claim, and (b) the
net obligation in respect of asbestos-related matters. Both of these
matters are discussed in Note 7 of Notes to Interim Consolidated
Financial Statements and it is important that you read this note.

As more fully discussed in Note 7 of Notes to Interim Consolidated
Financial Statements, we have not accrued any amount in our June 30,
2004 financial statements in respect of the USWA ULP matter. We did not
accrue any amount in the past as we did not consider the loss to be
"probable." Our assessment had been that the possible range of loss in
this matter was anywhere from zero to $250.0 million based on the proof
of claims filed (and other information provided) by the National Labor
Relations Board ("NLRB") and USWA in connection with the Company's and
KACC's reorganization proceedings. While the Company continues to
believe that the ULP charges were without merit, during January 2004,
the Company agreed to allow a claim in favor of the USWA in the amount
of the $175.0 million as a compromise and in return for the USWA
agreeing to substantially reduce and/or eliminate certain benefit
payments as more fully discussed in Note 9 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended
December 31, 2003. As the agreement to settle this matter was contingent
on NLRB and Court approval and ratification by union members, this
amount was not reflected in the Company's consolidated financial
statements at June 30, 2004. However, the charge and an offsetting
liability associated with the settlement of this matter will be
reflected in the Company's consolidated financial statements if and when
the agreement with the USWA is ultimately approved by the Court.

Also, as more fully discussed in Note 7 of Notes to Interim Consolidated
Financial Statements, KACC is one of many defendants in personal injury
claims by large number of persons who assert that their injuries were
caused by, among other things, exposure to asbestos during their
employment or association with KACC or by exposure to products
containing asbestos last produced or sold by KACC more than 20 years
ago. It is difficult to predict the number of claims that will
ultimately be made against KACC or the settlement value of such claims.
As of June 30, 2004, KACC had recorded an obligation for approximately
$610.1 million in respect of pending and an estimate of possible future
asbestos claims through 2011. The Company did not accrue for amounts
past 2011 because the Company believed that significant uncertainty
existed in trying to estimate any such amounts. However, it is possible
that a different number of claims will be made through 2011 and that the
settlement amounts during this period may differ and that this will
cause the actual amounts to differ materially from the Company's
estimate. Further, the Company expects that, during its reorganization
process, an estimate will have to be made in respect of its exposure to
asbestos-related claims after 2011 and that such amounts could be
substantial. Due to the Cases, holders of asbestos claims are stayed
from continuing to prosecute pending litigation and from commencing new
lawsuits against the Debtors. However, during the pendency of the Cases,
KACC expects additional asbestos claims will be asserted as part of the
claims process. A separate creditors' committee representing the
interests of the asbestos claimants, the ACC, has been appointed. The
Debtors' obligations with respect to present and future asbestos claims
will be resolved pursuant to a plan of reorganization.

The Company believes that KACC has insurance coverage in respect of its
asbestos-related exposures and that substantial recoveries in this
regard are probable. At June 30, 2004, KACC had recorded a receivable
for approximately $463.1 million in respect of expected insurance
recoveries related to existing claims and the estimate future claims
through 2011. However, the actual amount of insurance recoveries may
differ from the amount recorded and the amount of such differences could
be material. Further, depending on the amount of asbestos-related claims
ultimately determined to exist (including those in the periods after
2011), it is possible that the amount of such claims could exceed the
amount of additional insurance recoveries available.

See Note 7 of Notes to Interim Consolidated Financial Statements for a
more complete discussion of these matters.
61

3. The Company's judgments and estimates in respect of its employee
benefit plans.

Pension and post-retirement medical obligations included in the
consolidated balance sheet are based on assumptions that are subject to
variation from year-to-year. Such variations can cause the Company's
estimate of such obligations to vary significantly. Restructuring
actions (such as the indefinite curtailment of the Mead smelter in
January 2003) can also have a significant impact on such amounts.

