<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington D.C. 20549

                                FORM 10-K/A NO. 1
(MARK ONE)
   [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
                        SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
                                       OR

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

                        COMMISSION FILE NUMBER: 0-18858

                             KAISER VENTURES INC.
            (Exact name of registrant as specified in its charter)


              DELAWARE                               94-0594733
        ---------------------                     -----------------
     (State or other jurisdiction                 (I.R.S. Employer
     of incorporation or organization              Identification No.)

                          3633 E. INLAND EMPIRE BLVD.
                                  SUITE 850 
                               ONTARIO, CA 91764
                   -----------------------------------------

              (Address of principal executive offices and zip code)



        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (909)483-8500

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                          COMMON STOCK ($.03 PAR VALUE)
                          -----------------------------
                                (Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  Yes     X      No
                                         ----------    --------

At March 17, 1997, the aggregate market value of the registrant's Common Stock,
$.03 par value, held by non-affiliates of the registrant was $45,983,000.

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.  Yes  X   No
                           ---     ---

At March 17, 1997, 10,542,548 shares of the registrant's Common Stock, $.03 par
value, were outstanding, including 136,919 shares deemed outstanding but
reserved for issuance to the general unsecured creditors of Kaiser Steel
Corporation.

DOCUMENTS INCORPORATED BY REFERENCE: The Company's Proxy Statement for the 1997
Annual Meeting of Stockholders is incorporated into Part III of this Form 10-K.
<PAGE>
 
1. Amendment to Management's Discussion and Analysis of Financial Condition and
Results of Operations - Part II, Item 7.

          Certain references in Management's Discussion and Analysis of
Financial Condition and Results of Operations to "joint venture" revenues or
income should be more properly called revenues or income from "equity method
investments." To correct such references, Management's Discussion and Analysis
of Financial Condition and Results of Operations is hereby amended to read as
follows:


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

                          SECTION 1: OPERATING RESULTS


          Kaiser Ventures Inc. ("Kaiser" or the "Company") is an emerging asset
development company pursuing project opportunities and investments in activities
related to water resources, motorsports, property redevelopment and solid waste
management. The Company's long-term emphasis is on the further development of
its principal assets: (i) a 50.88% interest in Fontana Union Water Company
("Fontana Union"), a mutual water company; (ii) a 12.29% interest in Penske
Motorsports, Inc. ("PMI"), a publicly-traded professional motorsports company
that has developed the California Speedway ("TCS") on land acquired from the
Company; (iii) approximately a 73% interest in Mine Reclamation Corporation
("MRC"), the developer of the Eagle Mountain Landfill Project (the "Landfill
Project"); (iv) approximately 668 acres of the former Kaiser Steel Corporation
("KSC") steel mill site (the "Mill Site Property"); and (v) the 11,350 acre idle
iron ore mine in the California desert (the "Eagle Mountain Site"), which
includes the associated 460 acre town of Eagle Mountain ("Eagle Mountain
Townsite") and the land leased to MRC for the Landfill Project. The Company is
also pursuing other related longer-term growth opportunities on the balance of
its Mill Site Property, including the development of a transfer station and
materials recovery facility ("Mill Site MRF") and the redevelopment of
industrial and commercial parcels of land near TCS and the Mill Site MRF.

PRIMARY REVENUE SOURCES

ONGOING OPERATIONS

   
          The Company's revenues from ongoing operations are generally derived
from the development of the Company's long-term projects. Revenues from water
resources represent payments under the lease of the Company's interest in
Fontana Union to Cucamonga County Water District ("Cucamonga"). Property
redevelopment revenues primarily reflect revenues from long-term redevelopment
activities at the Mill Site property; housing rental income, aggregate rock
sales and lease payments for the minimum security prison at the Eagle Mountain
Townsite; and royalty revenues from iron ore shipments from the Company's iron
ore mine in California (the "Silver Lake Mine"). Income from equity method
investments reflect Kaiser's share of income related to those equity investments
(primarily PMI) and joint ventures which the Company accounts for under the
equity method. Prior to 1995, waste management revenues reflected the minimum
lease payments under MRC's 100-year lease in connection with the Landfill
Project.    

INTERIM ACTIVITIES

          Revenues from interim activities are generated from various sources
primarily related to the Mill Site Property. Significant components of interim
activities include rentals under short-term tenant lease arrangements, royalty
revenues from the sale of slag to outside contractors, water and wastewater
treatment

                                       1
<PAGE>
 
service revenues, revenues from the sale of recyclable materials and other
miscellaneous short-term activities.

SUMMARY OF REVENUE SOURCES

          Due to the development nature of certain Company projects and the
Company's recognition of revenues from bankruptcy-related and other
non-recurring items, historical period-to-period comparisons of total revenues
may not be meaningful for developing an overall understanding of the Company.
Therefore, the Company believes it is important to evaluate the trends in the
components of its revenues as well as the recent developments regarding its
long-term ongoing and interim revenue sources. See "Part I, Item 1. Business"
for a discussion of recent material events affecting the Company's revenue
sources.

          In addition, due to the concentration of motorsport racing events
between April and September, PMI's operations have been, and will continue to
be, highly seasonal. Except for one event week-end in October, 1997 at TCS, PMI
has no current plans to host events in the first and fourth quarters at its
existing facilities. As a result, the Company's reported share of undistributed
equity in the earnings of PMI will likely be positive (income) in the second and
third quarters and negative (loss) in the first and fourth quarters.

RESULTS OF OPERATIONS

ANALYSIS OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

     An analysis of the significant components of the Company's resource
revenues for the years ended December 31, 1996 and 1995 follows:
<TABLE>    
<CAPTION>

                                                 1996           1995      % Inc. (Dec)
                                                 ----           ----      ------------
<S>                                          <C>            <C>           <C> 
ONGOING OPERATIONS
   Water resource ........................   $ 4,505,000    $ 4,974,000             (9%)
   Property redevelopment ................     1,120,000        998,000             12%
   Income from equity method investments .     1,539,000        162,000            850%
   Mill Site land sale ...................     6,371,000             --             --
                                             -----------    -----------    -----------

     TOTAL ONGOING OPERATIONS ............    13,535,000      6,134,000            121%
                                             -----------    -----------    -----------

INTERIM ACTIVITIES
   Lease, service and other ..............     1,879,000      2,774,000            (32%)
   Asset sales ...........................            --      2,200,000           (100%)
                                             -----------    -----------    -----------

     TOTAL INTERIM ACTIVITIES ............     1,879,000      4,974,000            (62%)
                                             -----------    -----------    -----------

     TOTAL RESOURCE REVENUES .............   $15,414,000    $11,108,000             39%
                                             ===========    ===========    ===========

REVENUES AS A PERCENTAGE OF TOTAL RESOURCE
REVENUES:
   Ongoing operations ....................            88%            55%
   Interim activities ....................            12%            45%
                                             -----------    -----------

     TOTAL RESOURCE REVENUES .............           100%           100%
                                             ===========    ===========
</TABLE>     

     Resource Revenues. Total resource revenues for 1996 were $15,414,000,
compared to $11,108,000 for 1995. Revenues from ongoing operations increased
121% during the year to $13,535,000 from $6,134,000 in 1995, while revenues from
interim activities declined 62% to $1,879,000 from $4,974,000 in 

                                       2
<PAGE>
 
1995. Revenues from ongoing operations as a percentage of total revenues
increased to 88% in 1996 from 55% in 1995; however, excluding both the Mill Site
land sale in 1996 and the gain on sale of water rights to CSI in 1995, ongoing
operations represented 79% and 69% of total revenues in 1996 and 1995,
respectively.

     Ongoing Operations. Water lease revenues under the Company's 102-year
take-or-pay lease with Cucamonga were $4,505,000 during 1996 compared to
$4,974,000 for 1995. The 9% decrease in water revenues during the year reflects:
(a) a reduction affecting all parties under the Colton/Rialto Basin judgment, in
the amount of water that Cucamonga (through Fontana Union) can draw from the
Colton/Rialto Basin due to low water levels ($269,000); and (b) a likely
non-recurring reduction in the Chino Basin agricultural pool transfer relating
to increased agricultural usage and the overstatement of estimates in prior
years ($201,000). As previously disclosed, Metropolitan Water District of
Southern California ("MWD"), effective July 1, 1995, implemented changed rates
and a changed rate structure which resulted in the continuing lease
interpretation dispute with Cucamonga regarding the extent of the MWD rate
increases. Although the Company is continuing to bill Cucamonga at what it
believes is the correct MWD rate under the lease with Cucamonga, the Company has
elected to reserve the full amount in dispute and report revenues on the basis
of amounts actually received from Cucamonga. The total amount of lease payments
in dispute as of December 31, 1996 is approximately $748,000. In addition, MWD
has stated that it may further refine its rate structure in the near future.

     Property redevelopment revenues were $1,120,000 for 1996 compared to
$998,000 for 1995. The 12% increase from 1995 is primarily as a result of higher
iron ore sales from one of the Company's California mines which more than offset
reductions in tenant rental income at Eagle Mountain.

     Mill Site land sale revenues represents the sale of approximately 54.2 net
acres of the Mill Site Property, known as the Speedway Business Park, to PMI for
$5.0 million in cash and approximately $8.35 million, or 254,298 shares, of PMI
common stock. The transaction closed in December 1996. As a result of the
transaction, Kaiser increased its ownership of PMI to 1,627,900 shares or
approximately 12.29%.

   
     Income from equity method investments increased to $1,539,000 for 1996
compared to $162,000 for 1995 as a result of an increase in the amount of
project service fees paid by PMI ($488,000) plus the Company's 12.29% (10.56%
through November 30, 1996) share of PMI's net income, net of expenses, from
April 1, 1996 ($889,000). The Company is recording its investment in PMI on the
equity method and began recording its share of PMI's net income concurrent with
conversion of the Company's preferred stock into common stock at the end of the
first quarter of 1996.    

     Interim Activities. Revenues from interim activities for 1996 were
$1,879,000 compared to $4,974,000 for 1995. As noted above, the 62% decrease in
revenues from interim activities in 1996 is primarily attributable to the
non-recurring $2.2 million gain on the sale of water rights to CSI recorded in
1995; lower slag and scrap revenues ($156,000); service revenues under the
amended Services Agreement with CSI ($185,000) and lower miscellaneous revenues
($347,000). It is anticipated that in 1997, these revenues will continue to
decline due to the continuing redevelopment of the Mill Site Property.

     Resource Operating Costs. Resource operating costs are those costs directly
related to the resource revenue sources. Total resource operating costs for 1996
declined to $3,312,000 from $3,792,000 in 1995. Operations and maintenance costs
for 1996 were $1,092,000 compared to $1,496,000 for 1995. The 27% decrease in
1996 operations and maintenance costs was primarily due to lower expenses
associated with the reduced levels of services being provided to CSI and lower
property taxes associated with the portion of the Mill Site Property that was
contributed to PMI for the development of the TCS. Administrative support

                                       3
<PAGE>
 
expenses for 1996 decreased 3% to $2,220,000 from $2,296,000 for 1995. The
decrease was primarily due to lower outside professional costs and lower
depreciation expense.

     Corporate General and Administrative Expenses. Corporate general and
administrative expenses for 1996 decreased 9% to $3,837,000 from $4,201,000 for
1995. The decrease was due primarily due to savings realized as a result of the
departure of the Company's prior President & CEO at the end of 1995, and the
subsequent management realignment.

     Net Interest Expense (Income). Net interest expense for 1996 was $819,000
compared to $665,000 in 1995. The increase was due primarily to the accelerated
amortization of deferred loan fees associated with the Union Bank credit
facility being offset by the capitalization of interest expense associated with
the development of certain parcels of the Mill Site Property and higher interest
income.

