<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q

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

               For the quarterly period ended September 30, 2001

                          Commission File No. 1-12248
                          KAISER GROUP HOLDINGS, INC.
             (successor issuer to Kaiser Group International, Inc.)
             (Exact name of registrant as specified in its charter)

                     Delaware                           54-1437073
          -------------------------------          -------------------
          (State or other jurisdiction of            (I.R.S. Employer
          incorporation or organization)           Identification No.)

            9300 Lee Highway, Fairfax, Virginia           22031-1207
          ----------------------------------------        -----------
          (Address of principal executive offices)         (Zip Code)

       Registrant's telephone number including area code: (703) 934-3300

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

On November 9, 2001, there were 1,585,221 shares of Kaiser Group Holdings, Inc.
Common Stock, par value $0.01 per share, outstanding.
<PAGE>

                          KAISER GROUP HOLDINGS, INC.

                              INDEX TO FORM 10-Q

<TABLE>
<CAPTION>



                                                                                                  Page
<S>                                                                                             <C>

Part I - Financial Information

Item 1. Financial Statements:

        Consolidated Balance Sheets -
           September 30, 2001 and December 31, 2000......................                           3

        Consolidated Statements of Operations and Comprehensive Loss
           Three and Nine Months Ended September 30, 2001 and 2000.......                           4

        Consolidated Statements of Cash Flows -
           Nine Months Ended September 30, 2001 and 2000.................                           5

        Notes to Consolidated Financial Statements....................                           6-13

Item 2. Management's Discussion and Analysis of Financial Condition
           and Results of Operations.....................................                       13-22

Item 3. Quantitative and Qualitative Disclosures About Market Risk....                             22

Part II - Other Information

Item 1. Legal Proceedings Item........................................                             22

Item 2. Changes in Securities and Use of Proceeds.....................                             22

Item 3. Defaults Upon Senior Securities...............................                             22

Item 4. Submission of Matters to a Vote of Security Holders...........                             22

Item 5. Other Information.............................................                             22

Item 6. Exhibits and Reports on Form 8K...............................                             22

</TABLE>
<PAGE>

                  KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                       September 30,       December 31,
                                                                                       -------------       ------------
                                                                                            2001               2000
                                                                                          -------            --------
<S>                                                                                   <C>                 <C>
                                 ASSETS                                                           Successor
                                                                                                  ---------
Current Assets
Cash and cash equivalents.......................................................          $ 9,989            $ 41,344
Restricted cash and cash equivalents............................................           16,326              16,190
Contract receivables, net.......................................................              126               1,692
Prepaid expenses and other current assets.......................................            2,452               2,861
Net assets of discontinued operations...........................................           21,631              10,712
                                                                                          -------            --------
    Total Current Assets........................................................           50,524              72,799
                                                                                          -------            --------
Other Assets
Investments in and advances to affiliates.......................................           29,176              26,692
Notes receivable................................................................            6,550               6,550
Other long-term assets..........................................................              346                 127
                                                                                          -------            --------
                                                                                           36,072              33,369
                                                                                          -------            --------
    Total Assets................................................................          $86,596            $106,168
                                                                                          =======            ========
                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
Accounts payable................................................................          $ 1,016            $  2,367
Accrued salaries and benefits...................................................            7,572               9,148
Other accrued expenses..........................................................            5,008               6,848
Preferred stock dividend payable................................................              731                  --
Income taxes payable............................................................            1,068                 305
                                                                                          -------            --------
    Total Current Liabilities...................................................           15,395              18,668

Commitments and Contingencies

Preferred stock, par value $.01 per share:
  Authorized--2,000,000 shares
  Issued and outstanding--1,136,024 shares at September 30, 2001; stated at
  liquidation value of $55 per share............................................           62,481                  --

New Common stock, par value $.01 per share:
  Authorized--3,000,000 shares
  Issued and outstanding--1,585,221 shares at September 30, 2001................               16                  --

Old Common stock, par value $.01 per share:
  Authorized--90,000,000 shares
  Issued and outstanding--23,414,328 shares at December 31, 2000................               --                 234

Capital in excess of par........................................................            9,403              87,266
Accumulated loss................................................................             (656)                 --
Accumulated other comprehensive income (loss)...................................              (43)                 --
                                                                                          -------            --------
    Total Liabilities and Shareholders' Equity..................................          $86,596            $106,168
                                                                                          =======            ========
</TABLE>

                See notes to consolidated financial statements

                                       3
<PAGE>

                 KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES
         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                   (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                     For the Three             For the Nine
                                                                     Months Ended              Months Ended
                                                                     September 30,             September 30,
                                                             ------------------------  ------------------------
                                                                 2001         2000        2001        2000
                                                              -------       -------     -------     ---------
                                                            Successor   Predecessor   Successor   Predecessor
                                                            ---------   -----------   ---------   -----------
                                                                  (Unaudited)               (Unaudited)
<S>                                                         <C>         <C>           <C>         <C>
Gross Revenue.........................................        $    --       $    --          --     $ 271,385
  Subcontract and direct material costs...............             --            --          --      (195,367)
                                                              -------       -------     -------     ---------
Service Revenue.......................................             --            --          --        76,018

Operating Expenses
  Direct labor and fringe benefits....................             --            --          --        63,426
  Administrative expenses.............................          2,240         1,343       8,843         6,389
  Depreciation and amortization.......................             --           822          --         2,467
  Restructuring charges...............................             --         2,462          --         4,377
                                                              -------       -------     -------     ---------
Operating Income (Loss)...............................         (2,240)       (4,627)     (8,843)         (641)

Other Income (Expense)
   Equity income in earnings of affiliate, net
    of amortization of $881 and $2,643,
    respectively, for the three and
    nine months ended September 30, 2001..............          2,843         2,121       8,665         2,621
   Interest income....................................            429           793       1,755         1,966
   Interest expense...................................             --            --          --        (8,445)
                                                              -------       -------     -------     ---------
Income (Loss) From Continuing Operations
   Before Income Tax and Minority Interest............          1,032        (1,713)      1,577        (4,499)
   Income tax benefit (expense).......................           (801)        7,672      (1,815)        8,420
                                                              -------       -------     -------     ---------
Income (Loss) From Continuing Operations
 Before Minority Interest.............................            231         5,959        (238)        3,921
   Minority interest in net income
    of affiliated company.............................             --            --          --        (5,999)
                                                              -------       -------     -------     ---------
Income (Loss) From Continuing Operations..............            231         5,959        (238)       (2,078)
   Loss on sale of discontinued
    operations, net of tax............................            --         (9,435)         --        (9,435)
   Income (loss) from discontinued
    operations, net of tax............................            (51)         (755)       (418)        1,089
                                                              -------       -------     -------     ---------
Income (Loss) before Extraordinary Item...............            180        (4,231)       (656)      (10,424)
Extraordinary Item, net of tax........................             --           (35)         --           (35)
                                                              -------       -------     -------     ---------
Net Income (Loss).....................................            180        (4,266)       (656)      (10,459)

Preferred stock dividends.............................         (1,102)           --      (1,989)           --
                                                              -------       -------     -------     ---------
Net Loss Applicable to Common Shareholders  Net Loss..        $  (922)      $(4,266)    $(2,645)    $ (10,459)
                                                              =======       =======     =======     =========
Basic and Diluted Earnings (Loss) Per Common Share:
   Continuing operations, net of tax..................        $ (0.55)      $  0.26     $ (2.27)    $   (0.09)
   Discontinued operations, net of tax................          (0.03)        (0.44)      (0.43)        (0.36)
   Extraordinary item, net of tax.....................             --            --          --            --
                                                              -------       -------     -------     ---------
   Net Earnings (Loss) Per Common Share...............        $ (0.58)      $ (0.18)    $ (2.70)    $   (0.45)
                                                              =======       =======     =======     =========
Weighted average shares for basic and diluted
  earnings (loss) per common share....................          1,585        23,255         980        23,720
                                                              =======       =======     =======     =========
Comprehensive Income (Loss)
   Net Income (Loss)..................................        $   180       $(4,266)    $  (656)    $ (10,424)
  Other Comprehensive Income (Loss):
     Change in cumulative foreign translation
       Adjustments....................................             (4)        2,793         (43)        3,127
                                                              -------       -------     -------     ---------
        Total Comprehensive Income (Loss).............        $   176       $(1,473)       (699)    $  (7,297)
                                                              =======       =======     =======     =========
</TABLE>
                See notes to consolidated financial statements.

                                       4
<PAGE>


                  KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                                    For the nine
                                                                                                    Months ended
                                                                                                    September 30,
                                                                                           -------------------------------
                                                                                               2001               2000
                                                                                           ------------       ------------
                                                                                             Successor        Predecessor
                                                                                                     (Unaudited)
<S>                                                                                        <C>               <C>

Operating Activities
  Net loss..........................................................................         $   (656)          $(10,459)
  Adjustments to reconcile net loss to net cash used in operating
    activities:
     Net loss (income) of discontinued operations...................................              418             (1,089)
     Loss on sale of discontinued operations........................................               --              9,435
     Depreciation and amortization..................................................               --              2,467
     Extraordinary item.............................................................               --                 35
     Equity in income of unconsolidated affiliate...................................           (8,665)            (2,621)
     Minority interest in net income of affiliate...................................               --              5,999
     Changes in operating assets and liabilities, net of acquisitions
       and dispositions:
       Contract receivables, net....................................................            1,566              7,174
       Prepaid expenses and other current assets.. .................................              409             (2,016)
       Accounts payable and accrued expenses........................................           (4,767)           (10,081)
       Income tax payable...........................................................              763             (2,125)
       Other operating activities...................................................              795             (8,929)
                                                                                             --------           --------
       Net Cash Used in Operating Activities before claims resolution...............          (10,137)           (12,210)
       Distributions to allowed class 3 claim holders...............................             (912)                --
                                                                                             --------           --------
       Net Cash Used by Operating Activities........................................          (11,049)           (12,210)
                                                                                             --------           --------
Investing Activities
    Distributions from 50% owned affiliate..........................................            6,200                 --
    Proceeds from sales of discontinued operations..................................               --             37,717
    Purchases of fixed assets.......................................................               --               (666)
                                                                                             --------           --------
        Net Cash Provided by Investing Activities...................................            6,200             37,051
                                                                                             --------           --------
Financing Activities
    Distribution of income to minority interest....................................                --             (8,250)
    Release of cash collateral for performance guarantee...........................                --                455
    Redemption of Senior Notes.....................................................                --             (1,000)
    Cash reserved for unresolved claims............................................           (12,331)
    Distribution to allowed class 4 claim holders..................................           (12,793)                --
    Repurchase of New Common stock pursuant to buy back............................              (125)                --
    Payment of preferred stock dividends...........................................            (1,257)                --
                                                                                             --------           --------
        Net Cash Used in Financing Activities......................................           (26,506)            (8,795)
                                                                                             --------           --------
Increase (Decrease) in Cash and Cash Equivalents...................................           (31,355)            16,046
Cash and Cash Equivalents at Beginning of Period...................................            41,344             26,391
                                                                                             --------           --------
Cash and Cash Equivalents at End of Period.........................................          $  9,989           $ 42,437
                                                                                             ========           ========
</TABLE>



See notes to consolidated financial statements.