For pension obligations, the most significant assumptions used in
determining the estimated year-end obligation are the assumed discount
rate and long-term rate of return ("LTRR") on pension assets. Since
recorded pension obligations represent the present value of expected
pension payments over the life of the plans, decreases in the discount
rate (used to compute the present value of the payments) will cause the
estimated obligations to increase. Conversely, an increase in the
discount rate will cause the estimated present value of the obligations
to decline. The LTRR on pension assets reflects the Company's assumption
regarding what the amount of earnings will be on existing plan assets
(before considering any future contributions to the plans). Increases in
the assumed LTRR will cause the projected value of plan assets available
to satisfy pension obligations to increase, yielding a reduced net
pension obligation. A reduction in the LTRR reduces the amount of
projected net assets available to satisfy pension obligations and, thus,
causes the net pension obligation to increase.

For post-retirement obligations, the key assumptions used to estimate
the year-end obligations are the discount rate and the assumptions
regarding future medical costs increases. The discount rate affects the
post-retirement obligations in a similar fashion to that described above
for pension obligations. As the assumed rate of increase in medical
costs goes up, so does the net projected obligation. Conversely, if the
rate of increase is assumed to be smaller, the projected obligation will
decline.

As more fully discussed in Note 9 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31,
2003, all of the Company's material pension and medical benefit plans
are being (or have been) terminated as a part of the Company's
reorganization efforts, subject to the PBGC's rights, including the
ongoing appeal, as to the termination of the hourly pension plans. If
and when an agreement with the PBGC is reached or the appeal is
otherwise resolved, the Company's obligations with respect to the
existing plans will become fixed. However, at this time it is not
possible to definitely determine the "final" amount of such obligations
as the value of such amounts will be subject to negotiations among and
between the Company and the constituents of the ongoing Cases.

In preparing the Company's financial statements at June 30, 2004, the
Company has reflected its obligations in respect of these plans using
assumptions consistent with those used in accordance with GAAP for
ongoing plans. The Company believes that this represents a reasonable
estimation methodology. The Company currently believes that there are
arguments that it can make that the final allowed claim amounts should
be less than that reflected in the financial statements. The Company
also expects that certain constituents will assert that the value of
their obligations is in excess of the amounts reflected in the financial
statements.

See Note 9 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2003, and Recent
Events and Developments, Benefit (Legacy) Cost Matters above for
information regarding the Company's pension and post-retirement
obligations. Actual results may differ from the assumptions made in
computing the estimated June 30, 2004 obligations and such differences
may be material.

4. The Company's judgments and estimates in respect to environmental
commitments and contingencies.

The Company and KACC are subject to a number of environmental laws and
regulations ("environmental laws"), to fines or penalties assessed for
alleged breaches of the environmental
62

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

Based on the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals, primarily
related to potential solid waste disposal and soil and groundwater
remediation matters. These environmental accruals represent the
Company's estimate of costs reasonably expected to be incurred on a
going concern basis in the ordinary course of business based on
presently enacted laws and regulations, currently available facts,
existing technology, and the Company's assessment of the likely
remediation action to be taken. However, making estimates of possible
environmental remediation costs is subject to inherent uncertainties. 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.

An example of how environmental accruals could change is provided by the
multi-site agreement discussed in Note 7 of Notes to Interim
Consolidated Financial Statements. Another example discussed in Note 7
of Notes to Interim Consolidated Financial Statements is the
negotiations the Company is currently involved in with a number of the
parties that, if agreements are ultimately reached with the parties and
approved by the Court, could settle or otherwise resolve a substantial
portion of the environmental claims currently considered not subject to
compromise. As a means of expediting the reorganization process and to
assure treatment of the claims under a plan of reorganization that is
favorable to the Debtors and their stakeholders, it may be in the best
interests of the stakeholders for the Company to agree to claim amounts
in excess of previous accruals, which were based on an ordinary course,
going concern basis.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes the Company's significant contractual obligations
at June 30, 2004 (dollars in millions):

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

(a) See Note 5 of Notes to Interim Consolidated Financial Statements for
information in respect of long-term debt. Long-term debt obligations
exclude debt subject to compromise of approximately $848.2 million, which
amounts will be dealt with in connection with a plan of reorganization. See
Notes 1 and 5 of Notes to Interim Consolidated Financial Statements for
additional information about debt subject (a) to compromise.