     Income and Income Tax Provision. The Company recorded income before income
tax provision of $7,446,000 for 1996, a 204% increase from the $2,450,000
recorded in 1995. A provision for income taxes of $4,877,000 was recorded in
1996 as compared with $1,056,000 in 1995. Over 90% of the tax provisions for
1996 and 1995 are not currently payable due primarily to utilization of the
Company's net operating loss carryforwards ("NOL's"). Consequently, pretax
income is an important indicator of the Company's performance.

     Net Income. For 1996, the Company reported net income after extraordinary
items of $2,569,000, or $.24 per share, a 84% increase from the $1,394,000, or
$.13 per share, reported for 1995.

ANALYSIS OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

     An analysis of the significant components of the Company's resource
revenues for the years ended December 31, 1995 and 1994 follows:
<TABLE>    
<CAPTION>
                                                1995             1994     % INC. (DEC)
                                             -----------    -----------    -----------
<S>                                          <C>            <C>                      <C>
ONGOING OPERATIONS
   Water resource ........................   $ 4,974,000    $ 4,820,000              3%
   Property redevelopment ................       998,000      1,052,000             (5%)
   Income from equity method investments .       162,000             --             --
   Waste management ......................            --      2,400,000           (100%)
                                             -----------    -----------    -----------

     TOTAL ONGOING OPERATIONS ............     6,134,000      8,272,000            (26%)
                                             -----------    -----------    -----------

INTERIM ACTIVITIES
   Lease, service and other ..............     2,774,000      4,199,000            (34%)
   Asset sales ...........................     2,200,000             --             --
                                             -----------    -----------    -----------

     TOTAL INTERIM ACTIVITIES ............     4,974,000      4,199,000             18%
                                             -----------    -----------    -----------

     TOTAL RESOURCE REVENUES .............   $11,108,000    $12,471,000            (11%)
                                             ===========    ===========    ===========

REVENUES AS A PERCENTAGE OF TOTAL RESOURCE
REVENUES:
   Ongoing operations ....................            55%            66%
   Interim activities ....................            45%            34%
                                             -----------    -----------

     TOTAL RESOURCE REVENUES .............           100%           100%
                                             ===========    ===========
</TABLE>     

                                       4
<PAGE>
 
     Resource Revenues. Total resource revenues for 1995 were $11,108,000,
compared to $12,471,000 for 1994. Revenues from ongoing operations declined 26%
during the year to $6,134,000 from $8,272,000 in 1994, while revenues from
interim activities increased 18% to $4,974,000 from $4,199,000 in 1994. Revenues
from ongoing operations as a percentage of total revenues decreased to 55% in
1995 from 66% in 1994; however, excluding the non-recurring gain on the sale of
water rights to CSI, ongoing operations represented 69% of total revenues.

     Ongoing Operations. Water lease revenues under the Company's lease with
Cucamonga were $4,974,000 during 1995 compared to $4,820,000 for 1994. The 3%
increase in water revenues during the year reflects the July, 1995, 5.1%
increase in water rates of The Metropolitan Water District of Southern
California ("MWD") offset by a small decline, from 56.11% in 1994 to 55.53% in
1995, in the Company's effective interest in Fontana Union. The total amount of
lease payments in dispute as of December 31, 1995 was approximately $80,000.

     Property redevelopment revenues were $998,000 for 1995 compared to
$1,052,000 for 1994. The 5% reduction from 1994 primarily represents lower
aggregate and rocks sale revenues at Eagle Mountain.

   
     Income from equity method investments increased to $162,000 as a result of
the initial project service fees paid by PMI.    

     There were no waste management revenues during 1995 compared to $2,400,000
in 1994 as a result of the Company's acquisition of a 70% equity interest in MRC
effective January 1, 1995, and the elimination of MRC's minimum monthly rent
payments to the Company. Elimination of the maximum monthly rent payments will
not, however, affect the payments due the Company upon the commencement of
landfill operations.

     Interim Activities. Revenues from interim activities for 1995 were
$4,974,000 compared to $4,199,000 for 1994. As noted above, the 18% increase in
revenues from interim activities in 1995 is primarily attributable to the $2.2
million gain on the sale of water rights to CSI being partially offset by lower
levels of service revenues under the amended Services Agreement with CSI
($1,457,000) and lower miscellaneous revenues ($276,000).

     Resource Operating Costs. As is noted above, resource operating costs are
those costs directly related to the resource revenue sources. Total resource
operating costs for 1995 declined to $3,792,000 from $5,163,000 in 1994.
Operations and maintenance costs for 1995 were $1,496,000 compared to $1,970,000
for 1994. The 24% decrease in 1995 operations and maintenance costs was
primarily due to lower expenses associated with the reduced levels of services
being provided to CSI and lower property taxes at the Mill Site Property.
Administrative support expenses for 1995 decreased 28% to $2,296,000 from
$3,193,000 for 1994. The decrease was primarily due to non-recurring
environmental cleanup costs in 1994 relating to two Mill Site tenants that went
out of business and lower legal expenses.

     Corporate General and Administrative Expenses. Corporate general and
administrative expenses for 1995 increased 22% to $4,201,000 from $3,430,000 for
1994. The increase was due primarily to expenses related to the departure of the
Company's President and CEO and the resulting management realignment.

     Net Interest Expense (Income). Net interest expense for 1995 was $665,000,
compared with net interest income of $155,000 in 1994. The fluctuation was due
primarily to lower average cash balances on hand during 1995 and interest
expense on the $6.0 million note issued as part of the purchase of properties
from the Lusk Joint Ventures in July, 1994.

                                       5
<PAGE>
 
     Income and Income Tax Provision. The Company recorded income before income
tax provision of $2,450,000 for 1995, a 39% decrease from the $4,033,000
recorded in 1994. A provision for income taxes of $1,056,000 was recorded in
1995 as compared with $1,746,000 in 1994. Over 90% of the tax provisions for
1995 and 1994 are not currently payable due primarily to utilization of the
Company's net operating loss carryforwards ("NOL's").

     Income Before Extraordinary Loss. For 1995, the Company reported income
before extraordinary loss of $1,394,000, or $.13 per share, a decrease of 39%
from the $2,287,000, or $.21 per share, reported for 1994.

     UMWA Extraordinary Loss (Net of Taxes). As previously disclosed, the
Company, together with Kaiser Coal and the KSC bankruptcy estate "(KSC
Recovery"), settled all outstanding claims with the UMWA Combined Benefit Fund
and 1992 Benefit Trust in 1994. The Company's share of the settlement was
$3,788,000. As a result, for 1994 the Company recorded an extraordinary loss
(net of taxes) of $2,233,000.

     Net Income. For 1995, the Company reported net income after extraordinary
items of $1,394,000, or $.13 per share, a 25 fold increase from the $54,000, or
$.01 per share, reported for 1994.

COMPREHENSIVE INCOME

     The Financial Accounting Standards Board ("FASB") proposed, in 1996, a new
accounting statement concerning the reporting of comprehensive income.
Comprehensive income is defined as the aggregate of all changes in shareholder's
equity that occurred during the reporting periods other than changes resulting
from equity investments by or dividends and distributions to shareholders. The
purpose of the FASB proposal, which has not been adopted by the FASB and is,
therefore, not considered a generally accepted accounting principle, is to
highlight and disclose all transactions that impact shareholders equity
regardless of whether or not they flow through the consolidated income
statement. Comprehensive income, which should not be used as a replacement for
net income, is a very meaningful performance measure for Kaiser because of the
amount of deferred tax expense credited directly to equity caused by the
Company's NOL carryforwards and because of the impact of other transactions such
as the increase in equity due to the 1996 PMI public offering. Comprehensive
income and comprehensive income per share for the years ended December 31, 1996,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>

                                                        1996          1995           1994
                                                        ----          ----           ----
<S>                                                  <C>           <C>           <C>        
Net Income .......................................   $ 2,569,000   $ 1,394,000   $    54,000
Deferred tax expense credited to equity ..........     3,945,000       335,000        38,000
Increase in investment in Penske Motorsports, Inc.     6,116,000            --            --
                                                     -----------   -----------   -----------
Comprehensive income .............................    12,630,000     1,729,000        92,000
                                                     ===========   ===========   ===========

Comprehensive income per share ...................   $      1.18   $       .16   $       .01
                                                     ===========   ===========   ===========

Net Earning per share ............................   $       .24   $       .13   $       .01
                                                     ===========   ===========   ===========
</TABLE>

                          SECTION 2: FINANCIAL POSITION

     Cash, Cash Equivalents and Short-Term Investments. The Company defines cash
equivalents as highly liquid debt instruments with original maturities of 90
days or less. Cash and cash equivalents decreased $2,455,000 to $8,482,000 at
December 31, 1996 from $10,937,000 at December 31, 1995. Included in cash and
cash equivalents is $1,766,000 and $2,309,000 held solely for the benefit of MRC
at December 31, 1996 and 1995, respectively. The decrease in cash and cash
equivalents is due primarily to 

                                       6
<PAGE>
 
the $9,273,000 in capital expenditures and $6,595,000 in environmental
remediation, incurred in 1996 being offset by: (a) $5.0 million in cash from the
sale of the Speedway Business Park Property to PMI; (b) net cash proceeds of
approximately $3,400,000 from the 1995 CSI and environmental insurance
settlements; and (c) $3,000,000 of new borrowings under the Union Bank credit
facility.

     Working Capital. During 1996, current assets decreased $8,811,000 to
$11,818,000 while current liabilities decreased $4,750,000 to $13,058,000. The
decrease in current assets resulted primarily from the $2,455,000 decrease in
cash and cash equivalents, discussed above, plus a $6,356,000 decline in
accounts receivable due primarily to the receipt of over $6,000,000 in gross
proceeds from the CSI and environmental insurance settlements. The decrease in
current liabilities resulted primarily from payments under terms of the CSI
Settlement Agreement, and attorney fees arising from the Company's environmental
insurance litigation settlement. Current liabilities at December 31, 1996, and
1995 include $1,616,000 and $1,608,000, respectively, in accounts payable and
accrued liabilities relating to MRC. As a result, working capital decreased
during 1996 by $4,0612,000 to a negative $1,240,000 at December 31, 1996.

     Real Estate. Real Estate decreased $3.2 million during 1996 primarily
because of the sale of Speedway Business Park to PMI in December being partially
offset by the development expenditures incurred during 1996.

     Investments. The increase in investment in PMI is primarily related to the
increase in the equity investment in PMI as a result of PMI's initial public
offering in March 1996 ($6,513,000); the Company's recording of its share of
equity in PMI's undistributed earnings subsequent to the public offering in
March ($889,000), and the sale of Speedway Business Park to PMI for cash and
$8,352,000 in common stock in PMI in December, 1996. As a result of the initial
public offering, the Company increased its recorded investment in PMI, by
approximately $6.5 million, to reflect its diluted share of the increase in
shareholders equity of PMI that was generated by the public offering. The
Company also recorded corresponding increases in deferred income taxes and
stockholders equity of approximately $400,000 and $6.1 million, respectively.

     Other Assets. The increase in other assets is primarily related to
approximately $4.0 million of capitalized landfill permitting and development
costs for MRC being partially offset by the amortization of deferred loan fees
relating to the Union Bank Credit Facility.