                                       5
<PAGE>

                 KAISER GROUP HOLDINGS, INC. AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)



1.  Basis of Presentation

     The accompanying consolidated financial statements of Kaiser Group
Holdings, Inc. and subsidiaries (the Company), except for the December 31, 2000
balance sheet (derived from audited financial statements), are unaudited and
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included.

     These statements should be read in conjunction with the Company's audited
consolidated financial statements and footnotes and the other information
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000. Certain reclassifications have been made to the prior period financial
statements to conform them to the presentation used in the September 30, 2001
financial statements.

     Kaiser Group Holdings, Inc. is a Delaware holding company that was formed
on December 6, 2000 for the purpose of owning all of the outstanding stock of
Kaiser Group International, Inc. ("Old Kaiser"), which in turn continues to own
the stock of its remaining subsidiaries. On June 9, 2000, Old Kaiser and 38 of
its domestic subsidiaries voluntarily filed for protection under Chapter 11 of
the United States Bankruptcy Code in the District of Delaware (case nos. 00-2263
to 00-2301). Old Kaiser emerged from bankruptcy with an approved plan of
reorganization (the Second Amended Plan of Reorganization (the "Plan")) that was
effective on December 18, 2000 (the "Effective Date"). The Company is deemed a
"successor issuer" to Old Kaiser by virtue of rule 12-g 3(a) under the
Securities Exchange Act of 1934. References to "the "Company" or "Kaiser
Holdings" in this report refer to Kaiser Group Holdings, Inc. and its
consolidated subsidiaries. A summary of the Plan for Old Kaiser as well as other
information relative to the process regarding the Plan distributions of the cash
and new securities can be found in a Current Report on Form 8-K dated December
5, 2000 filed by Old Kaiser.

     Currently, apart from resolving remaining bankruptcy claims, the Company
has only a limited number of activities, assets and liabilities, primarily
consisting of:

 .  the ownership of a 50% interest in Kaiser-Hill Company, LLC ("Kaiser-Hill"),
   which serves as the general contractor at the U.S. Department of Energy's
   Rocky Flats Environmental Technology Site near Denver, Colorado, for the
   performance of a contract for the closure of the site. Kaiser-Hill has
   performed for the Department of Energy ("DOE") at this site since 1995 and in
   January 2000 was awarded a new contract to manage the closure of the site
   within this decade. Rocky Flats is a former DOE nuclear weapons-production
   facility, and under the new closure contract, Kaiser-Hill is working to
   stabilize and safely store radioactive materials at the site, to clean up
   areas contaminated with hazardous and radioactive waste, and to restore much
   of the 6,000-acre site to the public.
 .  the resolution and closeout of a completed contract for the engineering and
   construction of a steel mini-mill for Nova Hut in the Czech Republic ("Nova
   Hut project"). See Note 6 - Contingencies.
 .  the holding of a minority ownership interest in ICF Consulting Group Inc.
   (the consulting division that Old Kaiser sold in 1999) as well as the
   interest-bearing promissory notes and escrowed cash received in connection
   with that sale.
 .  a wholly owned captive insurance company that is in the process of resolving
   existing claims. As a result of the Company's sale of its E&C Group in 2000,
   the captive insurance company will be liquidated over time as existing claims
   are resolved.
 .  an ongoing obligation to fund a capped, post-employment medical benefit plan
   for a fixed group of retirees.


Changes in Accounting Affecting Comparability of Financial Statements
---------------------------------------------------------------------

     Adoption of Fresh-Start Reporting: The Company adopted fresh start
reporting in its consolidated balance sheet as of December 31, 2000. The
American Institute of Certified Public Accountants' Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
(SOP 90-7), requires that under certain circumstances resulting from a
bankruptcy, a new entity is created for financial reporting purposes upon the
emergence of that entity from bankruptcy.  Accordingly, the value of the
reorganized enterprise becomes the established amount for the emerging balance
of stockholders' equity and any accumulated deficit of the predecessor entity is
offset against available paid-in-capital to result in an emerging retained
earnings of zero.  Additionally, assets and liabilities are recorded at their
fair values.  Since the financial information as of and subsequent to December
31, 2000 has been prepared as if it is of a new reporting entity, a

                                       6
<PAGE>

black line has been shown to separate new entity information from prior entity
information on the Statements of Operations and the Statements of Cash Flows
since such presentations were not prepared on a comparable basis to the prior
year.

     The recorded value for the emergent enterprise used for fresh start
reporting, resulting in the December 31, 2000 stockholder's equity balance of
$87.5 million, was determined by management with the assistance of independent
advisors.  The methodology employed involved estimation of the enterprise value
taking into consideration a discounted cash flow analysis.  The discounted cash
flow analysis was based on a seven-year cash flow projection prepared by
management - taking into consideration the terminal value of its assets and
liabilities as of immediately prior to its emergence from bankruptcy on December
18, 2000.  Terminal values of assets and liabilities were determined based
either on contracted amounts, actuarial present values and/or management's
estimates of the outcome of certain operating activities. Net after-tax cash
flows, assuming a 40% effective tax rate, were discounted at 16% in order to
take into consideration the risks and uncertainties inherent in such
projections.  The cash flow projections were based on estimates and assumptions
about circumstances and events that have not yet taken place.  Estimates and
assumptions regarding individual retained matters which form the collective
composition of the overall enterprise value as of December 18, 2000 are
inherently subject to significant economic and competitive uncertainties and
contingencies beyond the control of the Company.  Accordingly, there may be
differences between projections and actual results because events and
circumstances frequently do not occur as expected and may be significant.  More
specifically, assumptions within the valuation related to the amount and timing
of the ultimate performance and related cash flows of the Company's investment
in Kaiser-Hill have the greatest impact to the overall enterprise valuation.

     Investment in Kaiser-Hill: Prior to June 8, 2000, through a designated
majority representation on Kaiser-Hill Company, LLC's board of managers, the
Company had a controlling interest in Kaiser-Hill and therefore consolidated
Kaiser-Hill's results of operations with those of its only other remaining
business segment, the Engineers and Constructors Group. Effective June 8, 2000,
the Company adopted the equity method of accounting for Kaiser-Hill coincident
with its signing of an agreement whereby the other 50% owner has the right to
designate 3 out of the 5 members of Kaiser-Hill's board of managers. The Company
retains the right to designate 2 out of the 5 members of Kaiser-Hill's board of
managers. Accordingly, the financial information contained herein for Kaiser-
Hill is reflected on a consolidated basis for all periods presented through June
8, 2000, and financial information for periods after June 8, 2000 is reflected
on the equity method.

     Discontinued Engineering Operations: In two separate transactions completed
in July 2000 and August 2000, the Company sold the majority of its Engineering
Operations pursuant to its Plan of Reorganization as filed with the Bankruptcy
Court.  The Company did not divest of a particular foreign engineering operation
that is in the final stages of completing its sole project and plans to
discontinue such foreign operations upon the project's completion.  Accordingly,
the financial results of the divested and non-divested engineering operations
have been presented in the accompanying financial statements as "discontinued
operations" for all periods presented.

2.  General Terms of Plan and Status of Bankruptcy Distributions

     The effectiveness of the Plan as of December 18, 2000 did not in and of
itself complete the bankruptcy process. The process of resolving in excess of
$500 million of claims initially filed in the Kaiser Group International
bankruptcy process is ongoing. Old Kaiser objected to the majority of the
unresolved claims, and if such claims are not settled via the objection or
dispute resolution processes or other means, they will ultimately be heard and
determined by the Bankruptcy Court. Once a claim is resolved with an amount
determined to be owed to the creditor, such portion of the claim is deemed to be
an allowed claim by the Bankruptcy Court (an "Allowed Claim"). The Company
cannot predict with accuracy when the claims resolution process will be complete
or what the total amount of Allowed Claims will be, but it does expect the
process to continue into 2002.

     In very general terms, the Plan contemplated three basic different classes
of creditors:

 .  Allowed "Class 3 claims" against Kaiser Group International bankruptcy -
   generally trade and similar creditors' claims of $20,000 or less -  received
   cash for their claims.

 .  Allowed "Class 4 claims", the largest class of claims against Kaiser Group
   International bankruptcy, is made up of creditor claims other than Class 3
   claims and equity claims. Class 4 claims included holders of the former
   Kaiser Group International senior subordinated notes due 2003. Holders of
   allowed Class 4 claims received a combination of cash and Kaiser Group
   Holdings preferred and common stock in respect of their claims. Such holders
   received one share of preferred stock and one share of common stock for each
   $100 of claims. However, the number of shares of preferred stock issued was
   reduced by one share for each $55.00 of cash received by the holder of an
   allowed Class 4 claim.

                                       7
<PAGE>

 .  The third class of claims recognized in the Kaiser Group International
   bankruptcy are equity claims, consisting of holders of former Kaiser Group
   International common stock and other "Equity Interests" as defined in the
   Plan. Under the Plan, holders of Equity Interests will receive a number of
   shares of common stock of Kaiser Group Holdings equal to 17.65% of the number
   of shares of such common stock issued to holders of allowed Class 4 Claims.
   In the initial distribution, one share of Kaiser Group Holdings common stock
   was issued for each 96 shares of previously outstanding Kaiser Group
   International common stock. Additional distributions of Kaiser Group Holdings
   common stock may be made in the future as additional shares of common stock
   are issued to holders of newly allowed Class 4 claims, if any. Apart from
   holders of former Kaiser Group International common stock, the only holders
   of Equity Interests of which the Company is aware are the former shareholders
   of ICT Spectrum Constructors, Inc., a corporation acquired by merger with a
   subsidiary of Kaiser Group International in 1998. The Bankruptcy Court
   recently confirmed the equity nature of those claims, which were treated as
   such in the initial distribution. Old shares of Old Kaiser were essentially
   cancelled and will continue to represent the right to this distribution until
   all such shares have been exchanged for the New Common.

     Pursuant to the terms of Old Kaiser's Plan, the Company was required to
complete its initial bankruptcy distribution within 120 days of the effective
date of the Plan.  Accordingly, on April 17, 2001, the Company effected its
initial distribution (as described in following discussions).  At that time,
there were approximately $136.8 million of Class 4 claims that had been allowed
in the bankruptcy process.  The amount of unresolved claims remaining was
approximately $130.5 million.

     To address the remaining unresolved claims, the Bankruptcy Court issued an
order on March 27, 2001, establishing an Alternative Dispute Resolution ("ADR")
procedure whereby the claimants and Old Kaiser produce limited supporting data
relative to their respective positions and engage in initial negotiation efforts
in an attempt to reach an agreed claim determination.  If necessary, thereafter,
the parties are required to participate in a non-binding mediation before a
mediator pre-selected by the Bankruptcy Court.  All unresolved claims are
subject to the ADR process. Since April 17, 2001, the date of initial
distribution, $49.3 million of asserted claims have been withdrawn, negotiated
or mediated to an agreed amount, resulting in a cash payment of approximately
$0.9 million without any additional issuance of New Preferred or New Common
stock. At November 12, 2001, the amount of unresolved claims was approximately
$81.0 million. The Company continues to aggressively pursue the resolution of
these remaining claims primarily via the ADR process.  The Company continues to
believe that the amount of Class 4 claims to ultimately be allowed in the Kaiser
Group International bankruptcy will not exceed $150.0 million.  As demonstrated
in the claim settlements completed since April 17, 2001, and based on the belief
that it is in the best interest of the Company and its current stockholders, the
Company has been settling certain remaining Class 4 claims entirely for cash
payments in lieu of the cash, preferred and common stock combination
contemplated in Old Kaiser's Plan of Reorganization.  The Company intends to
continue to use this settlement alternative during its resolution of remaining
Class 4 claims, but has no ability to determine the effect of the outcome on its
overall financial condition in the event such settlements are accepted in the
future.