The following paragraphs summarize the Company's off-balance sheet
arrangements.

KACC owns a 20% interest in QAL, which owns one of the largest and most
competitive alumina refineries in the world, located in Queensland, Australia.
QAL refines bauxite into alumina, essentially on a cost basis, for the account
of its shareholders under long-term tolling contracts. KACC currently sells its
share of QAL's production to third parties. The shareholders, including KACC,
purchase bauxite from another QAL shareholder under long-term purchase
contracts. These tolling and purchase contracts are scheduled to expire in 2008.
Under the agreements, KACC is unconditionally obligated to pay its proportional
share of debt, operating costs and certain other costs of QAL. KACC's share of
the aggregate minimum amount of

63

future principal payments as of June 30, 2004 is $60.0 million, which will
mature in varying amounts from 2005 to 2008. KACC's share of QAL's scheduled
debt principal repayment in July 2003 was funded with additional QAL borrowings.
KACC's share of payments, including operating costs and certain other expenses
under the agreements, has generally ranged between $70 million and $100 million
per year over the past three years. However, as discussed more fully in Notes 1
and 4 of Notes to Interim Consolidated Financial Statements, the Company is
considering the possibility of selling its interests in QAL. If KACC's interest
in QAL were to be sold, the Company believes that KACC's obligations in respect
of its share of the QAL debt would be assumed by the buyer. The Company has
agreements to supply alumina to and to purchase aluminum from Anglesey, a
49.0%-owned aluminum smelter in Holyhead, Wales.

As of June 30, 2004, outstanding letters of credit under the DIP Facility
were approximately $45.7 million, substantially all of which expire within the
next twelve months. The letters of credit relate primarily to environmental,
insurance, Alpart-related debt and other activities. Approximately $15.3 million
of the letters of credit are in respect of the Company's 65% share of the $22.0
million Alpart CARIFA financing (see Note 5 of Notes to Interim Consolidated
Financial Statements) which are reflected in the debt maturities table above. As
such, that portion of the letters of credit is duplicative of the obligation
reflected in the table above. The CARIFA financing is being repaid in connection
with the sale of the Company's interests in and related to Alpart, which were
sold on July 1, 2004 (see Note 4 of Notes to Interim Consolidated Financial
Statements). Upon such payment (which is scheduled to occur in August 2004), the
Company's letter of credit obligation under the DIP Facility securing the loans
will be cancelled.

Upon emergence from Chapter 11 proceedings, the Company anticipates that it
will provide some form of yet to be determined defined contribution pension plan
in respect of its salaried employees. Any such plans ultimately adopted will be
subject to a number of approvals. The Company currently estimates that the total
annual cash cost of such plans would be less than $5.0 million and, if approved,
would likely be required to be funded some time in 2005.

Pursuant to the terms of the USWA agreement, the Company will be required
to make annual contributions into the Steelworkers Pension Trust on the basis of
one dollar per USWA employee per hour worked. In addition, the Company will
institute a defined contribution pension plan for active USWA employees. Company
contributions to the plan will range from eight hundred dollars to twenty-four
hundred dollars per employee per year, depending on age and years of service.
The Company believes that similar defined contribution pension plans will be
established for non-USWA hourly employees subject to collective bargaining
agreements. The Company currently estimates that contributions to all such plans
will range from $3.0 million to $6.0 million per year. However, because the PBGC
is still reviewing these plans, the benefits could change.