     Environmental Remediation. As is discussed extensively in Part I, "Property
Redevelopment, Mill Site Environmental", the Company estimates, based upon
current information, that its future remediation and other environmental costs
for the balance of its land and related matters, including groundwater and other
possible third party claims, will be between approximately $20 million and $32
million, depending both upon the ultimate extent of the environmental
remediation and clean-up effort involved and which approved remediation
alternatives are eventually selected. In order to provide better information
regarding these future remediation and other environmental costs, the Company
has elected to restate its balance sheets to show as a separate liability rather
than, as previously, an offset to land, the amount of future environmental
related costs reflected in its financial statements. The restatement reflects
the original $34.7 million remediation adjustment to land; the $6.6 million
groundwater remediation reserve recorded in 1988 when the Company emerged from
bankruptcy as the reorganized successor of KSC; and the net $12.5 million in
environmental insurance litigation settlement proceeds received in 1995 being
offset by approximately $21.6 million in remediation and other environmental
costs expended through December 31, 1996. The Company's decision to restate its
balance sheet is based upon, among other things, the more extensive
investigation and remediation activities that have been pursued over the past
two years and the Company's ability to better estimate the probable range of
future remediation and other environmental costs.

                                       7
<PAGE>
 
     As of December 31, 1996, the total short-term and long-term environmental
liabilities including remediation reflected on the Company's balance sheet was
approximately $32.2 million, the high end of the probable range of future
remediation and other environmental costs, which declined from the $39.4 million
as of December 31, 1995. The decrease is a result, primarily, of the $7.2
million in remediation and other environmental costs incurred in 1996 on the
Mill Site property.

     Although ongoing environmental investigations are being conducted on the
Mill Site Property and management believes it is currently in a position to
estimate with some reasonable certainty future investigation and remediation
costs, there can be no assurance that the actual amount of environmental
remediation expenditures to be incurred will not substantially exceed those
currently anticipated or that additional areas of contamination may not be
identified. Accordingly, future facts and circumstances could cause these
estimates to change significantly.

     Long-term Debt. As of December 31, 1996, the Company had $8,102,000 in
long-term debt comprised of $5,102,000 of debt issued as part of the purchase of
properties from the Lusk Joint Ventures in July 1994 and $3.0 million borrowed
under the $20,000,000 revolving-to-term credit facility with Union Bank.

     Long-term Liabilities. The increase in other long-term liabilities is
primarily due to $1,237,000 in other additional deferred tax liabilities
recorded during 1996.

     Minority Interest and Other Liabilities. As of December 31, 1996, the
Company has recorded $1,618,000 of minority interest relating to MRC in which
the Company had approximately a 73% equity interest.

     Contingent Liabilities. The Company has contingent liabilities more fully
described in the notes to the financial statements.

                           SECTION 3: BUSINESS OUTLOOK

     The statements contained in this Business Outlook are based upon current
expectations. In addition to the forward-looking statements and information
contained elsewhere in this 10-K Report, these statements are forward-looking
and, therefore, actual results may differ materially.

     On-Going Operations. As noted above, the Company's revenues from ongoing
operations are generally derived from the development of the Company's major
long-term projects and investments. The development of a number of these
projects and investments, such as the 102-year take-or-pay lease with Cucamonga
and the 12.29% equity ownership in PMI, are essentially complete and the Company
is recognizing significant revenues and income from these investments. The
Company expects revenues from these projects and investments to increase
moderately over time as certain key economic factors impacting these projects
and investments increase.

     In regard to the lease with Cucamonga, the most significant economic factor
affecting future water lease revenues is likely to be adjustments in the MWD
rate for untreated and non-interruptible water as available through the Chino
Basin Municipal Water District (the "Lease Rate") upon which the lease payments
are calculated. The MWD rate established for untreated, non-interruptible water
is based on a number of factors, including MWD's need for funds to finance
capital improvements and to cover large fixed overhead costs. After increasing
at an average of over 9.0% per year during the past 35 years, MWD is projecting
that the MWD rate for untreated, non-interruptible water, including all of the
changed rates and charges implemented by MWD since July 1, 1995, will likely
increase at less than 5.0% per year 

                                       8
<PAGE>
 
for the next 3-5 years. This reduction is due to a reduced capital budget, lower
overhead, lower borrowing costs and reduced levels of inflation. Also affecting
the Company's future water lease revenues is the dispute with Cucamonga
regarding the calculation of the Lease Rate. A ruling in favor of the Company
would result in the receipt of all or a portion of the $748,000 of lease
payments in dispute as of December 31, 1996, which the Company has fully
reserved.

   
     In regard to the Company's 12.29% investment in PMI, the most significant
factors affecting the Company's future equity income from PMI will be the
increased revenues and net income generated by PMI from the expansion of its
professional motorsports operations. Critical to this expansion is the
successful startup of the TCS that is on land acquired from the Company.
Construction of TCS is virtually completed and it will hold its first major
races, the International Race of Champions and a NASCAR Winston West series race
on June 21, 1997, followed by the "NAPA 500" NASCAR Winston Cup race, on June
22, 1997. Three other major events, the "Marlboro 500" CART PPG World Series
Event on September 28, 1997 and a NASCAR Busch Series race on October 17, 1997,
and a Sears Craftsman Truck Series on October 18, 1997, are also scheduled. The
success of these events, coupled with the results of the other ten major racing
events schedule for PMI's MIS and Nazareth speedways and PMI's other motorsports
related operations, will determine the amount of income from equity method
investments the Company reports in the future.    

     The Company is also spending a significant amount of capital in the
continued development of its two other major project and investment
opportunities: the redevelopment of the remaining approximately 668 acres
(gross) of the Company's Mill Site Property and the re-permitting of the Eagle
Mountain Landfill by MRC, the Company's 73% owned subsidiary. If it is
successful in completing the development of these two projects as planned, the
Company expects to generate significant future revenues and net income from
them. However, as is noted elsewhere in this Report, there are also numerous
risks associated with completing the re-permitting of the Eagle Mountain
Landfill and the redevelopment of the remaining Mill Site Property that could
materially impact the Company's future revenues and net income from these
projects.

     In regard to the redevelopment of the remaining approximately 668 acres
(gross) of the Mill Site Property, the Company is currently undertaking efforts
to obtain the entitlement and permits necessary to develop the remaining 668
acres for a variety of possible commercial, industrial and recreational uses.
These efforts, which will continue throughout 1997 and into 1998, include the
approval of possible changes that would alter and improve the existing access to
portions of the Mill Site Property. In support of these efforts, the Company
expects to spend, in 1997, up to approximately $7.0 million for required
environmental remediation and approximately $3.5 million for real estate
entitlement and improvement expenditures. The $7.0 million to be spent in 1997
for required environmental remediation is a component of the $20-32 million
estimate to complete all remaining required remediation for the Mill Site
Property. In addition, substantial capital expenditures beyond the $3.5 million
projected for 1997 will be required to complete the necessary on-site and
off-site improvements for the redevelopment of remaining Mill Site property.

     In regard to the Eagle Mountain Landfill, MRC continues to pursue the
activities necessary to re-permit the Landfill Project. The final EIR/EIS has
been completed and released and is being reviewed by the Riverside County
Planning Commission. Once the Planning Commission completes its review, it will
forward the EIR/EIS with its recommendations to the Riverside County Board of
Supervisors. The Company expects that the Supervisors will act on the Landfill
Project during the middle of 1997; however, there are a number of issues and
actions that could delay such action. In addition, even if the Supervisors
approve the Landfill Project, the Company anticipates further litigation by the
opponents to the Landfill Project in state and federal court in an effort to
block the Landfill Project. The Company expects to spend 

                                       9
<PAGE>
 
approximately $3.7 million for support of MRC's landfill re-permitting efforts
in 1997 and approximately an additional $1.9 million in 1998.

     Capital Resources. The Company expects that its current cash balances and
short-term investments together with: (a) cash provided from operating
activities; (b) amounts available under its revolving-to-term credit facility
which was increased from $20,000,000 to $30,000,000 subsequent to December 31,
1996 (less $2,832,000 in reductions in the borrowing base and $5,505,000
reserved for financial assurances required by the DTSC and relating to
environmental remediation on the Mill Site Property) will be sufficient to
satisfy both the Company's near-term operating cash requirements and to enable
the Company to continue to fund the development of its long-term projects and
investments. As was discussed in more detail above, the Company expects to
commit, in 1997, a total of approximately $14.2 million for capital projects and
investments. To the extent that additional capital resources are required, such
capital will be raised through bank borrowings, partnerships, joint venture
arrangements, additional equity or the sales or monetization of assets.

     Improved Cash Flow from Use of Net Operating Loss Tax Carryforwards. Due to
the Company's status as successor to KSC and its use of KSC-related NOLs, income
taxes actually paid by the Company are substantially less than the income tax
provision reported in its financial statements. The tax benefit associated with
the utilization of these NOLs is reflected as an increase to stockholders'
equity rather than as an increase to net income. The Company expects that its
use of these NOLs will substantially reduce the cash paid for income taxes until
these NOLs are fully utilized. The total NOLs at December 31, 1996, are
estimated to be approximately $107,000,000 for federal purposes and $11,000,000
for California purposes. The federal NOLs expire in varying amounts over a
period from year 2000 to 2010 while the California NOLs expire in year 1997 and
2000.

     If within a three-year period, 50% or more of the stock of the Company
changes ownership, the future annual use of NOLs may be limited. The annual
limitation would be calculated as the product of: (i) the highest long-term
tax-exempt rate for a designated period prior to the ownership change; and (ii)
the market value of the Company at such time.

                                       10
<PAGE>
 
2.       Amendment to Financial Statements - Part II, Item 14.

         It has been determined that there was a misstatement of the amounts
between the Real Estate categories of "Land and improvements" and "Real estate
underdevelopment" on the Corporation's Consolidated Balance Sheets, although the
total remains the same. In addition, a portion of Footnote 10. "Stockholders'
Equity" to the Corporation's 1996 Financial Statements dealing with Stock Option
and Stock Grant Programs was inadvertently deleted in connection with the
electronic filing of the 10-K Report with the Securities and Exchange Commission
on March 31, 1997. The full text of the amended financial statements together
with notes follows:









                [REMAINDER OF THE PAGE INTENTIONALLY LEFT BLANK]

                                       11
<PAGE>
 
                         REPORT OF INDEPENDENT AUDITORS
                         ------------------------------


Board of Directors
Kaiser Ventures Inc. and Subsidiaries

         We have audited the accompanying consolidated balance sheets of Kaiser
Ventures Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of income, cash flows, and stockholders'
equity for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Kaiser Ventures Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.