     With respect to the unresolved claims, the Plan required that, at the date
of the initial distribution, sufficient cash reserves were to be retained by the
Company such that if all remaining unresolved claims were ultimately deemed
allowed at the originally claimed amount, the Company would be able to satisfy
the allowed claims including dividends accruing on related preferred stock since
April 17, 2001.  The cash reserve requirement and the fact that the Company had
not yet received a substantial cash payment that the Company asserts it is due
from the owner of the Nova Hut steel mini-mill in the Czech Republic (see Note 6
- Contingencies) limited the amount of cash available at the time of the initial
distribution to the holders of allowed Class 4 claims. The Company determined
that an aggregate of $25.0 million, or approximately $0.09347 per $1.00 of
Allowed and "deemed allowed" Class 4 claims, was available at the time of the
initial distribution to Allowed Class 4 claim holders.  Thus, more shares of
Kaiser Group Holdings preferred stock were issued than would have been had the
claims resolution process had advanced more quickly and had more cash been
available, collectively, from the Nova Hut project and/or other sources.  Due to
the proportion of remaining unresolved Class 4 claims in relation to the total
of all resolved and unresolved claims, approximately $12.3 million of the $25.0
million in available cash was paid into the reserve cash account as of April 17,
2001.

     As discussed in General Terms and Distribution Status of Plan, the exchange
ratio of Kaiser Group Holdings common stock for former Kaiser Group
International common stock (1 share for 96 shares) and the nature of the
distribution of shares of common stock to holders of Class 4 claims resulted in
there being a number of holders of a relatively small number of shares of Kaiser
Group Holdings common stock.  Therefore, the Company initiated an offer to
purchase all, but not less than all, shares of Kaiser Group Holdings common
stock distributable to persons who received 99 or fewer shares in the initial
distribution for a price equal to $4.50 per share.  This price was generally
based on the trading price of Kaiser Group International common stock during the
prior 30 days, which may not have borne any relation to the true value of such
shares.  The Company made no representation as to the fairness of the offer
price.  The offer expired on June 15, 2001 with 25,650 shares being repurchased
by the Company under this plan for a total of $115,000.

                                       8
<PAGE>

     In the case of holders of former Kaiser Group International common stock,
the offer to purchase shares was conditioned on the holder's agreement to also
sell the holder's right to future distributions of shares of Kaiser Group
Holdings' common stock under the Plan.  The offer price for such distribution
rights was $0.50 per share that would otherwise be distributed.  This offer
price was determined arbitrarily, based primarily on the Company's expectation
that future distributions of shares of Kaiser Group Holdings' common stock would
not exceed 10% of the number of shares then distributed at the present time.
Holders who wished to sell their right to future distributions had to also sell
their shares of Kaiser Group Holdings common stock.  Effective as of June 15,
2001, the Company had repurchased 20,002 rights under this plan for a total cost
of $10,000.

     The following table (amounts in thousands) depicts the Plan's unaudited
status on a pro forma basis as of September 30, 2001, as if all remaining
bankruptcy claims were resolved, all related bankruptcy distributions were made
and a projected preferred stock redemption had been completed.  The pro forma
adjustments are based on the following assumptions:

 .    the remaining Allowed Class 4 Claims will approximate $12.2 million, and

 .    the total excess cash reserves available upon the completion of all
     bankruptcy claims and distributions approximates $10.3 million to be used
     in the redemption of outstanding New Preferred Stock.

<TABLE>
<CAPTION>

                                                                              (Amounts in Thousands)
                                                                                    Estimated
                                                                                    Remaining
                                                              As Reported          Distributions
                                                              September 30,       and Redemptions                   Pro Forma
Balance Sheet Category                                            2001                 (c)                      September 30, 2001
----------------------                                        --------------      ----------------              ------------------
<S>                                                            <C>                <C>            <C>           <C>
Cash and restricted cash                                         $26,315               $(11,400)  a),b)                $14,915
Other current assets                                              24,209                                                24,209
Other noncurrent assets                                           36,072                     --                         36,072
                                                                 -------               --------                        -------
     Total Assets                                                $86,596               $(11,400)                       $75,196
                                                                 =======               ========                        =======

Current Liabilities                                              $15,395                                               $15,395
Preferred Stock                                                   62,481               $ (4,691)  a),b)                 57,790
Common Stock                                                          16                      1   a)                        17
Capital in excess of par                                           9,403                 (6,710)  a)                     2,693
Accumulated loss                                                    (656)                                                 (656)
Accumulated other comprehensive amount                               (43)                    --                            (43)
                                                                 -------               --------                        -------
    Total Liabilities and Shareholders' Equity                   $86,596               $(11,400)                       $75,196
                                                                 =======               ========                        =======
</TABLE>


Pro forma Adjustments and Assumptions:

a)   Reflects the final bankruptcy distribution as though an additional $12.2
     million in claims are deemed Allowed (resulting in the Company's total
     Class 4 Claim estimate of $150.0 million in cumulatively Allowed Class 4
     Claims upon resolution of all bankruptcy claims):

     . the issuance of $1.14 million in cash ($0.09347 per $1.00 of newly
       Allowed Claim)
     . the issuance of 101,266 shares of New Preferred Stock
     . the issuance of 119,137 shares of New Common Stock

b)   Reflects the redemption of 187,273 shares of New Preferred Stock, of the
     1,245,073 in pro forma outstanding shares of preferred stock, at
     $55.00/share, $10.3 million of cash available from the "reserve" fund and
     from operations, upon the resolution of all bankruptcy claims, provided
     that the total of Allowed Class 4 Claims does not exceed $150 million. The
     pro forma redemption does not intend to reflect future redemptions based on
     distributions of any cash received by the Company from sources other than
     the excess cash from the "reserve" fund.
c)   These adjustments do not reflect the affect, if any, of any claims that may
     be settled for something other than the Class 4 distribution discussed
     previously in this footnote.


3.   Earnings Per Share

     Basic earnings per share (EPS) is computed by dividing net income (loss) by
the weighted average number of common shares outstanding for the period.   Under
the bankruptcy plan, holders of Kaiser Group International, Inc. common stock
(Old Common) were to receive a number of shares of common stock of Kaiser Group
Holdings (New Common) equal to 17.65% of the number of shares of such common
stock issued to holders of Class 4 claims. In the initial bankruptcy
distribution, effected on April 17, 2001, one share of Kaiser Group Holdings'
common stock was issued for each 96 shares of  previously outstanding Kaiser
Group International common stock. The weighted average shares outstanding for
the three and nine months ended September 30, 2001 retroactively adjusts for the
conversion of the Old Common to New Common effective with the adoption of fresh-
start reporting. As additional distributions of Kaiser Group Holdings common
stock are made to holders of newly allowed Class 4 claims, the conversion ratio
of 96 shares may be adjusted to reflect the final total number of New Common.
Because Kaiser Group Holdings is assumed to be a new entity (as discussed in
Note 1) period prior to the adoption of fresh-start reporting have not been
restated.

                                       9
<PAGE>

     Diluted EPS normally includes the weighted-average effect of dilutive
securities outstanding during the period.  Pursuant to the Company's Plan of
Reorganization that was effective as of December 18, 2000, all then outstanding
common stock equivalents were cancelled.  Accordingly, no anti-dilutive
information is presented as of September 30, 2001 and the Company had no anti-
dilutive securities outstanding at September 30, 2000.

     The effect of preferred dividends of $1.1 million and $2.0 million has been
included in continuing operations in the calculation of basic and diluted
earnings per share for the three and nine months ended September 30, 2001,
respectively.


4.  Components of net assets of discontinued operations

     The components of the "Net Assets of Discontinued Operations" consist of
the carrying value of the net assets of the Nova Hut project and were as follows
(in thousands):
<TABLE>
<CAPTION>

                                                              September 30, 2001   December 31, 2000
                                                              -------------------  ------------------
                                                                  (unaudited)
<S>                                                           <C>                  <C>

       Cash.................................................        $   137             $   276
       Letter of credit cash collateral drawn by Nova Hut...         11,100                   -
       Retained accounts receivable, less reserves
        and allowances of $4,044 and $3,081, respectively...         16,769              17,559
       Subcontractor retentions and other accounts payable..         (6,375)             (7,123)
                                                                    -------             -------
                                                                    $21,631             $10,712
                                                                    =======             =======
</TABLE>

     As of December 31, 2000, the Company had $11.1 million in letters of credit
outstanding, collateralized by restricted cash balances for this project.  At
December 31, 2000, the restricted cash balance of $11.1 million was not included
as part of "Net Assets of Discontinued Operations".   On February 16, 2001,
however, Nova Hut drew against the $11.1 million letter of credit prior to its
expiration on March 5.  Accordingly, the $11.1 million has been included in the
September 30, 2001 balance above.  See Note 6 - Contingencies. The Company has
categorized this entire balance as a current asset in the accompanying
Consolidated Balance Sheets.


5.   Preferred Stock

     Resulting from its initial bankruptcy distribution on April 17, 2001, the
Company had $62.5 million in preferred stock outstanding as of September 30,
2001.  The preferred stock is a series of authorized preferred stock designated
as "Series 1 Redeemable Cumulative Preferred Stock," and has a par value of
$0.01 per share.  The preferred stock ranks ahead of the Company's New Common
Stock.

     Cumulative dividends on the preferred stock are payable on a quarterly
basis, as of April 30, July 31, October 31, and January 31, either in cash at an
annual rate of 7% of the liquidation preference per share or in additional
shares of preferred stock at an annual rate of 12% of the per share liquidation
preference.  Dividends accrue on the preferred stock coincident with the initial
distribution date, April 17, 2001. The dividend due to holders of record on
October 31, 2001, totaling approximately $1.1 million, was paid on November 7,
2001.  At September 30, 2001, in addition to the $10.5 million of cash reserves
for unresolved claims, the Company has reserved $1.4 million in the cash reserve
account for future dividends of preferred stock related to unresolved claims.

     The preferred stock has a liquidation preference of $55 per share plus the
amount of unpaid dividends, if any.  Upon the liquidation or dissolution of the
Company, each holder of preferred stock will be entitled to be paid this per
share liquidation preference before any holders of New Common stock or any other
junior securities of the Company receive payment for their shares.   If, in a
liquidation or dissolution setting, assets remaining after distribution to
holders of debt and other obligations are insufficient to pay all holders of
preferred stock the per share liquidation preference, then such assets will be
distributed on a proportionate basis to the holders of preferred stock and any
securities ranking on a parity with the preferred stock.