As a replacement for the Company's current postretirement benefit plans,
the Company agreed to contribute certain amounts to one or more VEBAs. Such
contributions are to include:

- An amount not to exceed $36.0 million and payable on emergence from the
Chapter 11 proceedings so long as the Company's liquidity is at least
$50.0 million after considering such payments. To the extent that less
than the full $36.0 million is paid and the Company's interests in
Anglesey are subsequently sold, a portion of such sales proceeds, in
certain circumstances, will be used to pay the shortfall.

- On an annual basis, 10% of the first $20.0 million of annual cash flow,
as defined, plus 20% of annual cash flow, as defined, in excess of $20.0
million. Such annual payments shall not exceed $20.0 million and will
also be limited (with no carryover to future years) to the extent that
the payments do not cause the Company's liquidity to be less than $50.0
million.

- Advances of $3.1 million in June 2004 and $1.9 million per month
thereafter until the Company emerges from the Cases. Any advances made
pursuant to such agreement will constitute a credit toward the $36.0
million maximum contribution due upon emergence.

On June 1, 2004, the Court approved an order making the agreements
regarding pension and postretirement medical benefits effective on June 1, 2004
notwithstanding that the Intercompany Agreement

64

was not effective as of that date. However, the Court order provided that if the
Debtors and the UCC had not signed the Intercompany Agreement and filed a motion
seeking the approval of such agreements by June 30, 2004, the UCC would have the
right (but not the requirement) at any time thereafter to direct the Debtors to
terminate the USWA agreement and other agreements to terminate postretirement
medical benefits 60 days from the date of the UCC notice. Although the Company
considers it unlikely, if such notice were received and a new arrangement with
the USWA, the UCC and others were not reached during the 60 day period, the
Debtors could have to reinstate the postretirement medical plan. The
Intercompany Agreement was not signed on June 30, 2004. To date, no motion has
been filed by the Company to approve the Intercompany Agreement. However, the
UCC has not exercised its right to cause the Debtors to terminate the USWA
agreement or other postretirement medical benefit obligations.

In May 2004, the Company entered into an agreement to sell its interest in
and related to the Gramercy facility and KJBC. Net proceeds from the sale are
expected to be approximately $23.0 million, subject to various closing
adjustments. A substantial portion of the proceeds may be used to satisfy
transaction related costs and obligations. The agreement was approved by the
Court on July 19, 2004 and the transaction is expected to close in the latter
part of the third quarter of 2004.

At emergence from Chapter 11, KACC will have to pay or otherwise provide
for a material amount of claims. Such claims include accrued but unpaid
professional fees, priority tax and environmental claims, secured claims, and
certain post-petition obligations (collectively, "Exit Costs"). KACC currently
estimates that its Exit Costs will be in the range of $100.0 million to $120.0
million. KACC expects to fund such Exit Costs using the proceeds to be received
under the proposed Intercompany Agreement together with existing cash resources
and available liquidity under an exit financing facility that will replace the
current Post-Petition Credit Agreement (see Note 5 of Notes to Interim
Consolidated Financial Statements). Given the material portion of the Exit Costs
represented by the expected Intercompany Agreement payments, such payments are a
critical element for KACC's successful emergence from the Cases. If the proposed
Intercompany Agreement were not ultimately approved by the Court or otherwise
put into effect or a reasonable alternative were not negotiated, it is unlikely
that KACC or its other debtor subsidiaries will be able to emerge from Chapter
11. Management believes it will be able to successfully resolve any issues that
may arise in respect of the proposed Intercompany Agreement or be able to
negotiate a reasonable alternative. However, no assurances can be given in this
regard. An exit financing facility to replace the current Post-Petition Credit
Agreement is also critical for KACC's successful emergence from the Cases.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold. As discussed
more fully in Notes 2 and 8 of Notes to Interim Consolidated Financial
Statements, KACC historically has utilized hedging transactions to lock-in a
specified price or range of prices for certain products which it sells or
consumes in its production process and to mitigate KACC's exposure to changes in
foreign currency exchange rates. However, because the agreements underlying
KACC's hedging positions provided that the counterparties to the hedging
contracts could liquidate KACC's hedging positions if KACC filed for
reorganization, KACC chose to liquidate these positions in advance of the
initial Filing Date. KACC has only completed limited hedging activities since
the Filing Date (see below). The Company anticipates that, subject to prevailing
economic conditions, it may enter into additional hedging transactions with
respect to primary aluminum prices, natural gas and fuel oil prices and foreign
currency values to protect the interests of its constituents. However, no
assurance can be given as to when or if the Company will enter into such
additional hedging activities.