                                                     ERNST & YOUNG LLP


Riverside, California
February 11, 1997

                                       12
<PAGE>
 
                      KAISER VENTURES INC. AND SUBSIDIARIES


                           CONSOLIDATED BALANCE SHEETS
                                AS OF DECEMBER 31

<TABLE>   
<CAPTION>
                                                                1996           1995
                                                                ----           ----
                                                                           (As Restated)
<S>                                                        <C>            <C>         
ASSETS

Current Assets
     Cash and cash equivalents .........................   $  8,482,000   $ 10,937,000
     Accounts receivable and other, net of allowance for
       doubtful accounts of $1,034,000 and $494,000,
       respectively ....................................      3,217,000      3,330,000
     CSI Settlement receivable .........................             --      3,661,000
     Insurance Settlement receivable ...................        119,000      2,701,000
                                                           ------------   ------------
                                                             11,818,000     20,629,000
                                                           ------------   ------------

Investment in common stock of Penske Motorsports, Inc. 
  (Fair market value of 1,627,923 shares equal to
   $41,512,000 as of December 31, 1996) ................     38,863,000     22,991,000
                                                           ------------   ------------

Investment in Fontana Union Water Company ..............     16,108,000     16,108,000
                                                           ------------   ------------

Real Estate
     Land and improvements .............................     52,116,000     50,902,000
     Real estate under development .....................      6,551,000     10,926,000
                                                           ------------   ------------

                                                             58,667,000     61,828,000
                                                           ------------   ------------

Other Assets
     Landfill permitting and development ...............      5,645,000      1,660,000
     Buildings and equipment (net) .....................      2,210,000      2,433,000
     Other assets and investments ......................        756,000      1,154,000
                                                           ------------   ------------

                                                              8,611,000      5,247,000
                                                           ------------   ------------

Total Assets ...........................................   $134,067,000   $126,803,000
                                                           ============   ============
</TABLE>    

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

                                       13
<PAGE>
 
                      KAISER VENTURES INC. AND SUBSIDIARIES


                           CONSOLIDATED BALANCE SHEETS
                                AS OF DECEMBER 31

<TABLE>
<CAPTION>


                                                               1996            1995
                                                               ----            ----
                                                                            (As Restated)
<S>                                                        <C>            <C>         
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
      Accounts payable .................................   $  2,936,000   $  4,065,000
      Accrued liabilities ..............................      4,125,000      6,268,000
      Current portion of long-term debt ................        240,000        240,000
      Environmental remediation ........................      5,757,000      7,235,000
                                                           ------------   ------------

                                                             13,058,000     17,808,000
                                                           ------------   ------------

Long-term Liabilities
      Accrued liabilities ..............................      1,417,000      1,111,000
      Deferred tax liabilities .........................      1,958,000        721,000
      Long-term debt ...................................      8,102,000      5,342,000
      Environmental remediation ........................     26,466,000     32,176,000
                                                           ------------   ------------

                                                             37,943,000     39,350,000
                                                           ------------   ------------

Total Liabilities ......................................     51,001,000     57,158,000
                                                           ------------   ------------

Minority Interest ......................................      1,618,000        948,000
                                                           ------------   ------------

Commitments and Contingencies

Stockholders' Equity
      Common stock, par value $.03 per share, authorized
        13,333,333 shares; issued and outstanding
        10,488,114 and 10,470,614 respectively .........        315,000        314,000
      Capital in excess of par value ...................     70,437,000     60,256,000
      Retained earnings since November 15, 1988 ........     10,696,000      8,127,000
                                                           ------------   ------------

Total Stockholders' Equity .............................     81,448,000     68,697,000
                                                           ------------   ------------

Total Liabilities and Stockholders' Equity .............   $134,067,000   $126,803,000
                                                           ============   ============

</TABLE>


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

                                       14
<PAGE>
 
                      KAISER VENTURES INC. AND SUBSIDIARIES



                        CONSOLIDATED STATEMENTS OF INCOME
                         FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>

                                                                1996           1995           1994
                                                                ----           ----           ----
<S>                                                         <C>            <C>            <C>         
RESOURCE REVENUES
  Ongoing Operations
     Water resource .....................................   $  4,505,000   $  4,974,000   $  4,820,000
     Property redevelopment .............................      1,120,000        998,000      1,052,000
     Income from equity method investments ..............      1,539,000        162,000             --
     Mill Site land sale ................................      6,371,000             --             --
     Waste management ...................................             --             --      2,400,000
                                                            ------------   ------------   ------------

         Total ongoing operations .......................     13,535,000      6,134,000      8,272,000
                                                            ------------   ------------   ------------

  Interim Activities
     Lease, service and other ...........................      1,879,000      2,774,000      4,199,000
     Asset sales ........................................             --      2,200,000             --
                                                            ------------   ------------   ------------

         Total interim activities .......................      1,879,000      4,974,000      4,199,000
                                                            ------------   ------------   ------------

         Total resource revenues ........................     15,414,000     11,108,000     12,471,000
                                                            ------------   ------------   ------------

RESOURCE OPERATING COSTS
  Operations and maintenance ............................      1,092,000      1,496,000      1,970,000
  Administrative support expenses .......................      2,220,000      2,296,000      3,193,000
                                                            ------------   ------------   ------------

         Total resource operating costs .................      3,312,000      3,792,000      5,163,000
                                                            ------------   ------------   ------------

INCOME FROM RESOURCES ...................................     12,102,000      7,316,000      7,308,000

  Corporate general and administrative expenses .........      3,837,000      4,201,000      3,430,000
                                                            ------------   ------------   ------------

INCOME FROM OPERATIONS ..................................      8,265,000      3,115,000      3,878,000

  Net interest expense (income) .........................        819,000        665,000       (155,000)
                                                            ------------   ------------   ------------

INCOME BEFORE INCOME TAX PROVISION AND EXTRAORDINARY LOSS      7,446,000      2,450,000      4,033,000

  Income tax provision
     Currently payable ..................................         92,000             --        125,000
     Deferred tax expense ...............................        840,000        721,000             --
     Deferred tax expense credited to equity ............      3,945,000        335,000      1,621,000
                                                            ------------   ------------   ------------

INCOME BEFORE EXTRAORDINARY LOSS ........................      2,569,000      1,394,000      2,287,000

EXTRAORDINARY LOSS (NET OF INCOME TAXES OF $1,705,000) ..             --             --      2,233,000
                                                            ------------   ------------   ------------

NET INCOME ..............................................   $  2,569,000   $  1,394,000   $     54,000
                                                            ============   ============   ============

EARNINGS PER SHARE BEFORE EXTRAORDINARY LOSS ............   $        .24   $        .13   $        .21
                                                            ============   ============   ============

NET EARNINGS PER SHARE ..................................   $        .24   $        .13   $        .01
                                                            ============   ============   ============

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ...........     10,716,032     10,671,665     10,671,154
</TABLE>






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

                                       15
<PAGE>
 
                      KAISER VENTURES INC. AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                         FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>

                                                               1996             1995              1994
                                                               ----             ----              ----
<S>                                                        <C>             <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
    Net income .........................................   $  2,569,000    $  1,394,000    $     54,000
    Provision for income tax which is credited to equity      3,945,000         335,000          38,000
    Equity income in Penske Motorsports, Inc. ..........       (889,000)             --              --
    Deferred tax expense ...............................        840,000         721,000              --
    Depreciation and amortization ......................        952,000         436,000         430,000
    Extraordinary loss (paid) accrued ..................             --      (3,938,000)      3,938,000
    Gain on sale of Speedway Business Park .............     (6,371,000)             --              --
    Gain from the CSI Settlement .......................             --      (2,200,000)             --
    Allowance for doubtful accounts ....................         36,000         258,000        (148,000)
    Changes in assets:
      Receivable and other .............................         77,000        (755,000)        446,000
    Changes in liabilities:
      Current liabilities ..............................     (2,810,000)        798,000        (880,000)
      Long-term accrued liabilities ....................        306,000              --              --
                                                           ------------    ------------    ------------

    Net cash flows from operating activities ...........     (1,345,000)     (2,951,000)      3,878,000
                                                           ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Minority interest and other liabilities ............        670,000       1,538,000              --
    Proceeds from the sale of Speedway Business Park ...      5,000,000              --              --
    Proceeds from the CSI Settlement ...................      3,661,000              --              --
    Capital expenditures ...............................     (9,273,000)     (1,605,000)     (1,334,000)
    Environmental remediation expenditures .............     (6,595,000)     (5,950,000)     (1,698,000)
    Environmental insurance proceeds (net) .............      2,582,000      13,823,000              --
    Investment in Penske Motorsports, Inc. .............        232,000        (309,000)       (250,000)
    Other investments ..................................       (268,000)       (184,000)       (100,000)
    Short-term investments and marketable securities ...             --       3,624,000       6,418,000
    Investment in Fontana Union Water Co. ..............             --         (62,000)             --
    Purchase of Lusk Joint Venture Properties ..........             --              --      (8,814,000)
                                                           ------------    ------------    ------------

    Net cash flows from investing activities ...........     (3,991,000)     10,875,000      (5,778,000)
                                                           ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Issuance of common stock ...........................        121,000         166,000          46,000
    Borrowing under revolver-to-term credit facility ...      3,000,000              --              --
    Principal payments on note payable .................       (240,000)       (358,000)        (60,000)
    Payment of loan fees ...............................             --              --        (761,000)
                                                           ------------    ------------    ------------

    Net cash flows from financing activities ...........      2,881,000        (192,000)       (775,000)
                                                           ------------    ------------    ------------

NET CHANGES IN CASH AND CASH EQUIVALENTS ...............     (2,455,000)      7,732,000      (2,675,000)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .........     10,937,000       3,205,000       5,880,000
                                                           ------------    ------------    ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR ...............   $  8,482,000    $ 10,937,000    $  3,205,000
                                                           ============    ============    ============
</TABLE>



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

                                       16
<PAGE>
 
                      KAISER VENTURES INC. AND SUBSIDIARIES



           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                             
                                         COMMON STOCK         CAPITAL IN             
                                 --------------------------    EXCESS OF    RETAINED
                                    SHARES       AMOUNT       PAR VALUE     EARNINGS       TOTAL
                                 --------------------------------------------------------------------
<S>                              <C>          <C>           <C>           <C>           <C>        
Balance at December 31, 1993     10,427,962   $   313,000   $59,672,000   $ 6,679,000   $66,664,000

   Provision for income tax,
     credited to equity .....            --            --        38,000            --        38,000

   Issuance of shares of
     common stock ...........         9,400            --        46,000            --        46,000

   Net Income ...............            --            --            --        54,000        54,000
                                -----------   -----------   -----------   -----------   -----------

Balance at December 31, 1994     10,437,362       313,000    59,756,000     6,733,000    66,802,000
                                -----------   -----------   -----------   -----------   -----------

   Provision for income tax,
     credited to equity .....            --            --       335,000            --       335,000

   Issuance of shares of
     common stock ...........        33,252         1,000       165,000            --       166,000

   Net Income ...............            --            --            --     1,394,000     1,394,000
                                -----------   -----------   -----------   -----------   -----------

Balance at December 31, 1995     10,470,614       314,000    60,256,000     8,127,000    68,697,000
                                -----------   -----------   -----------   -----------   -----------

   Increase in investment in
   Penske Motorsports, Inc. .
   due to public offering ...            --            --     6,116,000            --     6,116,000

   Provision for income tax,
     credited to equity .....            --            --     3,945,000            --     3,945,000

   Issuance of shares of
     common stock ...........        17,500         1,000       120,000            --       121,000

   Net Income ...............            --            --            --     2,569,000     2,569,000
                                -----------   -----------   -----------   -----------   -----------

Balance at December 31, 1996     10,488,114   $   315,000   $70,437,000   $10,696,000   $81,448,000
                                ===========   ===========   ===========   ===========   ===========
</TABLE> 
The accompanying notes are an integral part of the consolidated financial
statements.

                                       17
<PAGE>
 
                      KAISER VENTURES INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.       NATURE OF BUSINESS

     On November 16, 1988, the Company began operations as Kaiser Steel
Resources, Inc. upon the successful completion of the reorganization of Kaiser
Steel Corporation ("KSC") under Chapter 11 of the Bankruptcy Code. The Company
has changed its name twice since reorganization in June 1993 and 1995, to Kaiser
Resources Inc. and to Kaiser Ventures Inc. ("Kaiser" or the "Company"),
respectively.

     The Company's business focuses on the long-term development of its
principal assets including water resources, land and waste management assets.
The development of these assets is financed primarily through joint venture and
long-term lease arrangements. Ongoing operations refer to those revenue
resources which the Company is developing over the long-term while interim
activities refer to those revenue resources which are temporary or short-term in
nature and which are earned while the Company is evaluating the appropriate
long-term use of the asset or property.