     The Company will have the option to redeem the preferred stock at any time,
in whole or in part, at a redemption price of 100% of the liquidation preference
per share plus all accrued and unpaid dividends.  In addition, any net proceeds
in excess of $3.0 million in a calendar year received by the Company or any of
its direct or indirect subsidiaries from the disposition of assets to an
unaffiliated party outside of the ordinary course of business must be used to
redeem preferred stock at a redemption price of 100% of the liquidation
preference per share plus all accrued and unpaid dividends. Furthermore, the
Company has certain other assets relative to the Nova Hut Project. To the extent
that such assets are recovered, a portion must be used to redeem preferred stock
at a

                                       10
<PAGE>

redemption price of 100% of the liquidation preference per share plus all
accrued and unpaid dividends. All outstanding shares of preferred stock are
required to be redeemed by the Company on or before December 31, 2007, and if
such redemption does not occur, holders of preferred stock will be entitled to
elect two-thirds of the directors of the Company.

     The Company will be required to offer to purchase the preferred stock at
100% of the liquidation preference per share plus accrued and unpaid dividends
in connection with a change of control of Kaiser Holdings.

     Holders of preferred stock generally will be entitled to vote with holders
of New Common Stock on all matters submitted to a vote of shareholders, with
each share of preferred stock being entitled to one-tenth of a vote.  In
addition, holders of preferred stock will have the right to vote separately as a
class to exercise their right to elect an additional director due to a failure
to pay a quarterly dividend, to elect two-thirds of the directors if the
preferred stock is not redeemed by December 31, 2007, and to consent to the
issuance of any senior or parity securities.  The terms of the preferred stock
may not be materially and adversely modified without the consent of holders of a
least two-thirds of the preferred stock.  If the Company or any of its
affiliates holds any preferred stock, they will not be entitled to vote that
preferred stock.


6.   Contingencies

     Kaiser Group Holdings has various obligations and liabilities from its
continuing operations, including general overhead expenses in connection with
maintaining, operating and winding down the various entities and net assets
comprising Kaiser Group Holdings. Additionally, the Company believes contingent
liabilities may exist in the following areas.

     Nova Hut: Although Old Kaiser sold its Metals, Mining and Industry business
unit to Hatch in August, 2000, it retained its Netherlands subsidiary, Kaiser
Netherlands, B.V., which is responsible for a turnkey engineering and
construction services contract for the construction of a steel mini-mill in the
Czech Republic for Nova Hut. At the present time, the mini-mill project is
mechanically complete. The contract with Nova Hut provided for a maximum of
three possible performance tests. The first performance test was completed on
November 13, 2000. Kaiser Netherlands believes that the first performance test
was successful and that Nova Hut should have agreed to Final Acceptance of the
mini-mill and made final payment at the completion of the first test.  However,
Nova Hut has asserted that the first test was not successful.  Despite
consistent and lengthy efforts on the part of Kaiser Netherlands and the Company
to address and protect their positions, this matter remains disputed and Kaiser
Netherlands and the Company resorted to legal proceedings to enforce their
rights. The primary legal venue at this time is the Delaware bankruptcy
proceeding for Kaiser Group International, where Kaiser has asserted claims
against Nova Hut and the International Finance Corporation ("IFC"), while
rejecting claims from Nova Hut and the IFC. The initiation of a future
arbitration proceeding under the Nova Hut contract is also being contemplated.
The cost of litigating this dispute, as well as the cost of a possible ongoing
presence in Ostrava, Czech Republic, depending upon a final outcome, have had
and are expected to continue to have a negative impact on the cash flow of
Kaiser Netherlands and Kaiser Group Holdings. In addition to litigation actions,
Kaiser Holdings has been engaged in direct settlement discussions with Nova Hut,
which if successful would suspend current litigation proceedings.

     In connection with the Nova Hut project, on February 16, 2001 an $11.1
million cash collateralized letter of credit, which was originally expected to
remain in place for at least one year following the achievement of Final
Acceptance of the mini-mill, was drawn by Nova Hut. Kaiser Holdings, through
litigation, is attempting to regain the cash drawn from Nova Hut pursuant to the
terms of the Nova Hut contract.  Nova Hut has also drawn down the $11.0 million
retention account, resulting from withholdings from payments due to Old Kaiser
and its subcontractors, that was held in a bank in the Czech Republic. In
addition, under the Nova Hut contract as it currently exists, Kaiser Netherlands
believes that amounts payable to it include a $10 million fee due upon
achievement of Final Acceptance. Kaiser Holdings has accrued the majority of
this fee over the duration of its performance on the project and currently has
it included as part of Net Assets of Discontinued Operations on the Consolidated
Balance Sheet - See Note 4.

     On May 3, 2001, Kaiser Holdings received correspondence from Nova Hut
claiming that due to Kaiser Netherland's nonperformance of a second and third
performance test by a particular date, it had effectively breached the contract
and accordingly Nova Hut demanded that it be paid $46.0 million for the breach
pursuant to the terms of the contract.   Relative to this breach claim, Nova Hut
withdrew the $22.1 million of cash (consisting of the $11.1 million drawn
performance letter of credit and $11.0 million retention funds), that had been
maintained for Kaiser Netherland's benefit in a separate Czech bank account, as
it is entitled to do pursuant to the contract terms in the event of a valid
breach.  In addition, in consequence of its breach claim, in July 2001, Nova Hut
attempted to secure payment of a $5 million promissory note issued by Kaiser
Netherlands as a project performance guarantee instrument.  Nova Hut is
attempting to win a judgment in favor of payment of the promissory note by
Kaiser Netherlands through separate legal action in the Netherlands.  The
initial Nova Hut claim in the Dutch court system has been dismissed and is
currently under appeal by Nova Hut.

                                       11
<PAGE>

     Given the existing disputes with Nova Hut and the fact that Nova Hut is
experiencing financial difficulties, it is not possible to determine whether, or
when, Kaiser Netherlands will be able to (1) collect the substantial fees Kaiser
Netherlands believes is due to it from Nova Hut, (2) reclaim the cash that had
collateralized the $11.1 million letter of credit, (3) obtain the release of the
$11.0 million previously retained by Nova Hut in a separate Czech bank account,
(4) determine its liability, if any, for future warranty guarantees, or
(5)determine the remaining cost to pursue the resolution of the entire Nova Hut
matter.

     Kaiser-Hill: Under Kaiser-Hill's contract with the DOE, Kaiser-Hill is not
responsible for, and the DOE pays all costs associated with, any liability,
including, without limitation, any claims involving strict or absolute liability
and any civil fine or penalty, expense, or remediation cost, but limited to
those of a civil nature, which may be incurred by, imposed on, or asserted
against Kaiser-Hill arising out of any act or failure to act, condition, or
exposure which occurred before Kaiser-Hill assumed responsibility on July 1,
1995 ("pre-existing conditions"). To the extent the acts or omissions of Kaiser-
Hill constitute willful misconduct, lack of good faith, or failure to exercise
prudent business judgment on the part of Kaiser-Hill's managerial personnel and
cause or add to any liability, expense, or remediation cost resulting from pre-
existing conditions, Kaiser-Hill is responsible, but only for the incremental
liability, expense, or remediation caused by Kaiser-Hill.

     The Kaiser-Hill contract further provides that Kaiser-Hill will be
reimbursed for the reasonable cost of bonds and insurance allocable to the Rocky
Flats contract and for liabilities and expenses incidental to these liabilities,
including litigation costs, to third parties not compensated by insurance or
otherwise. There is an exception to this reimbursement provision applicable to
liabilities caused by the willful misconduct, lack of good faith or failure to
exercise prudent business judgment by Kaiser-Hill's managerial personnel.

     With respect to a revolving credit facility obtained by Kaiser-Hill in
November 1999, both parents of Kaiser-Hill granted a first lien security
interest to the Kaiser-Hill lenders in all of the ownership and equity interest
of Kaiser-Hill and have agreed to cure any events of default by Kaiser-Hill on
the facility.  As of September 30, 2001, Kaiser-Hill had no balances outstanding
on its revolving credit facility.

     ICF Consulting: Kaiser Holdings owns a 10% interest in ICF Consulting
Group, Inc., a privately-held entity, which was retained by Old Kaiser when it
sold its Consulting Group in September 1999. Kaiser Holdings also holds
approximately $6.55 million of notes (a $3.25 million Escrow Note and a $3.3
million Non-Escrow Note (the "ICF Notes") issued to Old Kaiser in connection
with that sale.  The notes mature on June 25, 2006 and bear interest at a rate
of 10 1/2% per annum. Amounts payable by ICF Consulting Group, Inc. on such
notes are subject to (1) the rights of holders of ICF Consulting Group's senior
lenders and (2) possible reduction as a result of indemnification claims
asserted by ICF Consulting Group, Inc. pursuant to the agreements entered into
by the parties at the time of Old Kaiser's sale of its Consulting Group. The
Company has been advised that ICF Consulting Group, Inc. remedied a technical
default under the financial covenants in its senior credit agreement.  As of the
date hereof however, ICF Consulting Group, Inc. has not paid $1.4 million in
interest payment due on the ICF Notes. Under the terms of the notes, overdue
interest bears interest at 12 1/2% per annum. Lastly, the Company is the
beneficiary of $750,000 of cash resulting from the sale transaction that is
currently held in escrow as collateral for various contractual indemnification
provisions, if any. The escrowed cash balance was due to be released to Kaiser
on April 15, 2001. On February 12, 2001, however, ICF Consulting presented the
escrow agent with notice that it has claims for indemnification from the Company
for amounts exceeding the balance of the escrowed cash and the $3.25 million
escrowed note. The Company believes the claim to be without merit, has not
provided for any negative outcome in the accompanying financial statements, and
will vigorously defend its right to be paid the escrowed funds.  However there
can be no assurance that the Company will be successful in this effort.    The
Company continues to accrue 10% interest on the $6.55 million of notes and
continues to carry the notes at their face value on its balance sheet.  Lastly,
the Company has not adjusted the historical carrying value, approximating $2.2
million, of its 10% ownership in the ICF Consulting Group.

     Litigation, Claims and Assessments: In the course of the Company's normal
business activities, various claims or charges have been asserted and litigation
commenced against the Company arising from or related to properties, injuries to
persons, and breaches of contract, as well as claims related to acquisitions and
dispositions. Claimed amounts may not bear any reasonable relationship to the
merits of the claim or to a final court award. In the opinion of management,
adequate reserves have been provided for final judgments, if any, in excess of
insurance coverage, that might be rendered against the Company in such
litigation. The continued adequacy of reserves is reviewed periodically as
progress on such matters ensues.