SENSITIVITY

Alumina and Primary Aluminum. The Company has historically been exposed to
commodity price risks and opportunities in respect of alumina and primary
aluminum production in excess of internal requirements that has been sold in
domestic and international markets. KACC's hedging transactions have been
intended to provide price risk management in respect of the net exposure of
earnings resulting from
65

(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, variations in
production and shipment levels, and timing issues related to price changes, the
Company estimates that during 2004 each $.01 increase (decrease) in the market
price per price-equivalent pound of primary aluminum increases (decreases) the
Company's annual pre-tax earnings by approximately $5.0 million, based on recent
operating levels. The lower 2004 impact (as compared to prior periods) on
pre-tax earnings linked to primary aluminum prices was due to the Alpart sale
and the Valco potline curtailments. As of June 30, 2004, the Company had options
covering substantially all of the Company's net hedgeable volume for the third
quarter of 2004 (at a strike price of approximately $.75 per pound).

Assuming that the Company's interests in QAL, Gramercy/KJBC, and Valco are
sold (and that Anglesey remains a part of the emerging entity), the Company
would no longer be a net seller of alumina and aluminum. Rather, net sales of
primary aluminum by Anglesey (reduced by the equivalent primary aluminum impact
of alumina requirements) would offset a portion of the primary aluminum
requirements of the fabricated products business. As such, the emerging entity
would be a net consumer of primary aluminum. However, the Company's pricing of
fabricated aluminum products is generally intended to lock-in a conversion
margin (representing the value added from the fabrication process(es)) and to
pass metal price risk on to its customers. The fabricated aluminum products
business does, however, from time to time enter into fixed price arrangements
(that include the primary aluminum price component). In such instances, the
Company may use third party hedging instruments to eliminate price exposure or
may consider such fixed price arrangements as a notional (internal) hedge of
primary aluminum to be produced at Anglesey. At June 30, 2004, the fabricated
products business held contracts for the delivery of fabricated aluminum
products that have the effect of fixing or capping the metal price component of
those contracts during the second half of 2004 and for the period 2005 -- 2008
totaling approximately (in 000 pounds of primary aluminum): 2004: 66,000, 2005:
59,000, 2006: 35,000, 2007: 34,000, and 2008: 10,000.

Foreign Currency. KACC enters into forward exchange contracts to hedge
material cash commitments for foreign currencies. KACC's primary foreign
exchange exposure is related to KACC's Australian Dollar (A$) commitments in
respect of activities associated with QAL. The Company estimates that, before
consideration of any hedging activities, a US $0.01 increase (decrease) in the
value of the A$ results in an approximate $1.5 million (decrease) increase in
the Company's annual pre-tax operating income.

Energy. KACC is exposed to energy price risk from fluctuating prices for
natural gas, fuel oil and diesel oil consumed in the production process. The
Company estimates that each $1.00 change in natural gas prices (per mcf) impacts
the Company's annual pre-tax operating results by approximately $20.0 million.
Approximately two-thirds of such exposure relates to the Gramercy facility with
the remaining one-third primarily relating to the Company's fabricated products
business. In order to avoid incremental risk in respect of natural gas prices
associated with the Gramercy facility, which as discussed in Note 4 of Notes to
Interim Consolidated Financial Statements is expected to be sold in the latter
part of the third quarter of 2004, the Company has entered into a fixed price
physical supply agreement with the natural gas supplier for July and August
2004.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. An evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was performed as of the end of the period covered by this Report
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Company's management, including the Chief Executive Officer and
Chief Financial Officer, concluded that the Company's disclosure controls and
procedures were effective.