     At December 31, 1996, the Company's long-term emphasis is on the further
development of its principal assets: (i) a 50.88% interest in Fontana Union
Water Company ("Fontana Union"), a mutual water company; (ii) a 12.29% interest
in Penske Motorsports, Inc. ("PMI"), a public professional motorsports company
that, among other projects, is developing the California Speedway on land
acquired from the Company; (iii) approximately a 73% interest in Mine
Reclamation Corporation ("MRC"), the developer of the Eagle Mountain Landfill
Project (the "Landfill Project"); (iv) approximately 668 acres of the former
Kaiser Steel Corporation ("KSC") steel mill site (the "Mill Site Property"); and
(v) the 11,350 acre idle iron ore mine in the California desert (the "Eagle
Mountain Site"), which includes the associated 460 acre town of Eagle Mountain
("Eagle Mountain Townsite") and the land leased to MRC for the Landfill Project.
The Company is also pursuing other related longer-term growth opportunities on
the balance of its Mill Site Property, including the development of a transfer
station and materials recovery facility on the ("Mill Site MRF") and the
redevelopment of industrial and commercial parcels of land adjoining the
California Speedway and the Mill Site MRF.

     The Company's consolidated financial statements include the following
significant entities: Fontana Water Resources, Inc., Kaiser Steel Land
Development, Inc., Eagle Mountain Reclamation, Inc., Lake Tamarisk Development
Corporation, Kaiser Eagle Mountain, Inc. and Mine Reclamation Corporation. See
Note 2 below for additional information concerning the Company's subsidiaries.

ONGOING OPERATIONS

     The Company's revenues from ongoing operations are generally derived from
the development of the Company's long-term projects. Revenues from water
resources represent payments under the lease of the Company's interest in
Fontana Union to Cucamonga County Water District ("Cucamonga"). Property
redevelopment revenues primarily reflect revenues from long-term development
activities at the Mill Site Property; land sales; housing rental income,
aggregate rock sales and lease payments for the minimum security prison at the
Eagle Mountain Townsite; and royalty revenues from iron ore shipments from the
Company's iron ore mine in California (the "Silver Lake Mine"). Income from
equity method investments reflect Kaiser's share of income related to those
equity investments (primarily PMI) and joint ventures which the Company accounts
for under the equity method. Prior to 1995, waste management revenues reflected
the minimum lease payments under MRC's 100-year lease in connection with the
Landfill Project.

                                       18
<PAGE>
 
INTERIM ACTIVITIES

     Revenues from interim activities are generated from various sources
primarily related to the Mill Site Property. Significant components of interim
activities include rentals under short-term tenant lease arrangements, royalty
revenues from the sale of slag to outside contractors, water and wastewater
treatment service revenues, revenues from the sale of recyclable materials and
other miscellaneous short-term activities.


NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF FINANCIAL STATEMENT PRESENTATION

     The stated value of the assets and liabilities of the Company were carried
forward from those of KSC except as adjusted in reorganization.

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
and all wholly-owned subsidiaries and majority owned investments, except as
specified below. Intercompany accounts and transactions have been eliminated.

     Fontana Union Water Company ("Fontana Union"). The Company, through its
wholly-owned subsidiary Fontana Water Resources, Inc. ("FWR"), owns 50.88% of
Fontana Union, a mutual water company, which entitles the Company to its
proportionate share of Fontana Union water. The Company has effectively
transferred its control in Fontana Union to Cucamonga pursuant to a 102-year
lease of its Fontana Union shares ("Cucamonga Lease") which the Company entered
into in March 1989 and which was amended in 1989, 1992 and 1993. Therefore,
Kaiser receives no direct benefit from nor has any direct exposure to the
operations or financial performance of Fontana Union. Consequently, Kaiser's
investment in Fontana Union is recorded on the cost method with revenues from
the Cucamonga Lease being recorded on a current basis pursuant to the terms and
conditions of the Lease. (See Note 9.)

     KSC Recovery, Inc. ("KSC Recovery"). The Company's wholly-owned subsidiary,
KSC Recovery, Inc., which is governed and controlled by a Bankruptcy Court
approved Plan of Reorganization, acts solely as an agent for KSC's former
creditors in pursuing bankruptcy related adversary litigation and administration
of the KSC bankruptcy estate. Kaiser exercises no significant control or
influence over nor does Kaiser have any interest in the operations, assets or
liabilities of KSC Recovery except as provided by the terms of the approved Plan
of Reorganization. In addition, all costs and expenses of KSC Recovery are
funded by KSC Recovery's cash on hand and potential future recoveries. It is
anticipated that the bankruptcy estate of KSC Recovery expects to make all final
distributions within the next 12 to 18 months. Consequently, activity of KSC
Recovery is not included in Kaiser's financial statements; however, KSC Recovery
is a member of the Kaiser consolidated group for tax purposes and is therefore,
included in the consolidated tax return.

CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid debt instruments purchased with
original maturities of 90 days or less to be cash equivalents. The Company
maintains its cash balances with high quality financial institutions and are
insured by the Federal Deposit Insurance Corporation up to $100,000 at each
institution.

                                       19
<PAGE>
 
REAL ESTATE

     In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of (FASB 121), the
Company records impairment losses on long-lived assets used in operations when
events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. There has been no requirement to record
impairment losses on the Company's assets under FASB 121.

     Interest and property taxes related to real estate under development are
capitalized during periods of development.

INVESTMENT IN PENSKE MOTORSPORTS, INC.

     The Company accounts for its investment in Penske Motorsports, Inc. ("PMI")
under the equity method of accounting because the Company exercises significant
influence over the operations of PMI through its representation on the Board of
Directors and PMI Board Committees.

DEFERRED COSTS

     Included in other assets are deferred loan fees of $761,000 incurred in
1994, which are being amortized over the life of the related loan on a
straight-line basis. Amortization of these deferred loan fees, which is included
in net interest expense (income) was $666,000, $77,000, and $18,000 for 1996,
1995 and 1994, respectively. Acceleration of amortization of loan fees in 1996
is due to the renegotiation of the revolving-to-term credit facility.

BUILDINGS AND EQUIPMENT

     Buildings and equipment are stated on the cost basis. Depreciation is
provided on the straight line method over the estimated useful lives of the
respective assets.

REVENUE RECOGNITION

     Revenues are recognized when the Company has completed the earnings process
and an exchange transaction has taken place.

INCOME TAXES

     The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of temporary timing differences between the financial
statement and tax bases of assets and liabilities at the applicable enacted tax
rates.

PER SHARE AMOUNTS

     Earnings per share is computed based on the weighted average number of
common stock and common stock equivalents (including stock options) outstanding
during each period.

STOCK OPTIONS

     The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees" and intends to
continue to do so. (See Note 10.)

                                       20
<PAGE>
 
FINANCIAL STATEMENT RESTATEMENT AND RECLASSIFICATIONS

     The 1995 Balance Sheet and certain footnote disclosure has been restated as
discussed in the footnote entitled Environmental Remediation Reserve. (See Note
8.)

     The Company has reclassified certain amounts in its Consolidated Financial
Statements for the years ended in 1994 and 1995 in order to conform with the
1996 presentation.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

     Cash and Cash Equivalents. The carrying amount approximates fair value
because of the short-term maturity of these instruments.

     Receivables. The carrying amount approximates fair value because of the
short-term maturity of these instruments.

     Long-Term Debt. The carrying approximates fair value based on the current
rates offered to the Company for debt of the same remaining maturities.


NOTE 3.       ACCOUNTS RECEIVABLE

     Accounts receivable as of December 31 consisted of the following:
<TABLE>
<CAPTION>
                                                                              1996             1995
                                                                              ----             ----
       <S>                                                                <C>                <C>       
       Cucamonga County Water District...............................     $ 2,099,000        $1,790,000
       Penske Motorsports, Inc.......................................         843,000            54,000
       Burrtec Waste Industries......................................         461,000            17,000
       Other.........................................................         848,000         1,963,000
                                                                          -----------        ----------
                                                                            4,251,000         3,824,000
       Allowance for doubtful accounts...............................      (1,034,000)         (494,000)
                                                                          -----------        ----------
                Total................................................     $ 3,217,000        $3,330,000
                                                                          ===========        ==========
</TABLE>

     The Company is currently in litigation against Cucamonga over the
interpretation of the Cucamonga Lease with regard to the amount payable to the
Company pursuant to the terms of the lease. Although the Company is continuing
to invoice Cucamonga at what it believes is the correct Metropolitan Water
District of Southern California ("MWD") rate under the lease with Cucamonga, the
Company has elected to reserve the full amount in dispute and report revenues on
the basis of amounts received. The total amount of lease 

                                       21
<PAGE>
 
payments in dispute as of December 31, 1996 is approximately $748,000 and is
included in the allowance for doubtful accounts.


NOTE 4. INVESTMENT IN PENSKE MOTORSPORTS, INC.

     The Company, as of December 31, 1996, owns 1,627,925 shares, or
approximately 12.29% of the common stock of PMI. As discussed in more detail
below, the Company's ownership interest in PMI was acquired as a result of: (i)
its contribution in November, 1995, to PMI of approximately 480 acres, as
adjusted, of the Central Mill Site Property on which the California Speedway
("TCS") has been built; and (ii) the subsequent sale of the Speedway Business
Park, totaling approximately 54 acres to PMI in December, 1996. Kaiser recorded
no gain or loss as a result of the November 1995 transaction discussed above
since the value of the PMI stock that Kaiser received was equal to the book
value of the land Kaiser contributed to PMI. PMI is traded on the NASDAQ
National Market under the symbol "SPWY".

     In March, 1996, Penske Motorsports, Inc. ("PMI") effected a
recapitalization resulting in PMI ownership of the outstanding shares of
Michigan International Speedway, Inc., Pennsylvania International Raceway, Inc.,
The California Speedway Corporation, Motorsports International Corp.,
Competition Tire West, Inc. and Competition Tire South, Inc. Subsequent to the
recapitalization, PMI completed an initial public offering ("IPO") by issuing
3,737,500 shares of common stock at a price to the public of $24 per share. The
proceeds to PMI, after underwriting discounts and commissions and other offering
expenses, were approximately $83.1 million. As a result of the IPO, which
materially increased the Company's share of PMI's stockholder's equity, the
Company has recorded an increase in its equity investment in PMI of $6,513,000
and corresponding increases in deferred income taxes and capital in excess of
par value of $397,000 and $6,116,000, respectively. As an additional result of
the IPO, when the Company converted its PMI preferred stock into PMI common
stock, the Company changed its accounting for this investment from the cost to
the equity method of accounting and began recording it's share of undistributed
equity in the earnings of PMI effective April 1, 1996.

     In addition, due to the concentration of motor sport racing events between
April and September, PMI's operations have been, and will continue to be, highly
seasonal. Except for one event week-end in October, 1997 at TCS, PMI has no
current plans to host events in the first and fourth quarters at its existing
facilities. As a result, the Company's reported share of undistributed equity in
the earnings of PMI will likely be positive (income) in the second and third
quarters and negative (loss) in the first and fourth quarters.

     PMI is a leading promoter and marketer of professional motorsports in the
United States as well as an owner and operator of speedway facilities. PMI
currently owns: (i) Michigan International Speedway, Inc. which owns and
operates the Michigan Speedway ("MIS"), in Brooklyn, Michigan; (ii) The
California Speedway Corporation, the developer of TCS near Los Angeles,
California; (iii) Pennsylvania International Raceway, Inc. which owns and
operates the Nazareth Motor Speedway ("Nazareth") in Nazareth, Pennsylvania;
(iv) Motorsports International Corp. ("MIC"), a motorsports apparel and
memorabilia company; (v) Competition Tire West, Inc. and Competition Tire South,
Inc., distributors of Goodyear racing tires in the mid-west and southern regions
of the United States; and (vi) approximately four (4) percent of the stock of
North Carolina Motor Speedway, Inc. which owns the North Carolina Motor
Speedway, Inc., Rockingham, North Carolina.