                                       12
<PAGE>

     Preferred Stock Put Rights: Holders of its former Senior Subordinated Notes
were offered the opportunity to have a right to "put" their New Preferred Stock
to Kaiser Government Programs, Inc. ("KGP"), which is the indirect 100% owner of
Old Kaiser's 50% interest in Kaiser-Hill, if KGP receives certain proceeds from
Kaiser-Hill. This opportunity was offered in exchange for the surrender of any
remaining rights held by holders of Senior Subordinated Notes as of August 14,
2000 under a guarantee previously issued by KGP. The exchange offer by KGP
expired on November 15, 2000, and the holders of $124,303,000, or 99.4%,
principal amount of the Old Subordinated Notes accepted the exchange offer.
Effective with the Company's initial bankruptcy distribution on April 17, 2001,
holders of Senior Subordinated Notes, as to which the KGP exchange offer was
accepted, also received certificates representing the KGP put rights. The number
of KGP put rights represented by such certificates correspond to the number of
shares of New Preferred Stock distributed with respect to such Senior
Subordinated Notes. The KGP put rights will expire on December 31, 2007.  The
KGP put rights obligate KGP to purchase New Preferred Stock owned by a holder of
the KGP put right, at the option of the then holder of a put, under three
circumstances:

 .  if KGP receives net after-tax proceeds from any cash distributions from
   Kaiser-Hill that, on a quarterly basis, exceed 2.8 times the amount of cash
   required to pay all past accrued but unpaid cash dividends on the New
   Preferred Stock distributed to holders of Senior Subordinated Notes pursuant
   to the Plan, plus the next scheduled quarterly cash dividend on New Preferred
   Stock;
 .  if KGP receives net after-tax proceeds from any direct or indirect
   disposition of any interest in Kaiser-Hill; or
 .  if KGP receives net after-tax proceeds from an extraordinary distribution
   from Kaiser-Hill.

     KGP put rights may be exercised only as a result of a triggering event as
described above. Upon exercise of a put, KGP will pay an exercising holder 100%
of the liquidation preference of the New Preferred Stock that is the subject of
the KGP put rights, plus all accrued and unpaid dividends on the New Preferred
Stock. KGP will purchase shares of New Preferred Stock on a pro rata basis based
upon the number of shares of New Preferred Stock as to which puts have been
properly exercised, but only up to the amount of the available net after-tax
proceeds from triggering events.  KGP put rights will not become exercisable
more frequently than every 12 months unless the cumulative amount of available
net after-tax proceeds from triggering events is at least $3 million.


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

Overview

     Kaiser Group Holdings, Inc. is a Delaware holding company that was formed
on December 6, 2000 for the purpose of owning all of the outstanding stock of
Kaiser Group International, Inc. ("Old Kaiser"), which in turn continues to own
the stock of its remaining subsidiaries.  On June 9, 2000, Old Kaiser and 38 of
its domestic subsidiaries voluntarily filed for protection under Chapter 11 of
the United States Bankruptcy Code in the District of Delaware (case nos. 00-2263
to 00-2301).  Old Kaiser emerged from bankruptcy with a confirmed plan of
reorganization (the Second Amended Plan of Reorganization (the "Plan")), that
was effective on December 18, 2000.   The Company is deemed a "successor issuer"
to Old Kaiser by virtue of rule 12-g 3(a) under the Securities Exchange Act of
1934.  References to the "Company" or "Kaiser Holdings" in this Report refer
to Kaiser Group Holdings, Inc. and its consolidated subsidiaries.   A summary of
the Plan for Old Kaiser, as well as other information relative to the process
regarding the Plan distributions of the cash and new securities, can be found in
a Current Report on Form 8-K dated December 5, 2000, and, in less detail, in the
Annual Report on Form 10-K filed with the SEC by Kaiser Group Holdings on April
2, 2001.

     Following the completion of the sales of businesses, the effectiveness of
the Plan in December 2000 and the resolution of the remaining bankruptcy claims,
the Company has only a limited number of activities, assets or liabilities,
primarily consisting of:

 .  The ownership of a 50% interest in Kaiser-Hill Company, LLC ("Kaiser-Hill"),
   which serves as the general contractor at the U.S. Department of Energy's
   Rocky Flats Environmental Technology Site near Denver, Colorado, for the
   performance of a contract for the closure of the site. Kaiser-Hill has
   performed for DOE at this site since 1995 and in January 2000 was awarded a
   new contract to manage the closure of the site within this decade. Rocky
   Flats is a former DOE nuclear weapons-production facility, and under the new
   closure contract, Kaiser-Hill is working to stabilize and relocate to Safe
   Storage the radioactive materials at the site, to clean up areas contaminated
   with hazardous and radioactive waste, to demolish the on-site structures, and
   to restore much of the 6,000-acre site to the public.

        As discussed below, the Company is encouraged, based on Kaiser-Hill's
        recent progress, that Kaiser-Hill will be able to complete the
        performance of the closure contract within the target schedule and cost.
        Of course, the Kaiser-Hill project remains subject to substantial
        performance and other risks.

                                       13
<PAGE>

 .  The resolution and closeout of a completed contract for the engineering and
   construction of a steel mini-mill for Nova Hut in the Czech Republic ("Nova
   Hut project"). See Note 6 to the Financial Statements - Contingencies.

       The Company is disappointed that it has not yet been possible to resolve
       the disputes related to the Nova Hut project, which has been more time-
       consuming and expensive than anticipated. The Company continues to
       believe that substantial sums are due to it in relation to the Nova Hut
       project, and that it is necessary to continue to invest in the pursuit of
       these claims and to defend against the claims of Nova Hut.

 .  The holding of a minority ownership interest in ICF Consulting Group Inc.
   (the consulting division that Old Kaiser sold in 1999) as well as the
   interest-bearing promissory notes and escrowed cash received in connection
   with that sale.

       As discussed in Note 6 to the Consolidated Financial Statements, ICF
       Consulting has asserted claims against the Company, has not released the
       escrowed cash the Company believes is due to it, and has not paid
       interest that is due on the notes held by the Company. The Company
       continues to attempt to resolve these matters without incurring further
       litigation expense, but such a resolution cannot be assured.

 .  A wholly owned captive insurance company that is in the process of resolving
   existing claims. As a result of the Company's sale of its E&C Group in 2000,
   the captive insurance company will be liquidated over time, as existing
   claims are resolved.

       The Company is attempting to accelerate the liquidation of the captive
       insurance company in order to make available cash reserves held by the
       captive insurance company earlier than had previously been anticipated.
       This will require a final resolution of a number of the remaining
       bankruptcy claims filed against the Company.

 .  An ongoing obligation to fund a capped, post-employment medical benefit plan
   for a fixed group of retirees.

  Management has entered into discussions with a number of entities in an effort
to seek ways to enhance shareholder value through an expansion of the Company's
activities. To date, these discussions have focused on potential joint ventures,
but in the future, may also encompass possible acquisitions of new lines of
business. The potential outcome of future management efforts to enhance
shareholder value is uncertain.


General Terms and Distribution Status of Plan

     The effectiveness of the Plan as of December 18, 2000 did not in and of
itself complete the bankruptcy process. The process of resolving in excess of
$500 million of claims initially filed in the Kaiser Group International
bankruptcy process is ongoing. Old Kaiser has objected to the majority of the
unresolved claims, and if such claims are not settled via the objection or
dispute resolution processes or other means, they will ultimately be heard and
determined by the Bankruptcy Court. Once a claim is resolved with an amount
determined to be owing to the creditor, such portion of the claim is deemed to
be an allowed claim by the Bankruptcy Court (an "Allowed Claim"). While the
Company has made substantial progress in resolving disputed claims and has
achieved a number of what it considers favorable settlements, the Company cannot
predict with accuracy when the claims resolution process will be complete or
what the total amount of Allowed Claims will be, but it does expect the process
to continue into 2002.

     In very general terms, the Plan contemplated three basic different classes
of creditors:

 .  Allowed "Class 3 claims" against Kaiser Group International bankruptcy--
   generally trade and similar creditors' claims of $20,000 or less - received
   cash for their claims.

 .  Allowed "Class 4 claims", the largest class of claims against Kaiser Group
   International bankruptcy, is made up of creditor claims other than Class 3
   claims and equity claims. Class 4 claims included holders of the former
   Kaiser Group International senior subordinated notes due 2003. Holders of
   allowed Class 4 claims received a combination of cash and Kaiser Group
   Holdings preferred and common stock in respect of their claims. Such holders
   received one share of preferred stock and one share of common stock for each
   $100 of claims. However, the number of shares of preferred stock issued was
   reduced by one share for each $55.00 of cash received by the holder of a
   Class 4 claim.

                                       14
<PAGE>

 .  The third class of claims recognized in the Kaiser Group International
   bankruptcy are equity claims, consisting of holders of former Kaiser Group
   International common stock and other "Equity Interests" as defined in the
   Plan. Under the Plan, holders of Equity Interests will receive a number of
   shares of common stock of Kaiser Group Holdings equal to 17.65% of the number
   of shares of such common stock issued to holders of Class 4 Claims. In the
   initial distribution, one share of Kaiser Group Holdings common stock was be
   issued for each 96 shares of previously outstanding Kaiser Group
   International common stock. Additional distributions of Kaiser Group Holdings
   common stock may be made in the future as additional shares of common stock
   are issued to holders of newly allowed Class 4 claims, if any. Apart from
   holders of former Kaiser Group International common stock, the only holders
   of Equity Interests of which the Company is aware are the former shareholders
   of ICT Spectrum Constructors, Inc., a corporation acquired by merger with a
   subsidiary of Kaiser Group International in 1998. The Bankruptcy Court
   recently confirmed the equity nature of those claims, which were treated as
   such in the initial distribution. Old shares of Kaiser were essentially
   cancelled and will continue to represent the right to this distribution until
   all such shares have been exchanged for the New Common.

     Pursuant to the terms of Old Kaiser's Plan, the Company was required to
complete its initial bankruptcy distribution within 120 days of the effective
date of the Plan.  Accordingly, on or about April 17, 2001, the Company effected
its initial distribution (as described in following discussions).  At that time,
there were approximately $136.8 million of Class 4 claims that had been allowed
in the bankruptcy process.  The amount of unresolved claims remaining was
approximately $130.5 million.

     To address the remaining unresolved claims, the Bankruptcy Court issued an
order on March 27, 2001, establishing an Alternative Dispute Resolution (the
"ADR") procedure whereby the claimants and Old Kaiser produce limited supporting
data relative to their respective positions and engage in initial negotiation
efforts in an attempt to reach an agreed claim determination.  If necessary,
thereafter, the parties are required to participate in a non-binding mediation
before a mediator pre-selected by the Bankruptcy Court.  All unresolved claims
are subject to the ADR process. Since April 17, 2001, the date of initial
distribution, $49.3 million of asserted claims have been withdrawn or negotiated
or mediated to an agreed amount, resulting in a cash payment of $0.9 million
without any additional issuance of New Preferred or New Common stock. At
November 9, 2001, the amount of unresolved claims is approximately $81.0
million. The Company expects that substantial progress will continue in the
resolution of claims over the balance of this calendar year.  The Company
continues to believe that the amount of Class 4 claims to ultimately be allowed
in the Kaiser Group International bankruptcy will not exceed $150.0 million.  As
demonstrated by the claim settlements completed during the quarter ended
September 30, 2001, and based on the belief that it is in the best interest of
the Company and its current stockholders, the Company began settling certain
remaining Class 4 claims entirely for cash payments in lieu of the
cash/preferred and common stock combination contemplated in Old Kaiser's Plan of
Reorganization.  The Company intends to continue to use this settlement
alternative during its resolution of remaining Class 4 claims, but has no
ability to determine the effect of the outcome on its overall financial
condition in the event such settlements are accepted in the future.

