KAISER ALUMINUM & CHEMICAL 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 1-3605

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

DELAWARE 94-0928288
(State of incorporation) (I.R.S. Employer Identification No.)

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

(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 46,171,365 shares of Common Stock
outstanding.

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

1. REORGANIZATION PROCEEDINGS

Kaiser Aluminum & Chemical Corporation (the "Company"), its parent company,
Kaiser Aluminum Corporation ("Kaiser" or "KAC"), and 24 of the Company'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,
Kaiser and 15 of the Company's subsidiaries (the "Original Debtors") filed in
the first quarter of 2002 and nine additional Company 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 the Company'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 the Company 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.

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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 & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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 & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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 the Company.
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 the
Company that, except as further described below, will have to be satisfied by
the Company'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). The Company'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 the Company'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 the Company and certain of
its other subsidiaries and joint venture affiliates or interact with third
parties on behalf of the Company 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 the Company also have claims against certain Company subsidiaries that
own or owned the Company's interests in joint venture affiliates and which
represent a significant portion of the Company's consolidated asset value. For
example, noteholders have claims against
8

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

each of AJI and KJC, which through 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 the Company's Senior Notes and Senior
Subordinated Notes. Additionally, the PBGC, pursuant to statute, has joint and
several claims against the Company and all entities which are 80% or more owned
by the Company (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 the Company. 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 Company'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 Company'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 the Company and its claimholders (in respect of the Company'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 the Company 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 the Company 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 the Company 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 the Company's sale of its
interests in Alpart. The proposed Intercompany Agreement calls for such payments
to become payable to the Company at the earlier of the sale

9

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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 that was paid to the Company
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 the Company until the Company's emergence from
the Cases. In the interim, the Company'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, the Company 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"). The Company
currently estimates that its Exit Costs will be in the range of $100.0 to
$120.0. The Company 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, the Company 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
10

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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 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) the Company'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.

11

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

The change in evaluation methodology was required 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.

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, the Company
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

12

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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.

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 & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2003

14

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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 & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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 & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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 & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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 & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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 & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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 wholly owned subsidiary of
Kaiser, which is a subsidiary of MAXXAM Inc. ("MAXXAM").

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 & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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 & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

Derivative Financial Instruments. Hedging transactions using derivative
financial instruments are primarily designed to mitigate the Company's exposure
to changes in prices for certain of the products which the Company sells and
consumes and, to a lesser extent, to mitigate the Company's exposure to change
in foreign currency exchange rates. The Company does not utilize derivative
financial instruments for trading or other speculative purposes. The Company's
derivative activities are initiated within guidelines established by management
and approved by the Company's board of directors. Hedging transactions are
executed centrally on behalf of all of the Company'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 13 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.

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.

22

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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.

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 the Company to
fund the prepayment of the Company'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,

23

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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 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, the
Company 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 the Company
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

24

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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, the
Company 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.

- 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 the
Company'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.
25

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

- The Company had a long-term liability, net of estimated subleases income,
on an office complex in Oakland, California, in which the Company 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 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
Kaiser 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, the Company 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 Kaiser and certain significant subsidiaries of the Company.
Interest on any

26

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

outstanding borrowings will bear a spread over either a base rate or LIBOR, at
the Company'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 the Company to comply with certain covenants and
places restrictions on the Company's, Kaiser's and the Company'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.

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.

27

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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. The Company 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 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.

28

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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

Commitments. The Company 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, the Company
is unconditionally obligated to pay its proportional share (20%) of debt,
operating costs, and certain other costs of QAL. The Company'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. The Company's share of QAL's debt increased by approximately $8.0 during
2003 as additional drawdowns on QAL financing (the Company's share $40.0) more
than offset the Company's share ($32.0) of QAL's debt principal payment. During
July 2002, the Company made payments of approximately $29.5 to QAL to fund the
Company's share of QAL's scheduled debt maturities. The Company'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 the Company's interest in QAL
were to be sold, the Company believes that the Company's obligations in respect
of its share of QAL's debt would be assumed by the buyer (see Note 4). The
Company 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 Kaiser 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. The Company 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
29

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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.

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 the Company's
environmental exposure at a number of non-owned sites. Under this agreement,
among other things, the Company 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 Company-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

30

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

matters is subject to further regulatory review and approval, no specific
assurance can be given as to when the factors upon which a substantial portion
of this estimate is based can be expected to be resolved. However, the Company
is currently working to resolve certain of these matters.

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

Other Environmental Matters. During April 2004, the Company 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
the Company's Trentwood facility in the State of Washington. The Company 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. The Company 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 financial statements.