     PMI promoted a total of nine major racing events at MIS and Nazareth in
1996 and currently expects to promote a total of 15 racing events at MIS,
Nazareth and TCS in 1997. Of the anticipated 1997 races, 9 are to be sanctioned
by the National Association for Stock Car Auto Racing, Inc. ("NASCAR(R)")
including 3 associated with the Winston Cup Series professional stock car racing
circuit, 3 races with the NASCAR 

                                       22
<PAGE>
 
Busch Grand National Series, 1 race associated with the NASCAR Winston West
Series, and 2 races associated with the Sears Craftsman Truck Series; 3 races
will be sanctioned by Championship Auto Racing Teams, Inc. ("CART(R)"); 2 races
will be sanctioned by Automobile Racing Club of America ("ARCA"); and 2 races
will be with the International Race of Champions ("IROC").

     Total 1996 revenues for PMI, on a consolidated basis were $55.2 million
with a net income of $10.9 million, or $.90 per share. The Company's share of
undistributed equity in the earnings of PMI for 1996, was $889,000 net of
residual transaction expenses.

     A condensed balance sheet of PMI as of December 31, follows:
<TABLE>
<CAPTION>

                                                                          1996                     1995
                                                                          ----                     ----
       <S>                                                             <C>                      <C>        
       Current Assets............................................     $ 33,559,000             $ 8,458,000
       Property and Equipment....................................      140,402,000              61,009,000
       Other Assets..............................................       10,036,000               3,788,000
                                                                      ------------             -----------
                Total Assets.....................................     $183,997,000             $73,255,000
                                                                      ============             ===========

       Current Liabilities.......................................     $ 25,801,000             $15,664,000
       Other Liabilities.........................................        3,825,000               1,454,000
       Deferred taxes............................................        8,969,000               9,115,000
       Minority Interest.........................................              ---               1,210,000
       Stockholders' Equity......................................      145,402,000              45,812,000
                                                                      ------------             -----------
                Total Liabilities and Stockholders' Equity.......     $183,997,000             $73,255,000
                                                                      ============             ===========
</TABLE>


NOTE 5.  MINE RECLAMATION CORPORATION

     As previously disclosed, the Company, in January, 1995, acquired a 70%
interest in Mine Reclamation Corporation ("MRC"), the developer of the Eagle
Mountain Landfill Project. Concurrent with this acquisition, MRC and the Company
amended the MRC Lease to terminate the minimum monthly rent payments by MRC to
the Company. Consequently, the Company did not receive any rent payments from
MRC during 1995 or 1996 nor will it in the future until commencement of
operations at the Landfill Project. The transaction which was insignificant to
the operating results, financial position and total assets of the Company has
been treated as a purchase, and the assets acquired and liabilities assumed were
recorded at their fair market values.

     As of December 31, 1996 the Company had provided approximately $4.5 million
in equity funding to MRC. In addition, the Company's Board of Directors has
committed, subject to their periodic review, an additional $3.7 million of
equity funding for MRC during 1997. As a result of these equity fundings, the
Company's ownership interest in MRC as of December 31, 1996 is approximately
73%.

     While the Company has made the decision to invest up to an additional $3.7
million in equity in MRC, the Company is not obligated to provide additional
funding to MRC beyond its current commitments. MRC will need additional capital
beyond that committed to successfully complete the permitting and development
process.

                                       23
<PAGE>
 
NOTE 6.  BUILDINGS AND EQUIPMENT (NET)

     Buildings and equipment (net) as of December 31 consisted of the following:
<TABLE> 
<CAPTION> 
                                                                               1996               1995
                                                                               ----               ----
       <S>                                                                <C>                   <C>          
       Buildings and structures .....................................     $ 2,074,000         $ 2,063,000
       Machinery and equipment.......................................       1,621,000           1,557,000
                                                                           ----------          ----------
                                                                            3,695,000           3,620,000
       Accumulated depreciation......................................      (1,485,000)         (1,187,000)
                                                                          -----------         -----------
                Total................................................     $ 2,210,000         $ 2,433,000
                                                                          ===========         ===========
</TABLE>


NOTE 7.  ACCRUED LIABILITIES

     Accrued liabilities as of December 31 consisted of the following:
<TABLE> 
<CAPTION> 
                                                                            1996               1995
                                                                            ----               ----
       <S>                                                                <C>                <C>          
       Environmental insurance settlement costs......................     $1,313,000         $3,938,000
       Compensation and related employee costs.......................      1,353,000          1,475,000
       Other  .......................................................      1,459,000            855,000
                                                                          ----------         ----------
              Total..................................................     $4,125,000         $6,268,000
                                                                          ==========         ==========
</TABLE>

NOTE 8.       ENVIRONMENTAL REMEDIATION RESERVE

     The Company estimates, based upon current information, that its future
remediation and other environmental costs, including groundwater and other
possible third party claims, will be between approximately $20 million and $32
million, as determined on an undiscounted basis, depending both upon the
ultimate extent of the environmental remediation and clean-up involved and upon
which approved remediation alternatives are eventually selected. In order to
improve the presentation regarding these future remediation and other
environmental costs, the Company has elected to restate all balance sheet
information presented to show, as a separate liability rather than as an offset
to land, the amount of future remediation and other environmental costs
reflected in its financial statements. The restatement reflects the amounts
originally recognized when the Company emerged from bankruptcy comprised of a
$34.7 million remediation adjustment to land and a $6.6 million groundwater
remediation reserve and $12.5 million in environmental insurance litigation
settlement proceeds received in 1995, reduced by approximately $21.6 million in
remediation and other environmental costs expended through December 31, 1996.
The Company's decision to restate its balance sheet information is based upon
the more extensive investigation and remediation activities that have been
pursued over the past two years and the Company's ability to better estimate the
probable range of future remediation and other environmental costs.

     As of December 31, 1996, the total short-term and long-term environmental
remediation liabilities reflected on the Company's balance sheet was
approximately $32.2 million, which is the high end of the probable range of
future remediation and other environmental costs. Below is a table showing the
activity in the remediation liability accounts for the years ended December 31:

                                       24
<PAGE>
 
<TABLE>
<CAPTION>
                                             1996            1995
                                             ----            ----

        <S>                              <C>             <C>           
        Beginning Estimated Liability   $ 39,411,000    $ 34,529,000  
        
          Environmental Insurance
             Proceeds ...............             --      12,500,000
        
          Remediation Costs Incurred      (7,188,000)     (7,618,000)
                                        ------------    ------------
        
        Ending Estimated Liability ..     32,223,000      39,411,000
        
          Less:  Current Portion ....     (5,757,000)     (7,235,000)
                                        ------------    ------------
        
        Long-term Portion ...........   $ 26,466,000    $ 32,176,000
                                        ============    ============
</TABLE>

     In 1995, the additional remediation and other environmental costs
identified were offset by the receipt of approximately $12.5 million in net
environmental insurance litigation settlement proceeds; therefore, there was no
income statement impact from either the additional remediation and other
environmental costs identified or the receipt of the insurance litigation
proceeds.

     See Note 15, "Commitments and Contingencies" for further information.


NOTE 9.       LONG-TERM DEBT

     As of December 31, 1996, long-term debt consisted of a $5,342,000 note,
which includes the current portion of $240,000 secured by a first trust deed
issued to Bank of America as part of the Company's purchase of property from the
Lusk Joint Ventures and $3,000,000 in borrowings under the Union Bank credit
facility. The Bank of America note is payable in quarterly payments of $60,000
plus interest at the their prime rate plus 1.5% (9.75% at December 31, 1996)
with all remaining principal and accrued and unpaid interest due and payable on
July 28, 1998.

     The Company, through FWR, had a 9-year, $20,000,000 revolving-to-term
credit facility with Union Bank at floating interest rates and collateralized by
the Company's shares of Fontana Union and the lease of those shares to
Cucamonga. At December 31, 1996, there was $3,000,000 in outstanding loans
outstanding under the credit facility. The borrowing base available under the
credit facility is limited to the discounted present value of a five year
projection of future payments under the Cucamonga Lease, as defined in the
credit facility agreement. Under the borrowing base calculations, the maximum
amount available was $19,525,000 as of December 31, 1996. The net available
funds under the $20,000,000 revolving-to-term credit facility less $5,505,000
reserved for financial assurances required by the DTSC and relating to
environmental remediation on the Mill Site Property; and $3,000,000 in
outstanding loans was $11,020,000 as of December 31, 1996.

   
     On January 30, 1997 the $20,000,000 revolving-to-term credit facility with
Union Bank, was increased to $30,000,000. In addition, the term of the facility
was extended 2 years to September 30, 2004, and the borrowing base calculation
was revised to include 8 years, rather than 5 years, of projections of future
payments under the Cucamonga Lease. (See Note 17.)    

     Total interest expense incurred in 1996, 1995, and 1994 was $743,000,
$625,000 and $263,000, respectively.

                                       25
<PAGE>
 
NOTE 10.  STOCKHOLDERS' EQUITY

COMMON STOCK OUTSTANDING

     At December 31, 1996 and 1995, Kaiser Ventures Inc. common stock has a par
value of $0.03 and 13,333,333 authorized shares, of which 10,488,114 and
10,470,614 were outstanding, respectively.

     In November, 1988, 10,000,000 shares of common stock (after giving effect
for a 3 for 1 reverse stock split that took place in 1990) were issued pursuant
to the KSC Plan of Reorganization. As of December 31, 1996, 136,919 of these
shares are being held for the benefit of the former general unsecured creditors
of the predecessor company pending the resolution of disputed bankruptcy claims.
The final resolution of these claims will result in the final allocation of the
held shares among the unsecured creditor group, which presents no liability to
the Company. For financial reporting purposes these shares have been considered
issued and outstanding.

     In February, 1993, the Company completed a stock offering of 2,000,000
shares of its common stock, including 500,000 shares sold by the Company and
1,500,000 shares sold by its two principal stockholders. After the Company's
proportionate share of costs of approximately $100,000 incurred in connection
with the stock offering, the Company realized net proceeds from the stock
offering of approximately $6,000,000.

STOCK OPTION AND STOCK GRANT PROGRAMS

     In October, 1990, the Company's stockholders approved the Amended, Restated
and Substituted Kaiser Steel Resources, Inc. 1989 Stock Plan (the "1989 Stock
Plan"). The 1989 Stock Plan provided for the grant of incentive stock options,
non-qualified stock options, stock appreciation rights, restricted stock or
deferred stock awards. Certain options granted under the 1989 Stock Plan are
still outstanding. No compensation expense was incurred by the Company during
1996, 1995 and 1994.

     In June, 1995, the Company's stockholders approved the 1995 Stock Plan. The
1995 Stock Plan provides for the grant of incentive stock options, non-qualified
stock options, restricted stock and other stock related incentives. In June,
1996, the 1995 Stock Plan was amended to reserve up to 859,102 shares for
issuance upon exercise of stock options, grants of stock and other stock related
incentives. As a result of the increase in the 1995 Stock Plan reserve, the
Company had 419,691 reserved shares as of December 31, 1996. Grants are
generally established at fair market value of the Company's common stock on the
date of the grant and the exercise thereof may extend for up to 10 years with
various vesting schedules.

     In addition, under the 1995 Stock Plan, each director when first elected to
the Board shall automatically be granted options for 5,000 common stock shares.
Each non-employee director who is re-elected or serving an unexpired term as a
member of the Board at an annual meeting of holders of stock of the Company will
be automatically granted an additional 1,500 stock options. These options have
an exercise price equal to the fair market value of the Company's Common Stock
on the date of the grant.