     With respect to the unresolved claims, the Plan required that, at the date
of the initial distribution, sufficient cash reserves were to be retained by the
Company such that, if all remaining unresolved claims were ultimately deemed
allowed at the originally claimed amount, the Company would be able to satisfy
the allowed claims, including dividends accruing on related preferred stock
since April 17, 2001. The cash reserve requirement and the fact that the Company
had not yet received a substantial cash payment that the Company asserts it is
due from the owner of the Nova Hut steel mini-mill in the Czech Republic (see
Note 6 - Contingencies) limited the amount of cash available at the time of the
initial distribution to the holders of allowed Class 4 claims. The Company
determined that an aggregate of $25.0 million, or approximately $0.09347 per
$1.00 of Allowed and "deemed allowed" Class 4 claims, was available at the time
of the initial distribution to Allowed Class 4 claim holders.  Thus, more shares
of Kaiser Group Holdings preferred stock were issued than would have been had
the claims resolution process advanced more quickly and had more cash been
available, collectively, from the Nova Hut project and/or other sources.  Due to
the proportion of remaining unresolved Class 4 claims in relation to the total
of all resolved and unresolved claims, approximately $12.3 million of the $25.0
million was paid into the reserve cash account as of April 17, 2001.

     Based on the claims settlement activities since April 17, 2001 and on the
level of remaining unresolved Class 4 claims of $81.0 million and the dividends
theoretically accrued on such unresolved dividends since April 17, 2001, the
Company is required to have reserve cash on hand of approximately $9.1 million
until such claims are resolved.   As of November 9, 2001, the actual balance of
reserve cash on hand was $11.4 million.  The difference of $2.3 million,
representing roughly 4% of the total preferred stock outstanding at November 9,
2001, will be required to be used to redeem outstanding preferred stock.   As
the Company will continue to aggressively pursue the resolution of remaining
Class 4 claims and continues to estimate that the total amount of Class 4 claims
ultimately allowed will not exceed $150.0 million (roughly $12.3 million more
than have been allowed or settled to date), it is likely that a significant
amount of the reserve cash will be available to redeem additional shares of
preferred stock in the future.  Pending the resolution of the remaining $80.1
million in open claims, however, the Company is not contemplating a preferred
stock redemption during 2001, but will continue to

                                       15
<PAGE>

evaluate the timing of such a redemption commensurate with its progress in
claims resolution

     As discussed in General Terms and Distribution Status of Plan, the exchange
ratio of Kaiser Group Holdings common stock for former Kaiser Group
International common stock (1 share for 96 shares) and the nature of the
distribution of shares of common stock to holders of Class 4 claims resulted in
there being a number of holders of a relatively small number of shares of Kaiser
Group Holdings common stock.  Therefore, the Company initiated an offer to
purchase all, but not less than all, shares of Kaiser Group Holdings common
stock distributable to persons who received 99 or fewer shares in the initial
distribution for a price equal to $4.50 per share.  This price was generally
based on the trading price of Kaiser Group International common stock during the
prior 30 days, which may not have borne any relation to the true value of such
shares.  The Company made no representation as to the fairness of the offer
price.  The offer expired on June 15, 2001 with 25,650 shares being repurchased
by the Company under this plan for a total of $115,000.

     In the case of holders of former Kaiser Group International common stock,
the offer to purchase shares was conditioned on the holder's agreement to also
sell the holder's right to future distributions of shares of Kaiser Group
Holdings' common stock under the Plan.  The offer price for such distribution
rights was $0.50 per share that would otherwise be distributed.  This offer
price was determined arbitrarily, based primarily on the Company's expectation
that future distributions of shares of Kaiser Group Holdings' common stock would
not exceed 10% of the number of shares then distributed.  Holders who wished to
sell their right to future distributions had to also sell their shares of Kaiser
Group Holdings common stock.  At June 15, 2001, the Company had repurchased
20,002 rights under this plan for a total cost of $10,000.

     The following table depicts the status, as of the date of this Report, of
the initial distribution under the Plan as well as a projection of the effects
of all distributions, once completed, in the bankruptcy process:
<TABLE>
<CAPTION>
                                         (Amounts in Thousands)
 <S>                           <C>       <C>   <C>       <C>     <C>         <C>             <C>         <C>

                                                                                      Distribution Element
                                                                               ------------------------------------
                                                                               Liquidation    # of        # of
                                                                               ------------   ---------   ---------
                                                                               Preference     shares of   shares of
                                                                               ------------   ---------   ---------
                                                                               of New         New         New
                                                                               ------------   ---------   ---------
                                Claim                     % of                 Preferred      Preferred   Common
Amounts as of                   --------  Distribution    -----                ------------   ---------   ---------
Initial Distribution Date:      Amount    Amount          Total   Cash         Stock          Stock       Stock
($'s in thousands)              --------  ------------    -----   ----------   ------------   ---------   ---------
                                 %     $Value
                                ---   --------

Amount of Allowed               $    912  100%  $    912     --   $      912             --          --          --
 Class 3 Claims
Amount of Allowed
 Class 4 Claims                 $136,863   55%  $ 75,275     51%  $   12,793       $ 62,481   1,136,024   1,368,632
Remaining Amount of
Unresolved Claims /1/           $130,329   55%  $ 71,681     48%  $   12,183       $ 59,499        /NI/        /NI/
Holders of Old Common Stock           --   55%        --                  --             --          --     242,239
Buyback of Odd-Lot New
 Common Stock                         --              --                  --             --          --     (25,650)
                                --------        --------          ----------   ------------   ---------   ---------
Totals                          $268,104        $147,868    100%  $   25,888       $121,980   1,136,024   1,585,221
                                ========        ========          ==========   ============   =========   =========

Total Estimates at
Completion of Bankruptcy/2/:
  - Allowed Class 3 Claims      $    912  100%  $    912          $      912       $     --          --          --
  - Other Priority Claims             88  100%        88                  88             --          --          --
  - Allowed Class 4 Claims       150,000   55%    82,500              14,628         68,050   1,237,273   1,491,000
  - Holders of Old
    Common Stock                      --              --                  --             --          --     263,118
                                --------        --------          ----------   ------------   ---------   ---------
                                $151,000        $ 83,500          $   15,628       $ 68,050   1,237,273   1,754,118
Pro Forma
Redemption of Outstanding
New Preferred Stock/3/:               --              --              10,260/3/     (10,260)   (187,273)         --
                                --------        --------          ----------   ------------   ---------   ---------
   Total                        $151,000        $ 83,500          $   25,888       $ 57,790   1,050,000   1,754,118
                                ========        ========          ==========   ============   =========   =========

</TABLE>

/NI/ Not Issued.  The Company is required to retain cash, New Preferred Stock
and New Common Stock for all unresolved claims at the claimed amount until such
claims are resolved.  Shares of New Preferred Stock and New Common Stock will
not be issued until claims are resolved and deemed Allowed.  Upon the resolution
of all remaining outstanding claims, available reserve cash balances will be
used to redeem shares.

/1/ The amount of unresolved claims have been and will continue to be reduced
significantly from time-to-time as pending court actions are finalized.

/2/ Excluding the effect of any cash reserves, available upon the resolution of
all remaining claims, that may be being used to redeem outstanding shares of New
Preferred Stock in the future.

/3/ From time-to-time in the future, as remaining unresolved claims are
resolved, excess cash to be available from the "reserve" fund (including cash
added to "reserve" fund in payment of pro forma dividends on retained shares of
New Preferred Stock) will be used to redeem outstanding shares of New Preferred
Stock.  This pro forma, cumulative, estimate of $10.0 million of available cash
is based on the assumption that there is a total of $150.0 million in Allowed
Class 4 Claims upon the resolution of all remaining unresolved bankruptcy
claims.  The estimate excludes cash collections from Nova and does not intend to
depict the effects of any future redemptions based on distributions of cash
received by the Company from sources other than the excess cash from the
"reserve" fund.

                                       16
<PAGE>

Results of Retained Operations

     Due to the sale of the majority of Old Kaiser's operations and the
reporting of those operations as discontinued in the accompanying Statements of
Operations for all periods presented, all remaining operations are solely
attributable to the Company's 50% ownership of Kaiser-Hill. The Kaiser-Hill
contribution to the Company's overall financial results for the three and nine
month period ended September 30, 2001 were $2.8 million and $8.7 million,
respectively (prior to a $0.9 million and $2.6 million, respectively, charge for
amortization), versus $2.1 million and $14.6 million for the same periods in
2000.  The difference in the results for the nine months ended September 30,
2001 and 2000 is due in part to a nonrecurring award in the first quarter of
2000 related to a performance fee that was awarded to Kaiser-Hill upon the
January 2000 completion and closeout of the original Rocky Flats contract and in
part to the fact that the terms of the new closure contract provided for
different profitability characteristics preventing comparability to the
predecessor contract that was in place for the month of January 2000.

     Kaiser-Hill Company, LLC is a 50% owned joint venture between Kaiser Group
Holdings, Inc. and CH2M Hill, formed solely to perform the U.S. Department of
Energy's Rocky Flats Closure Project initially awarded in late 1995. Under such
contract, Kaiser-Hill serves as the general contractor at the U.S. Department of
Energy's Rocky Flats Environmental Technology Site (a former DOE nuclear weapons
production facility) near Denver, Colorado. Prior to June 8, 2000, through a
designated majority representation on Kaiser-Hill's board of managers, the
Company had a controlling interest in Kaiser-Hill and therefore consolidated
Kaiser-Hill's results of operations with those of its only other remaining
business segment, the Engineering Operations. Effective June 8, 2000, the
Company adopted the equity method of accounting for Kaiser-Hill coincident with
its signing of an agreement whereby the other 50% owner has the right to
designate 3 out of the 5 members of Kaiser-Hill's board of managers. The Company
retains the right to designate 2 out of the 5 members of the Kaiser-Hill board
of managers. Accordingly, the financial information contained herein for Kaiser-
Hill is reflected on a consolidated basis for all periods presented through June
8, 2000, and financial information for periods after June 8, 2000 is reflected
on the equity basis.

     On January 24, 2000, Kaiser-Hill was awarded the follow-on Rocky Flats
contract pursuant to which Kaiser-Hill is providing services that will complete
the restoration of the Rocky Flats site and close it to DOE occupation (the
Closure Contract). The Closure Contract became effective February 1, 2000 and
terminated the remaining period of the former contract as of January 31, 2000.