Asbestos Contingencies. The Company 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 the Company or exposure to products containing asbestos
produced or sold by the Company. The lawsuits generally relate to products the
Company 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, the Company 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 the
Company's entire asbestos-related liability, which may go beyond 2011, and that
such costs could be substantial.

The Company believes that it 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

31

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

and on the resolution of any disputes regarding coverage under the applicable
insurance policies. The Company believes that substantial recoveries from the
insurance carriers are probable and additional amounts may be recoverable in the
future if additional claims are added. The Company reached this conclusion after
considering its prior insurance-related recoveries in respect of
asbestos-related claims, existing insurance policies, and the advice of Heller
Ehrman White & McAuliffe LLP with respect to applicable insurance coverage law
relating to the terms and conditions of those policies. During 2000, the Company
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 the Company's long-term liquidity.

The following tables present historical information regarding the Company'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 the
Company 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 the Company'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 the
Company 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

32

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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 stated) is only reflective of an estimate of claims through 2011. The
Company'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 Kaiser'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 the Company's asbestos-related liabilities or estimated
insurance recoveries could have a material impact on the Company's future
financial statements.

The Company 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 the Company has no interest, but which amounts will be available for the
ultimate settlement of the Company'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 Kaiser 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 the Company, 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, the Company responded to all such allegations and believed
that they were without merit. Twenty-two of twenty-four allegations of ULPs
previously brought against the Company 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 the
Company 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, the Company 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
33

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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. 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 the Company 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 Kaiser 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, the Company uses various instruments, including
forward contracts and options, to manage the risks arising from fluctuations in
aluminum prices, energy prices and exchange rates. The Company 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

34

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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 the Company'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.

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 the Company'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, the Company 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.
35

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

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 the
Company's interest in and related to Valco (property, plant and equipment of
$31.8 and 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 17 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'

36

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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:

37

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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

38

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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.

39

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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

40

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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.

12. SUPPLEMENTAL GUARANTOR INFORMATION

Certain domestic, wholly-owned (direct or indirect) subsidiaries of the
Company (hereinafter collectively referred to as the Subsidiary Guarantors) have
provided, joint and several, guarantees of the 9 7/8% Senior Notes, the 10 7/8%
Senior Notes, due 2006 and the 12 3/4% Senior Subordinated Notes (the "Notes").
Such guarantees are full and unconditional. See Note 18 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December 31,
2003 for a more complete discussion regarding the Subsidiary Guarantors and
their operations.
41

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

The accompanying financial information presents consolidating balance
sheets, statements of income (loss) and statements of cash flows showing
separately the Company, Subsidiary Guarantors, other subsidiaries and
eliminating entries. Other subsidiaries' discontinued operations include Alpart
and the related discontinued operations of KAII. Subsidiary Guarantors'
discontinued operations include the discontinued operations of AJI and KJC.
Certain reclassifications of prior year information were made to conform to the
current presentation.

CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2004

42

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2003

43

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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

44

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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

45

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(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

NOTES TO CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Income Taxes -- The income tax provision (benefit) for the quarter and six
month periods ended June 30, 2004 and 2003, relate primarily to foreign income
taxes. 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 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

46

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

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN MILLIONS OF DOLLARS)
(UNAUDITED)

additional net operating losses and foreign tax credits generated in 2004 and
2003 were offset by equal increases in valuation allowances.

Foreign Currency -- The functional currency of the Company and its
subsidiaries is the United States Dollar, and accordingly, pre-tax translation
gains (losses) are included in the Company's and Subsidiary Guarantors'
operating income (loss) and other income (expense), net balances. Such amounts
for the Company totaled $(20.2) and $23.8 for the quarters ended June 30, 2004
and 2003, respectively, and $(18.3) and $38.0 for the six month periods ended
June 30, 2004 and 2003, respectively. Such amounts for the Subsidiary Guarantors
totaled $20.9 and $(25.1) for the quarters ended June 30, 2004 and 2003,
respectively, and $19.2 and $(39.4) for the six month periods ended June 30,
2004 and 2003, respectively.

Debt Covenants and Restrictions -- The Indentures contain restrictions on
the ability of the Company's subsidiaries to transfer funds to the Company in
the form of dividends, loans or advances.