     A summary of the status of the stock option grants under the Company's
Stock Plans' as of December 31, 1996 and 1995 and activities during the years
ending on those dates is presented below:

                                       26
<PAGE>
 
<TABLE>
<CAPTION>
                                           1996                          1995                      1994
                                --------------------------   -------------------------  ------------------------
                                          WEIGHTED-AVERAGE            WEIGHTED-AVERAGE          WEIGHTED-AVERAGE
                                               EXERCISE                   EXERCISE                  EXERCISE
                                  OPTIONS       PRICE        OPTIONS        PRICE        OPTIONS      PRICE
                                  -------       -----        -------        -----        -------      -----
<S>                               <C>        <C>             <C>        <C>              <C>        <C>      
Outstanding at beginning of                                                             
   year ....................      809,661    $   11.63       652,836    $   13.00        493,903    $   12.39
                                                                                        
Granted ....................      639,000        10.87       182,000         5.93        165,000        14.64
Exercised ..................      (17,500)        6.89       (17,801)        4.26         (6,067)        8.11
Forfeited ..................           --           --        (7,374)       10.09             --           --
                               ----------    ---------       -------    ---------        -------    ---------         
Outstanding at end of year .    1,431,161    $   11.35       809,661    $   11.63        652,836    $   13.00
                               ==========                    =======                     =======                      
                                                                                        
Options exercisable at year                                                             
   end .....................      497,791    $   11.29       425,916    $   10.97        309,937    $   11.45
                               ==========                    =======                     =======                      
                                                                                        
Weighted-average fair value                                                             
   of options granted during                                                            
   the year ................   $     2.87                  $    1.22                                  
</TABLE>
   

     The following table summarizes information about fixed stock options
outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
                                               OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
                                      -------------------------------------    --------------------------------------
                      WEIGHTED-
                      AVERAGE                             WEIGHTED-                               WEIGHTED-     
   RANGE OF          REMAINING                             AVERAGE                                 AVERAGE       
 EXERCISE PRICES     LIFE (YEARS)         OPTIONS       EXERCISE PRICE          OPTIONS         EXERCISE PRICE  
 ---------------     ------------         -------       --------------          -------         --------------  
<S>                       <C>              <C>             <C>                  <C>              <C>       
$3.00 to $  7.50          7.7              185,511         $ 5.71               123,741          $   5.66
$7.51 to $ 17.58          7.8            1,245,650         $12.22               374,050          $  13.16
</TABLE>   
          
     The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for the
Company's stock-based compensation plans other than for compensation and
performance-based stock awards. Had compensation cost for the Company's stock
option plan been determined based upon the fair value at the grant date for the
awards under the plan consistent with the methodology prescribed under Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("FAS 123") the effect on the Company's net income and earnings
per share would have been adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>

                               1996                1995
                               ----                ----
<S>                      <C>                <C>         
Net Earnings
  As reported            $   2,569,000      $  1,394,000
  Pro forma              $   2,160,000      $  1,249,000

Earnings per share
  As reported            $        0.24      $       0.13
  Pro forma              $        0.20      $       0.12
</TABLE>    

                                       27
<PAGE>
 
     The Company employed the Black-Scholes option-pricing model in order to
calculate the above reduction in net income and earnings per share. The effect
on net earnings for 1996 and 1995 is not necessarily representative of the
effect in future years. The following table describes the assumptions utilized
by the Black-Scholes option-pricing model and the resulting fair value of the
options granted:
<TABLE>
<CAPTION>

                              1996               1995
                              ----               ----
<S>                            <C>                 <C> 
Volatility                     .254                .346
Risk-free interest rate       5.74%               6.98%
Expected life in years        2.67                2.25
Forfeiture rate               0.00%               0.00%
Dividend yield                0.00%               0.00%
</TABLE>

     In 1988, the Company granted stock options totaling 533,333 shares with a
nominal exercise price to certain of its officers as part of the emergence from
bankruptcy reorganization. These options became 50% vested at the date of grant
with the remaining options ratably vesting through June 1, 1991. As of December
31, 1996, 160,000 of these options remain vested and unexercised.


NOTE 11.  SUPPLEMENTAL CASH FLOW INFORMATION

     The Company paid interest during 1996, 1995, and 1994 of $674,000, $607,000
and $144,000, respectively.

     As a result of the PMI initial public offering in March, 1996, the Company
increased its investment in PMI by approximately $6.5 million and recorded
corresponding increases in deferred income taxes and stockholders equity of
approximately $400,000 and $6.1 million, respectively.

     During 1996, the Company sold Speedway Business Park to PMI for
$13,352,000. The Company received $5,000,000 of the proceeds in cash and
$8,352,000 in common stock of PMI.

     During 1996, the Company capitalized interest and property taxes on
property real estate under development of $354,000 and $28,000, respectively.
There was no capitalization of interest expense on property taxes during 1995 or
1994.

     During 1995, in connection with the contribution of the land to PMI, the
Company reclassified $22.5 million of land to investment in PMI.

     During 1994, non-cash investing activities included a $6,000,000 note
payable as part of the Company's purchase of properties owned by the Lusk Joint
Ventures.

                                       28
<PAGE>
 
NOTE 12. INCOME TAXES

     The income tax provisions for the years ended December 31, 1996, 1995 and
1994 are composed of the following:
<TABLE>
<CAPTION>
                                                                   1996                1995                1994
                                                                   ----                ----                ----
      <S>                                                     <C>                 <C>                 <C>         
      Current tax expense:
         Federal...........................................   $    56,000         $       ---         $     92,000
         State.............................................        36,000                 ---               33,000
                                                              -----------         -----------         ------------
                                                                   92,000                 ---              125,000
                                                              -----------         -----------         ------------
      Deferred tax expense credited to equity:
         Federal...........................................     3,945,000             335,000            1,371,000
         State.............................................           ---                 ---              250,000
                                                              -----------         -----------         ------------
                                                                3,945,000             335,000            1,621,000
                                                              -----------         -----------         ------------
     Deferred tax expense:
         Federal...........................................           ---                 ---                  ---
         State.............................................       840,000             721,000                  ---
                                                              -----------         -----------         ------------
                                                                  840,000             721,000                  ---
                                                              -----------         -----------         ------------
     Tax benefit of extraordinary item (Note 13): 
     Current tax benefit:
         Federal...........................................           ---                 ---              (92,000)
         State.............................................           ---                 ---              (30,000)
                                                              -----------         -----------         ------------
                                                                      ---                 ---             (122,000)
                                                              -----------         -----------         ------------
     Deferred tax benefit credited to equity:
         Federal...........................................           ---                 ---           (1,339,000)
         State.............................................           ---                 ---             (244,000)
                                                              -----------         -----------         ------------
                                                                      ---                 ---           (1,583,000)
                                                              -----------         -----------         ------------

                                                              $ 4,877,000         $ 1,056,000         $     41,000
                                                              ===========         ===========         ============
</TABLE>

     In accordance with SFAS 109, the tax benefits of all deductible temporary
differences and loss carryforwards that existed at the date of a reorganization
must be credited directly to additional paid-in capital when the initial
recognition of these benefits occurs subsequent to the reorganization.

     Income taxes paid in 1996 and 1994 were $20,000 and $272,000, respectively.
There were no income taxes paid in 1995.

     Deferred tax liabilities (assets) are comprised of the following as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>

                                                                        1996                  1995
                                                                        ----                  ----

     <S>                                                           <C>                    <C>            
     Land held for development...............................      $  2,231,000           $  4,744,000
     Investment in Fontana Union.............................         6,440,000              6,440,000
     Investment in Penske Motorsports Inc....................        11,795,000              9,031,000

     Depreciation............................................            36,000                103,000
                                                                   ------------           ------------
                                                                     20,502,000             20,318,000
                                                                   ------------           ------------

     Groundwater remediation.................................          (690,000)              (695,000)

     Insurance Proceeds......................................        (2,165,000)            (5,098,000)
     Investment in MRC.......................................        (1,837,000)            (1,837,000)
     Accounts receivable reserve.............................          (181,000)              (166,000)
     Other...................................................        (1,262,000)            (1,219,000)
     Loss carryforwards......................................       (39,898,000)           (45,912,000)
                                                                   ------------           ------------
                                                                    (46,033,000)           (54,927,000)
                                                                   ------------           ------------
     Deferred tax asset valuation allowance..................        27,489,000             35,330,000
                                                                   ------------           ------------
                                                                   $  1,958,000           $    721,000
                                                                   ============           ============
</TABLE>

                                       29
<PAGE>
 
     As indicated above, the net change in the valuation allowance was a
reduction of $7,841,000 in 1996.

     A reconciliation of the effective income tax rate to the federal statutory
rate, for financial reporting purposes, is as follows:
<TABLE>
<CAPTION>
                                                                            1996         1995         1994
                                                                            ----         ----         ----
<S>                                                                         <C>          <C>          <C>  
Federal statutory rate...............................................       34.0%        34.0%        34.0%
Increase resulting from state tax, net of federal benefit............        5.1          6.1          6.1
Other................................................................        2.4          3.0          3.0
Additional recognition of pre-reorganization benefits................       17.5          ---         ---
Increase in valuation allowance on state NOLs........................        6.2          ---         ---
                                                                         ---------    ---------    ------
                                                                            65.2%        43.1%        43.1%
                                                                         ========     ========     ========
</TABLE>

     The consolidated Net Operating Loss ("NOL") carryforwards available for
federal income tax purposes as of December 31, 1996, are approximately
$107,000,000 and will expire over a period from year 2000 through 2010. The
amount of NOL carryforwards available for California state tax purposes is
approximately $11,000,000 as of December 31, 1996. During 1993, the California
Legislature amended the tax code relative to the generation and use of NOL
carryforwards available for California state tax purposes. This legislation,
among other changes, reduced the NOL carryforwards from 15 years to 5 years.
Therefore, the Company's NOL carryforwards available for California state tax
purposes now expire in year 1997 and 2000. In addition, there are certain
limitations as to the future annual use of NOLs if 50% or more of the stock of
the Company changes ownership. The Company also has approximately $2,817,000 of
investment tax credit carryforwards available. The credits will expire in the
years 1997 through 2000 and can be utilized only after the NOL is exhausted.


NOTE 13.   EXTRAORDINARY LOSS

     During the first quarter of 1994, the Company learned that it may have been
responsible for the payment of premiums levied pursuant to the Coal Industry
Retiree Health Benefit Act of 1992 (the "Coal Act"). This legislation not only
imposes liability for premiums on companies currently in the coal mining
industry, but also on companies and their successors that were in the coal
mining industry. Prior to 1985, coal mines were operated to support the
Company's steel making operations. In December 1994, the Company reached an
agreement settling all outstanding and future claims under which the Company
paid $3,778,000 plus expenses. The settlement was recorded as an extraordinary
loss of $2,233,000 (net of tax benefits of $1,705,000) in December 1994.


NOTE 14.   LEASED ASSETS AND SIGNIFICANT CUSTOMERS

LONG-TERM LEASES

     The Company has long-term lease agreements with Cucamonga pursuant to the
Cucamonga Lease (Note 1), Management Training Corporation ("MTC") and California
Steel Industries ("CSI"). Minimum lease payments expected to be received by the
Company through the next five years are as follows:

                                       30
<PAGE>
 
<TABLE>
<CAPTION>
      YEAR ENDING           CUCAMONGA                                    CSI SERVICE
      DECEMBER 31             LEASE                MTC LEASE              AGREEMENT                 TOTAL
      -----------             -----                ---------              ---------                 -----
      <S>                 <C>                     <C>                     <C>                   <C>       
          1997            $ 4,867,000             $625,000                $ 220,000             $ 5,712,000
          1998            $ 4,867,000             $    ---                $ 110,000             $ 4,977,000
          1999            $ 4,867,000             $    ---                $       ---           $ 4,867,000
          2000            $ 4,867,000             $    ---                $       ---           $ 4,867,000
          2001            $ 4,867,000             $    ---                $       ---           $ 4,867,000
</TABLE>

     The amounts for the Cucamonga Lease are based upon: (a) the quantities of
water as of December 31, 1996, and as provided for under the Lease; (b) the
current disputed lease rate paid by Cucamonga, (which is less than the lease
rate the Company bills Cucamonga by approximately $540,000 on an annual basis)
and; (c) projections by MWD which forecast no rate increases in the disputed
rate over the next 5 years.