     The economic terms of the Closure Contract are significantly different from
the former contract in that Kaiser-Hill, in addition to continuing to earn
revenue from the reimbursement of the actual costs of its services, will also
earn a performance fee based on a combination of the actual costs of completion
and on the actual date of physical completion. The Closure Contract will
reimburse Kaiser-Hill for the costs it incurs to complete the site closure,
currently estimated to range between $3.6 billion and $4.8 billion and, in
addition, will pay Kaiser-Hill an incentive fee ranging from $150.0 million to
$460.0 million, depending on Kaiser-Hill's ability to control the incurred costs
at completion to within the targeted range and its ability to meet the closure
goal anytime between March 31, 2006 - March 31, 2007. In addition to recognizing
revenue equal to all reimbursable costs incurred on the project, Kaiser-Hill is
also recognizing a portion of the total estimated performance fee equal to the
proportion of total costs incurred to date as compared to total estimated costs
it expects to incur over the life of the project. For the contract to date
period ended December 31, 2000, Kaiser-Hill used the highest potential cost
amount and accordingly the lowest potential fee award of $150.0 million as its
estimate for recording revenue and profit on the contract in 2000. Effective in
2001, Kaiser-Hill estimates its total costs at contract completion to be
approximately $4.5 billion. The effect of the lower cost estimate has the impact
of increasing the fee that Kaiser-Hill could earn to approximately $180.0
million from the previous estimate of $150.0 million. The fee estimate is likely
to change over time as Kaiser-Hill achieves certain milestones and is better
able to estimate its ultimate award. Notwithstanding significant uncertainties
inherent in Kaiser-Hill's ultimate performance on the project, Kaiser-Hill
management has achieved substantial project performance improvement in the past
several months, is currently achieving positive variances to both target project
schedule and cost and believes that it is currently executing work plans that,
with continued successful performance, would attain closure of the site prior to
the end of 2007 and result in a larger fee award than is currently be accrued.
Once the ultimate fee earned by Kaiser-Hill is determined however, it will be
reduced for any costs incurred by Kaiser-Hill that were not reimbursable by the
DOE, in accordance with the provisions of Federal Acquisition Regulations, prior
to any distribution of its net earnings to either of the two owners. Kaiser-Hill
has estimated the unreimbursable costs could range up to 20%-30% of the net
performance fee ultimately awarded to it by the DOE. Kaiser-Hill recognizes
these unreimbursable expenses as they are incurred.

     Through 2000, the Closure Contract provided for Kaiser-Hill to invoice the
DOE quarterly based on a $340.0 million target fee pool, less a 50% retainage
for 2000.  Thereafter, the quarterly invoicing will revert to a formula such
that, unless otherwise approved by the DOE, cumulative contract billings may not
exceed the minimum fee of $150.0 million spread over a 7-year timeframe, with
retainages.  The DOE does however have the ability to increase the quarterly
payments based on their acknowledgement of upward fee adjustments subject to the
same 50% retainage.  To date, DOE has not agreed to increase the quarterly
payments beyond the $150.0 million minimum fee level.  However, Kaiser-Hill has
been accruing

                                       17
<PAGE>

the fee using an estimate of $180 million for the duration of 2001. Kaiser-Hill
anticipates that the DOE will take formal action to acknowledge its accelerated
contract performance during the first half of 2002. Such action would then
result with an adjustment to catch up and increase the annual fee payments by up
to 13%, inclusive of a triggered requirement for DOE to "holdback" 50% of the
amount of fee over the $150 million minimum level.

     In connection with the Company's adoption of fresh-start reporting as of
December 31, 2000, it increased the carrying value of the investment in Kaiser-
Hill by approximately $21.0 million.  Generally accepted accounting principles
require that the difference between the carrying value and the Company's actual
percentage ownership in Kaiser-Hill's undistributed equity be amortized over the
estimated useful life of the Kaiser-Hill asset.  Therefore, beginning in 2001,
the Company recognized amortization expense for the three months and nine months
ended September 30, 2001 of $0.9 million and $2.6 million, respectively, against
its 50% ownership of Kaiser-Hill's actual net income for the same period.  The
Company is using an estimated 6-year life of the Kaiser-Hill investment for
purposes of computing this amortization charge.

     Administrative Expenses: Administrative expenses incurred during the three
and nine month period ended September 30, 2001 consisted of roughly equal
amounts of salaries/benefits and external professional costs and, to a lesser
extent, other customary facilities, utilities and regulatory compliance costs,
all incurred in connection with managing the asset divestitures, bankruptcy
proceedings and other activities associated with remaining asset management and
the winding down of historical operations.  Also included in this expense
category is the Company's expense relative to retiree medical benefit costs.  As
the Company progresses on the winding down and bankruptcy claim resolution
initiatives, it continues to reduce the amount of administrative expense
incurred.  Although the Company anticipates further near-term reductions in
administrative expenses attributable primarily to full-time staffing reductions,
until the majority of the remaining bankruptcy claims and the dispute with the
Nova Hut client are resolved, it remains difficult to estimate a normal level of
administrative expenditures necessary for the Company's remaining operations.

     Administrative expenses incurred during the same time periods in 2000
consisted largely of costs incurred for activities that were indirectly
supporting the business units that were later divested.  Since these support
functions were not divested in 2000 along with the asset sales, the related
costs have not been presented as part of the results of discontinued operations.

     Depreciation and Amortization Expense: The expense recognized during the
three and nine month periods ended September 30, 2000 was largely attributable
to amortization expense associated with the carrying value of the original
issuance costs of the Company's Senior and Senior Subordinated Notes.  The notes
were eliminated from the balance sheet in connection with transactions and
reorganization completed later in 2000 and therefore related amortization did
not recur in 2001.

     Restructuring Charges: During the three and nine months ended September 30,
2000, the Company incurred approximately $2.5 million and $4.4 million,
respectively, in costs associated with its restructuring plan.  These costs
primarily consisted of professional fees incurred in connection with the
Company's debt restructuring activities.

     Equity Income in Earnings of Affiliate: Equity income in earnings of
affiliate consists of the Company's 50% equity income in Kaiser-Hill for the
three and nine months ended September 30, 2001 totaling $2.8 million and $8.7
million, respectively, net of $0.9 million and $2.6 million, respectively,
related to the amortization of the excess of the Company's carrying value of its
investment in Kaiser-Hill over its ownership percentage of the underlying
Kaiser-Hill equity. The Company increased the carrying value of this investment
significantly as part of its adoption of Fresh-Start reporting as of December
31, 2000 and will continue to amortize that difference over the estimated life
of the Kaiser-Hill investment of approximately 6 years.

     Interest:  Interest income is earned on available cash balances that were
generated primarily from the divestitures in 1999 and 2000 prior to the use of
cash in operations or for bankruptcy distributions and related matters.
Interest income of 10% has also been accrued on $6.55 million in notes
outstanding from the sale of ICF Consulting in September 1999 - See Note 6 to
the Consolidated Financial Statements - Contingencies.

     Interest expense incurred for the three and nine months ended September 30,
2000 was primarily attributable to the 13% interest expense accruing on the
$125.0 million of outstanding Senior Subordinated Notes.  Interest on the Senior
Subordinated Notes for this period was not paid in 2000 but was allowed as a
claim of the note holders together with the principal amount of their notes.
The Company incurred no interest expense on the Senior Subordinated Notes after
it filed for bankruptcy protection on June 8, 2000.

     Income Tax: The Company recorded an income tax expense of $0.8 million and
$1.8 million on income from continuing operations of $1.0 million and $1.6
million, respectively, for the three and nine months ended September 30, 2001
due to the fact that the amortization of the Kaiser-Hill investment carrying is
not deductible for federal income tax purposes.

                                       18
<PAGE>

     Results of Discontinued Operations: The operating results of the Company's
divested and non-divested discontinued operations have been presented in the
accompanying financial statements, in accordance with generally accepted
accounting principles, in the form of its net results only.  Summarized results
for the discontinued segments for the three and nine months ended September 30,
2001and 2000 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                    2001                           2000
                                                                         Three Months   Nine Months     Three Months   Nine Months
                                                                         ------------   -----------     -----------    -----------
<S>                                                                      <C>            <C>             <C>            <C>
Gross Revenue                                                                    $ --         $ 488         $ 41,599      $157,173
  Subcontracts and materials                                                       --            --          (29,702)      (92,198)
  Equity income of affiliates                                                      --            --              267         1,275
                                                                                 ----         -----         --------      --------
Service Revenue                                                                    --           488           12,164        66,250
Operating Expenses:
  Direct labor and fringe                                                          16           666            8,027        40,180
  Selling, general and administrative                                              68           518            5,169        23,225
  Depreciation/amortization                                                        --            --              226         1,030
                                                                                 ----         -----         --------      --------
  Operating Income (Loss) Before Income Taxes                                     (84)         (696)          (1,258)        1,815
  Income Tax Benefit (Provision)                                                   33           278              503          (726)
                                                                                 ----         -----         --------      --------
  Income (Loss)  from Discontinued Operations                                     (51)         (418)            (755)        1,089
                                                                                 ====         =====         ========      ========
</TABLE>

     The losses from discontinued operations in 2001 relate to expenses incurred
for project wind-down, demobilization and the inception of warranty related
activities of the Nova Hut project.


                        LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

     Operating activities: The Company used  $11.0 million of cash in the nine
months ended September 30, 2001, that, in addition to funding operating costs of
its remaining activities, was used primarily for extinguishment of obligations
arising out of its bankruptcy, including severances, professional fees and
various other wind-down expenditures and distributions to allowed class 3 claim
holders.  Of the total $12.2 million of cash used in operating activities during
the nine months ended September 30, 2000, Kaiser-Hill's earnings in excess of
cash distributions represented approximately $3.5 million of the total operating
cash shortfall.  The remaining $8.7 million was used for operating, asset sale
preparation, the payment of the 1999 pension obligation on September 15, 2000 of
approximately $2.2 million and debt restructuring activities.

     Investing activities: During the nine months ended September 30, 2001, the
Company received three quarterly distributions totaling $6.2 million from
Kaiser-Hill. During the nine months ended September 30, 2000, the Engineering
Operations were sold for proceeds totaling $36.7 million, and Old Kaiser sold an
investment in a French environmental company and collected approximately $1.0
million.

     Financing activities: In the nine month period ended September 30, 2001,
the Company paid out $12.8 million in connection with the initial bankruptcy
distribution to allowed claim class 4 holders and $0.9 million in subsequent
class 4 holder claim settlements were paid out of the cash reserves for
remaining open claims. The Company transferred $12.3 million to a restricted
cash account required, pursuant to the terms of the Plan of Reorganization, as a
reserve for future claim holders and related potential dividends, paid $125,000
to repurchase certain odd-lot shares of new common stock resulting from a stock
buy back offer (see related discussion above) and paid $1.3 million in preferred
stock dividends.  As of September 30, 2000, the Company had received an $8.3
million distribution from Kaiser-Hill and repurchased the remaining $1.0 million
in outstanding Senior Notes plus accrued interest.

Liquidity and Capital Resource Outlook

     The Company currently has no debt as a result of the effectiveness of Old
Kaiser's Plan of Reorganization. The Company is financing its initial bankruptcy
distribution requirements and follow-on working capital needs, in part, through
the use of the available cash generated from the 2000 asset sales and, in part,
from distributions from its Kaiser-Hill subsidiary. Based on (i) current
expectations for operating activities and results, (ii) its current available
cash position, (iii) recent trends and projections in liquidity and capital
needs, and (iv) current expectations of total Allowed Claims upon the completion
of the bankruptcy proceedings, management believes the Company has sufficient
liquidity to cover the required cash distributions resulting from the resolution
of Claims in the bankruptcy process, the future operating needs of the Company
and the dividend requirements applicable to the New Preferred Stock.