47

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 & Chemical Corporation (the "Company"), its parent company,
Kaiser Aluminum Corporation ("Kaiser" or "KAC"), and 24 of the Company'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,
Kaiser and 15 of the Company's subsidiaries (the "Original Debtors") filed in
the first quarter of 2002 and nine additional Company 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 the Company'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
48

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 the Company.
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 the
Company that, except as further described below, will have to be satisfied by
the Company'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). The Company'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 the Company'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
49

be merged 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 the Company and certain of its other subsidiaries and joint venture
affiliates or interact with third parties on behalf of the Company 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 the Company also have claims against
certain Company subsidiaries that own or owned the Company's interests in joint
venture affiliates and which represent a significant portion of the Company'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 the Company's Senior Notes and Senior
Subordinated Notes. Additionally, the PBGC, pursuant to statute, has joint and
several claims against the Company and all entities which are 80% or more owned
by the Company (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 Company'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 Company'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 the Company and its claimholders (in respect of the Company'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 the Company 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 the Company 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 the Company (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,
50

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 the Company's sale of its
interests in Alpart. The proposed Intercompany Agreement calls for such payments
to become payable to the Company 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 the Company in July 2004
upon the sale of Alpart and any amounts paid by the Company 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 the Company until the Company's emergence from the Cases. In the
interim, the Company'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, the Company 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"). The Company
currently estimates that its Exit Costs will be in the range of $100.0 million
to $120.0 million. The Company 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, the
Company 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

51

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 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) the Company'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/
52

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 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, the Company 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

53

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 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, the Company 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.

54

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, 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.

55

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 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

56

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 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 17 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.

57

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 the
Company'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 the Company'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 for the quarter ended June
30, 2004, compared to a net loss of $61.3 million for the same period in 2003.
For the six months ended June 30, 2004, the Company reported a net loss of $39.7
million compared to a net loss of $126.4 million 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.

59

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
60

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

61

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, the Company'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
Kaiser 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. The Company 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 Kaiser and certain
significant subsidiaries of the Company. Interest on any outstanding borrowings
will bear a spread over either a base rate or LIBOR, at the

62

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

The DIP Facility requires the Company to comply with certain covenants and
places restrictions on the Company's, Kaiser's and the Company'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 currently believes 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.

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

63

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.

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.

64

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.

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.

65

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
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, the Company 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 the Company or by exposure to products
containing asbestos last produced or sold by the Company more than 20
years ago. It is difficult to predict the number of claims that will
ultimately be made against the Company or the settlement value of such
claims. As of June 30, 2004, the Company 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, the Company 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 it has insurance coverage in respect of its
asbestos-related exposures and that substantial recoveries in this
regard are probable. At June 30, 2004, the Company 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.

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

66

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 Kaiser are subject to a number of environmental laws and
regulations ("environmental laws"), to fines or penalties assessed for
alleged breaches of the environmental laws, and to claims and litigation
based upon such laws. The Company 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

67

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.

The Company 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. The Company
currently sells its share of QAL's production to third parties. The
shareholders, including the Company, 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, the Company is
unconditionally obligated to pay its proportional share of debt, operating costs
and certain other costs of QAL. The Company's share of the aggregate minimum
amount of future principal payments as of June 30, 2004 is $60.0 million, which
will mature in varying amounts from 2005 to 2008. The Company's share of QAL's
scheduled debt principal repayment in July 2003 was funded with additional QAL
borrowings. The Company's share of payments,

68

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 the Company's interest in QAL
were to be sold, the Company believes that the Company'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 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,

69

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, the Company 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"). The Company
currently estimates that its Exit Costs will be in the range of $100.0 million
to $120.0 million. The Company 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 the Company'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 the Company 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 the
Company'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, the Company 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 the Company's exposure to
changes in foreign currency exchange rates. However, because the agreements
underlying the Company's hedging positions provided that the counterparties to
the hedging contracts could liquidate the Company's hedging positions if the
Company filed for reorganization, the Company chose to liquidate these positions
in advance of the initial Filing Date. The Company 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. The Company's hedging transactions have been
intended to provide price risk management in respect of the net exposure of
earnings resulting from (i) anticipated sales of alumina, primary aluminum and
fabricated aluminum products, less (ii) expected purchases of certain items,
such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with
the
70

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. The Company enters into forward exchange contracts to
hedge material cash commitments for foreign currencies. The Company's primary
foreign exchange exposure is related to the Company'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. The Company 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

71

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, the Company 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
the Company's Trentwood facility in the State of Washington. The Company 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. The Company 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 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.

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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 & CHEMICAL CORPORATION

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

KAISER ALUMINUM & CHEMICAL CORPORATION

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

Dated: August 13, 2004

74

EXHIBIT INDEX

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

* Filed herewith.