Changes in Internal Control. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation. Additionally, no
changes in the Company's internal controls over financial reporting have
occurred during the

66

Company's most recently completed quarter that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Reference is made to Part I, Item 3. "LEGAL PROCEEDINGS" in the Company's
Form 10-K for the year ended December 31, 2003 for information concerning
material legal proceedings with respect to the Company.

Possible Environmental Settlements. The Company is currently involved in
negotiations with a number of parties that, if agreements are ultimately reached
with the parties and approved by the Court, could settle or otherwise resolve a
substantial portion of the environmental claims currently considered not subject
to compromise. As a part of such agreements, it is possible that the Company may
have to pay amounts in the range of $25.0 million -- $30.0 million during the
fourth quarter of 2004 or early 2005. Because the agreements have not been
approved by the Court and are still subject to material modification, the
Company has not reflected any such incremental charges or liabilities in the
consolidated financial statements as of and for the periods ended June 30, 2004
as the Company does not believe that such potential future settlements should be
considered "probable" (which is the criteria for recognition under GAAP).

Other Environmental Matters. During April 2004, KACC was served with a
subpoena for documents and has been notified by Federal authorities that they
are investigating certain environmental compliance issues with respect of KACC's
Trentwood facility in the State of Washington. KACC is undertaking its own
internal investigation of the matter through specially retained counsel to
ensure that it has all relevant facts regarding Trentwood's compliance with
applicable environmental laws. KACC believes it is in compliance with all
applicable environmental laws and requirements at the Trentwood facility and
intends to defend any claims or charges, if any should result, vigorously. The
Company cannot assess what, if any, impacts this matter may have on the
Company's or KACC's financial statements.

Other Personal Injury Claims. The Company has received other personal
injury claims related to noise induced hearing loss (approximately 2,900 claims)
and exposure to silica and coal tar pitch volatiles (approximately 3,900 claims
and 300 claims, respectively). The Company believes that all such claims are
pre-petition claims that will be resolved by the Cases. The Company cannot
presently determine the impact or value of these claims. However, the Company
currently expects that all such claims will be transferred, along with certain
rights against certain corresponding insurance policies, to a separate trust
along with (similar to) the settled hearing loss cases, whether or not such
claims are settled prior to the Company's emergence from the Cases.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

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

* Filed herewith.

(b) Reports on Form 8-K.

On April 23, 2004, under Item 5, "Other Events" of Form 8-K, the
Company filed a Current Report on Form 8-K reporting that RUSAL was the
successful bidder for the Company's interest in and related to Alumina
Partners of Jamaica ("Alpart").

No other Reports on Form 8-K were filed by the Company during the
quarter ended June 30, 2004, however:

On July 16, 2004, under Item 2, "Acquisition or Disposition of
Assets," of Form 8-K, the Company filed a Current Report on Form 8-K
reporting that it had sold its interest in and related to Alpart.

On July 30, 2004 under item 5, "Other Events" of Form 8-K, the Company
filed a Current Report on Form 8-K reporting that it had been notified by
the Pension Benefit Guaranty Corporation ("PBGC") that the PBGC intends to
assume responsibility for the Kaiser Aluminum Inactive Pension Plan
retroactive to June 30, 2004.

68

SIGNATURE

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 as the principal financial officer and principal accounting
officer of the registrant, respectively.

KAISER ALUMINUM CORPORATION

By: /s/ KERRY A. SHIBA
------------------------------------
Kerry A. Shiba
Vice President and Chief Financial
Officer
(Principal Financial Officer)

KAISER ALUMINUM CORPORATION

By: /s/ DANIEL D. MADDOX
------------------------------------
Daniel D. Maddox
Vice President and Controller
(Principal Accounting Officer)

Dated: August 13, 2004

69

EXHIBIT INDEX

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

* Filed herewith.