                                       19
<PAGE>

     The terms of the New Preferred Stock include provisions for cumulative
dividends, payable quarterly, either in cash at an annual rate of 7% of the
liquidation preference per share or in additional shares of New Preferred Stock
at an annual rate of 12% of the per share liquidation preference. Dividends
began to accrue on the New Preferred Stock as of the initial distribution date
regardless of whether the stock had been actually issued as of that time or
issued in the future upon the resolution of additional Allowed Claims.

     As of September 30, 2001, Old Kaiser had $4.6 million in letters of credit
outstanding collateralized by restricted cash balances primarily for the
requirements of its captive insurance subsidiary.

     Kaiser Holdings' longer-term liquidity and future ability to redeem
significant portions of its outstanding shares of preferred stock will depend in
large part upon:

 .    its ability to resolve the remaining $81.0 million of open bankruptcy
     claims for a substantially lesser amount;
 .    Kaiser-Hill's performance under its Closure Contract with the DOE. Kaiser-
     Hill serves as the general contractor at the DOE's Rocky Flats
     Environmental Technology Site near Denver, Colorado - see section
     entitled - Overview of Retained Operations;
 .    the timing of DOE actions to accelerate the payment of Kaiser-Hill award
     fee;
 .    the resolution of disputes relating to Kaiser Netherlands' performance
     under its fixed-price contract for turnkey engineering and construction
     services relating to a steel mini-mill in the Czech Republic for Nova Hut
     and on the ability of Nova Hut, which is in financial difficulty, to pay
     for such services (See Note 6 to the Consolidated Financial Statements);
     and
 .    the liquidation of certain other remaining, non-operating, assets and
     liabilities for amounts approximating their current carrying values.

     Lastly, with respect to a revolving credit facility obtained by Kaiser-Hill
in November 1999, both parents of Kaiser-Hill granted a first lien security
interest to the Kaiser-Hill lenders in all of the ownership and equity interest
of Kaiser-Hill and have agreed to cure any events of default by Kaiser-Hill on
the facility.  As of September 30, 2001, Kaiser-Hill had no balances outstanding
on its revolving credit facility.


Other Matters

     Contingencies: The Company has various obligations and liabilities from its
continuing operations, including general overhead expenses in connection with
maintaining, operating and winding down the various entities and net assets
comprising Kaiser Holdings.  Additionally, the Company believes contingent
liabilities may exist in the areas described in  Note 6 to its Consolidated
Financial Statements.

     Recent Accounting Pronouncements:  Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (FAS 142) was issued in June 2001.  FAS 142
provides guidance on the treatment of goodwill and other intangible assets.
This standard is effective for fiscal years beginning after December 15, 2001.
Upon adoption of FAS 142, goodwill and other intangibles assets that have
indefinite useful lives will not be amortized, but rather will be tested at
least annually for impairment.  Recognized intangible assets with determinable
useful lives will continue to be amortized.  We will adopt FAS 142 effective
January 1, 2002 and do not expect any financial impact.

     In August 2001, the Financial Accounting Standards Board (FASB) issued FAS
144, Accounting for the Impairment or Disposal of Long-Lived Assets. FAS 144
provides guidance on the accounting for the impairment or disposal of long-lived
assets. FAS 144 supercedes FAS 121 and applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30 (APB 30), Reporting Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business. FAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and, generally, its provisions are to be applied
prospectively. The Company will adopt FAS 144 effective January 1, 2002 and does
not expect any financial impact.


                    RISK FACTORS RELATING TO KAISER HOLDINGS

     The restructuring of Old Kaiser through the bankruptcy process involves a
significant degree of risk, and certain disclosures and reports or statements to
be released by Kaiser Holdings or statements to be made by its officers or
directors may contain forward-looking statements that involve risks and
uncertainty.  Kaiser Holdings' actual results could differ materially from those
anticipated in such forward-looking statements as a result of a variety of
factors, including those set forth in the following risk factors and elsewhere
in this Report.

                                       20
<PAGE>

     Kaiser Holdings is Dependent on Kaiser-Hill's Performance and wind-down of
Nova Hut Project: Kaiser Holdings' long-term future profitability is dependent,
to a significant extent, on Kaiser-Hill's performance under its Closure Contract
with the DOE.  Kaiser-Hill serves as the general contractor at the DOE's Rocky
Flats Environmental Technology Site near Denver, Colorado.  Rocky Flats is a
former DOE nuclear weapons production facility.  Kaiser-Hill's contract with the
DOE includes a performance fee based upon a combination of the actual costs to
complete the site closure and the actual date of completion of the closure.  If
Kaiser-Hill fails to complete within the target cost for the project and fails
to complete the project by March 31, 2007, Kaiser Hill's potential fee will be
reduced by 30% of the costs incurred after the target date, up to a maximum of
$20 million.

     Kaiser Holdings' profitability and cash flow will also be dependent, to a
significant extent, on the resolution of disputes relating to Kaiser
Netherlands' performance under its fixed-price contract for turnkey engineering
and construction services relating to a steel mini-mill in the Czech Republic
for Nova Hut and on the ability of Nova Hut, which is in financial difficulty,
to pay for such services.

     Risks From Special Federal Regulations: Because Kaiser-Hill provides the
Federal government with nuclear energy and defense- related services, it and a
number of its employees are required to have and maintain security clearances
from the Federal government.  There can be no assurance that the required
security clearances will be obtained and maintained in the future.  In addition,
Kaiser-Hill is subject to foreign ownership, control and influence regulations
imposed by the Federal government and designed to prevent the release of
classified information to contractors subject to foreign ownership, influence
and control.  There can be no assurance that foreign ownership, influence and
control concerns will not affect the ability of Kaiser-Hill to maintain its DOE
contract.

     Potential Substantial Liabilities and Costs Associated With Kaiser-Hill's
DOE Contract: Under the DOE contract, Kaiser-Hill is responsible for, and the
DOE will not pay for costs associated with, liabilities caused by the willful
misconduct or lack of good faith of Kaiser-Hill's managerial personnel or the
failure to exercise prudent business judgment by Kaiser-Hill's managerial
personnel.  If Kaiser-Hill were found liable for any of these reasons, the
associated costs could be substantial.

     Absence of a Business Plan Beyond Kaiser-Hill and Nova Hut Project: Apart
from the risks associated with Kaiser-Hill's performance under its Closure
Contract with the DOE, the performance of Kaiser Netherlands and resolution of
the dispute regarding the Nova Hut project, and Nova Hut's ability to pay Kaiser
Netherlands, Kaiser Holdings' long-term future profitability will be dependent,
to a significant extent, on its ability to develop a business plan for ongoing
operations.  It is possible that Kaiser Holdings' ongoing business plan will be
limited to completing the Nova Hut project and participating in the activities
of Kaiser-Hill.  The Board of Directors of Kaiser Holdings is considering
whether Kaiser Holdings should attempt to take advantage of its successful
history of performing in the government services market, both independently and
through Kaiser-Hill, in order to develop a new revenue base.

     Ability to Obtain Performance Guaranties: Given Old Kaiser's history,
Kaiser Holdings may not be able to obtain satisfactory contract performance
guaranty mechanisms, such as performance bond and letters of credit, at all or
on satisfactory terms, to the extent such mechanisms are needed for new or
existing projects.

     Uncertainties Beyond Kaiser Holdings' Control: A number of other
uncertainties may adversely impact Kaiser Holdings' future operations including,
without limitation, economic recession, adverse regulatory agency actions, acts
of God, or similar circumstances.  Many of these factors will be substantially
beyond Kaiser Holdings' control, and a change in any factor or combination of
factors could have a material adverse effect on Kaiser Holdings' financial
condition, cash flows, and results of operations.

     Uncertainties Concerning Adequacy of Funds: There can be no assurance that
Kaiser Holdings will be able to continue to generate sufficient funds to meet
its obligations, notwithstanding the significant improvements in Kaiser
Holdings' operations and financial condition.  Although Kaiser Holdings'
believes it will be able to generate sufficient funds to meet its working
capital needs for the foreseeable future, its ability to gain access to
additional capital, if needed, cannot be assured.

     Risks Related to Old Kaiser's Reorganization and Related Estimates and
Assumptions: As with any plan of reorganization or other financial transaction,
there are certain risk factors that must be considered in connection with Kaiser
Holdings in relation to Old Kaiser's reorganization.  All risk factors cannot be
anticipated, some events will develop in ways that were not foreseen, and many
or all of the assumptions that have been used in connection with this Report on
Form 10-Q and the Plan will not be realized exactly as assumed.  Some or all of
such variations may be material.

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<PAGE>

     Some of the principal risks associated with Old Kaiser's reorganization
include the following:

 .   The total amount of all Allowed Claims in the Bankruptcy Cases may be
    materially in excess of the estimated amounts of Allowed Claims assumed in
    Kaiser Holdings' financial statements in this Report. The amount and timing
    of the distributions that will ultimately be received by any particular
    holder of an Allowed Claim in any Class may be materially and adversely
    affected should the assumptions be exceeded as to any Class.

 .   There are substantial uncertainties relating to the resolution of disputes
    between Kaiser Netherlands and Nova Hut concerning the Nova Hut mini-mill
    project and Nova Hut's financial capacity to pay the substantial amounts
    Kaiser Holdings believes is due to Kaiser Netherlands.

 .   Realization of the ICF Notes and related interest and investment carrying
    values and ability to favorably resolve pending claim made by ICF.

Item 3.   Quantitative and Qualitative Information about Market Risk

Market Risk

     The Company does not believe that it has significant exposures to market
risk.  The interest rate risk associated with the Company's Preferred Stock
activity is fixed at 7%.  The interest rate risk associated with the Company's
obligation to fund a capped retiree medical obligation is sensitive to interest
rate risk via the use of a discount rate in determining the present value of its
remaining obligation thereunder.  A 10% increase or decrease in the average
annual prime rate would result in a change in the financial statement carrying
value of the plan obligation but would not change the actual long-term cost of
the plan.

Part II - Other Information

Item 1.  Legal Proceedings

As previously reported in the Annual Report on Form 10-K for the year ended
December 31, 2000. See also Note 6 to the consolidated financial statements
contained herein.

Item 2.  Changes in Securities

(a) None
(b) None
(c) None
(d) Not applicable

Item 3.  Defaults Upon Senior Securities

(a) None
(b) None

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

None

Item 5.  Other Information

None

Item 6.  Exhibits and Reports on Form 8-K

     (a) The exhibits filed as part of this report are listed below:

          No. 3(ii)  Amended and Restated Bylaws of Kaiser Group Holdings, Inc.
                     as of October 23, 2001.
          No. 21     Consolidated Subsidiaries of the Registrant as of
                     October 31, 2001.

     (b) Reports on Form 8-K

         None


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                                  SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.

                          KAISER GROUP HOLDINGS, INC.
                                  (Registrant)

Date: November 14, 2001


                             /s/ Marijo L. Ahlgrimm
                             ---------------------------

                             Marijo L. Ahlgrimm
                             Executive Vice President and Chief Financial
                             Officer (Duly authorized officer and principal
                             financial officer)

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