     The net book values of Fontana Union and Eagle Mountain at December 31,
1996 were $16,108,000 and $10,386,000, respectively. Only a portion of Eagle
Mountain is being utilized for the MTC Lease.

SIGNIFICANT CUSTOMERS

     The Company received substantial portions of its revenue from the following
customers:
<TABLE>
<CAPTION>

       YEAR ENDED       CUCAMONGA                                       CSI SERVICE 
      DECEMBER 31        LEASE                     MTC LEASE            AGREEMENT              MRC LEASE
      -----------        -----                     ---------            ---------              ---------
      <S>                                        <C>                    <C>                   <C>           
          1996        $4,505,000                 $709,000               $  217,000                   ---
          1995        $4,974,000                 $699,000               $  416,000                   ---
          1994        $4,820,400                 $694,000               $1,859,000             $2,400,000
                    
</TABLE>

NOTE 15.  COMMITMENTS AND CONTINGENCIES

ENVIRONMENTAL CONTINGENCIES

     As discussed in Note 8 above, the Company estimates, based upon current
information, that its future remediation and other environmental costs,
including groundwater and other possible third party claims, will be between
approximately $20 million and $32 million, depending upon which approved
remediation alternatives are eventually selected.

     Although ongoing environmental investigations are being conducted on the
Company's property, management believes it is currently in a position to
estimate with some reasonable certainty future investigation and remediation
costs, there can be no assurance that the actual amount of environmental
remediation expenditures and incurred will not substantially exceed those
currently anticipated or that additional areas of contamination may not be
identified. Accordingly, future facts and circumstances could cause these
estimates to change significantly. The Company anticipates recovery of the
remediation costs incurred through redevelopment of the property, primarily in
connection with specific redevelopment projects or joint ventures. Further, the
Company has provided certain financial assurances to the DTSC in connection with
anticipated remediation activities, the primary one being the dedication of
approximately $5.5 million of Kaiser's Union Bank Credit facility.

                                       31
<PAGE>
 
     While the Company has monitored certain groundwater wells in the past, the
DTSC requested and the Company will implement a supplemental groundwater
monitoring system. The Company has settled obligations of groundwater
contamination with the California Regional Water Quality Control Board. The
settlement required a $1,500,000 cash payment by the Company which was made in
February, 1994, and the contribution of 1,000 acre feet of water annually for 25
years to a water quality project. These water rights are unrelated to those
leased to Cucamonga. In 1995, the Company contributed 18,000 acre feet of its
water in storage thus satisfying the first 18 years of its obligation. The
Company remains contingently liable for any impacts the groundwater plume may
have on water wells owned by third parties. Recently the City of Ontario,
California commenced litigation against the Company alleging that the Company
has contaminated one of its municipal wells. The Company believes sufficient
amounts have been accrued for this contingency.

PENSION PLANS

     The Company currently sponsors a voluntary qualified 401(k) savings plan
and a nonqualified pension plan, available to all full-time employees.
Participants may make contributions of up to 15% of their compensation with the
Company matching one-half of each participant's contribution up to 6% of
compensation. The non-qualified plan mirrors the qualified 401(k) plan.

     Total expense relative to these plans for the years ended December 31,
1996, 1995 and 1994, was $199,000, $170,000 and $139,000, respectively.

LETTERS OF CREDIT

     At December 31, 1996, the Company had guaranteed letters of credit
outstanding on its behalf to third parties totaling $420,000. These letters of
credit were issued for reclamation activities performed at two idled coal
properties, on behalf of and at the expense of the KSC bankruptcy estate.


NOTE 16.   LEGAL PROCEEDINGS

     Significant legal proceedings are summarized as follows:

BANKRUPTCY ADVERSARY LITIGATION/CLAIMS

     The Company's predecessor, KSC, was in reorganization under Chapter 11 of
the United States Bankruptcy Code from February, 1987 until November, 1988.
Pursuant to the KSC Plan of Reorganization, the Company has established a
subsidiary, KSC Recovery, Inc. ("KSC Recovery") see Note 1, which was engaged in
the process of pursuing certain legal actions on behalf of the former creditors
of KSC and handling the remaining administrative duties of the KSC bankruptcy
estate, including claims resolution.

     From time-to-time, various environmental and similar types of claims such
as injury or death from asbestos exposure that relate to KSC pre-bankruptcy
activities are asserted against the Company and/or KSC Recovery. In connection
with the KSC Plan of Reorganization, the Company, as the reorganized successor
to KSC, was discharged from all liabilities that may have arisen prior to
confirmation of the KSC Plan of Reorganization, except as otherwise provided by
the plan or by law. Although the Company believes there is no ongoing
contamination from its activities and that all pre-petition environmental claims
were discharged under the KSC Plan of Reorganization, in the event any of these
claims are ultimately determined to survive the KSC bankruptcy, it could have a
material adverse effect on the Company.

                                       32
<PAGE>
 
OTHER LITIGATION

     In addition, the Company, in the normal course of its business, is involved
in various claims and legal proceedings. Management believes these matters will
not have a material adverse effect on the Company's business or financial
condition.


NOTE 17.   SUBSEQUENT EVENT

   
     On January 30, 1997 the Company amended its revolving-to-term credit
facility with Union Bank. As a result of the amendment, the amount available
under the credit facility was increased from $20.0 million to $30.0 million. In
addition, the term of the facility was extended 2 years to September 30, 2004,
and the borrowing base calculation was revised to include 8 years, rather than 5
years, of projections of future payments under the Cucamonga Lease. The other
existing terms and conditions of the credit facility remain in effect.    

                                       33
<PAGE>
 
NOTE 18.  QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>

                                            FIRST        SECOND       THIRD         FOURTH 
                                           QUARTER       QUARTER      QUARTER       QUARTER
                                           -------       -------      -------       -------
<S>                                      <C>           <C>           <C>           <C>        
1996

Resource revenues ....................   $ 2,034,000   $ 2,423,000   $ 2,345,000   $ 8,612,000

Income from operations ...............   $   335,000   $   658,000   $   677,000   $ 6,595,000

Income before income tax provision ...   $   224,000   $   519,000   $   521,000   $ 6,182,000

Net income ...........................   $   127,000   $   294,000   $   296,000   $ 1,852,000

Earnings per share ...................   $       .01   $       .03   $       .03   $       .17

1995

Resource revenues ....................   $ 1,999,000   $ 2,150,000   $ 2,089,000   $ 4,870,000

Income from operations ...............   $   237,000   $   243,000   $   291,000   $ 2,266,000

Income before income tax provision ...   $    88,000   $    86,000   $   108,000   $ 2,168,000

Net income ...........................   $    50,000   $    49,000   $    62,000   $ 1,233,000

Earnings per share ...................   $       .00   $       .00   $       .01   $       .12

1994

Resource revenues ....................   $ 2,944,000   $ 2,848,000   $ 3,302,000   $ 3,377,000

Income from operations ...............   $   781,000   $   882,000   $ 1,105,000   $ 1,092,000

Income before income tax provision and
    extraordinary loss ...............   $   889,000   $   998,000   $ 1,146,000   $ 1,000,000

Income before extraordinary loss .....   $   504,000   $   566,000   $   650,000   $   567,000

Extraordinary loss (net of taxes) ....            --            --            --   $ 2,233,000

Net income (loss) ....................   $   504,000   $   566,000   $   650,000   $(1,666,000)

Earnings (loss) per share
   Before extraordinary loss .........   $      0.05   $      0.05   $      0.06   $      0.05
   After extraordinary loss ..........   $      0.05   $      0.05   $      0.06   $     (0.15)

</TABLE>

                                       34
<PAGE>
 
          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>




                                            BALANCE AT           CHARGED TO          DEDUCTIONS
                                             BEGINNING           COSTS AND              FROM                BALANCE AT
           CLASSIFICATION                    OF PERIOD          EXPENSES (A)        RESERVES (B)          END OF PERIOD
--------------------------------------    ----------------    -----------------    ----------------     -------------------
<S>                                       <C>                 <C>                  <C>                  <C>           

YEAR ENDED DECEMBER 31, 1996

Allowance for losses in collection
of current accounts receivable......      $       494,000     $       668,000      $      128,000       $    1,034,000
                                          ===============     ===============      ==============       ==============


YEAR ENDED DECEMBER 31, 1995

Allowance for losses in collection
of current accounts receivable......      $       156,000     $       423,000      $       85,000       $      494,000
                                          ===============     ===============      ==============       ==============


YEAR ENDED DECEMBER 31, 1994

Allowance for losses in collection
of current accounts receivable......      $       314,000     $       149,000      $      307,000       $      156,000
                                          ===============     ===============      ==============       ==============

</TABLE>


(A) Although the Company is continuing to bill Cucamonga at what it believes is
the correct Metropolitan Water District of Southern California ("MWD") rate
under the lease with Cucamonga, the Company has elected to reserve the full
amount in dispute and report revenues on the basis of amounts received. The
total amount of lease payments in dispute for the years ending December 31, 1996
and 1995 are approximately $668,000 and $80,000, respectively.


(B) Amount charged off during the year.

                                       35
<PAGE>
 
                                   SIGNATURES


      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to
Registrant's 1996 Form 10-K Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

      Date:  April 1, 1997

                                    KAISER VENTURES INC.


                                    By:      /s/ Richard E. Stoddard
                                    -------------------------------------
                                    Name:    Richard E. Stoddard
                                    -------------------------------------
                                    Title:   Chief Executive Officer and
                                    -------------------------------------
                                             Chairman of the Board
                                    -------------------------------------


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Amendment No. 1 to the Registrant's 1996 Form 10-K Report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.

                 SIGNATURE                       TITLE             DATE
                 ---------                       -----             ----


1.  Principal Executive Officer
   
    /s/ Richard E. Stoddard       Chief Executive Officer and      April 1, 1997
    ---------------------------   Chairman of the Board
    Richard E. Stoddard           
   
2.  President
   
    /s/ Gerald A. Fawcett         President and Chief Operating    April 1, 1997
    ---------------------         Officer
    Gerald A. Fawcett             
   
3.  Principal Financial and
    Accounting Officer
   
    /s/ James F. Verhey           Sr. Vice President Finance and   April 1, 1997
    ----------------------------  Chief Finance Officer
    James F. Verhey               

                                       36
<PAGE>
 
                    SIGNATURE            TITLE                     DATE
                    ---------            -----                     ----

4.    Directors

      *                                Director                 April 1, 1997
      ---------------------------
      Ronald E. Bitonti

      *                                Director                 April 1, 1997
      ---------------------------
      Todd G. Cole

      *                                Director                 April 1, 1997
      ---------------------------
      Reynold C. MacDonald

      *                                Director                 April 1, 1997
      ---------------------------
      William J. Morgan

      *                                Director                 April 1, 1997
      ---------------------------
      Charles E. Packard

      *                                Director                 April 1, 1997
      ---------------------------
      Thomas S. Rabone

      *                                Director                 April 1, 1997
      ---------------------------
      Lyle B. Stevenson

      *                                Director                 April 1, 1997
      ---------------------------
      Marshall F. Wallach



                  *  By:  /s/ Richard E. Stoddard
                           Richard E. Stoddard
                           Attorney-In Fact

                                       37