<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington D.C. 20549
 
                                   FORM 10-K
 
(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, 1998
                                      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                              Identification No.)
organization)
 
 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:
 

                                               Name of Each Exhchange on 
    Title of Each Class                            which  Registered
----------------------------                  ---------------------------    
Common Stock ($.03 par value                     Nasdaq Stock Market(SM)
 
                      ----------------------------------- 

       Securities registered pursuant to Section 12(g) of the Act:  None
                
                      ----------------------------------- 

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
                                                ---- 
 
The aggregate market value of the registrant's Common Stock, $.03 par value,
held by non-affiliates of the registrant was approximately $48,400,535 based
upon the average of the bid and ask prices of registrant's Common Stock on the
Nasdaq Stock Market(SM) at March 23, 1999, or $9.50 per share.
 
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 23, 1999, 10,699,354 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 1999
Annual Meeting of Stockholders is incorporated into Part III of this Form 10-K.
<PAGE>
 
                        TABLE OF CONTENTS TO FORM 10-K
                        ------------------------------
                    
                                    PART I
<TABLE>
<CAPTION>

<S>          <C>                                                 <C>
Item 1.      BUSINESS...........................................   1

Item 2.      PROPERTIES.........................................  27

Item 3.      LEGAL PROCEEDINGS..................................  29

Item 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY
              HOLDERS...........................................  31

                                    PART II

Item 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND
              RELATED STOCKHOLDER MATTERS.......................  32

Item 6.      SELECTED FINANCIAL DATA............................  33

Item 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS...............  34

Item 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........  43

Item 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
              ON ACCOUNTING AND FINANCIAL DISCLOSURE............  43

                                    PART III

Item 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE
              REGISTRANT........................................  44

Item 11.     EXECUTIVE COMPENSATION.............................  44

Item 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
              AND MANAGEMENT....................................  44

Item 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....  44

                                    PART IV

Item 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
              REPORTS ON FORM 8-K...............................  45
</TABLE> 


                                       i
<PAGE>
 
                                    PART I

FORWARD-LOOKING INFORMATION

  Except for the historical statements and discussions contained herein,
statements contained in this 10-K Report constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended.  Any 10-K,
Annual Report to Stockholders, 10-Q or 8-K Report of the Company may include
forward-looking statements.  In addition, other written or oral statements,
which constitute forward-looking statements, have been made and may be made in
the future by the Company.  When used or incorporated by reference in this 10-K
Report or in other written or oral statements, the words "anticipate,"
"estimate," "project" and similar expressions are intended to identify forward-
looking statements.  Such statements are subject to certain risks, uncertainties
and assumptions.  Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated, expected or projected.
For example, actual results could materially differ from those projected as a
result of factors such as, but not limited to: general economic conditions in
the United States and Southern California; the impact of any year 2000 problems
on a regional or national basis; the impact of federal, state, and local laws
and regulations on the Company's development activities; the impact of weather
on the Company's remediation or construction related activities; the discovery
of unanticipated environmental conditions on any of the Company's properties;
the failure of the bankruptcy discharge granted to the Company to address claims
and litigation that relate to the pre-bankruptcy activities of Kaiser Steel
Corporation; or the failure to obtain any required approval or permit for the
proposed Eagle Mountain landfill project or development of the Company's Mill
Site real estate. Readers are cautioned not to put undue reliance on forward-
looking statements. The Company disclaims any intention to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.

Item 1.  BUSINESS

General

  Kaiser Ventures Inc. ("Kaiser" or the "Company", including its wholly-owned
subsidiaries unless otherwise provided herein) is an asset development company
based in Southern California.  The Company is the reorganized successor to
Kaiser Steel Corporation ("KSC") which was an integrated steel manufacturer that
filed for bankruptcy protection in 1987.  Today, the Company's principal assets
include:  (i) a 50.88% ownership interest in Fontana Union Water Company
("Fontana Union") which is leased to Cucamonga County Water District
("Cucamonga") pursuant to a 102-year take-or-pay lease; (ii) an 11.73% ownership
interest in Penske Motorsports, Inc. ("PMI"), a publicly traded motorsports
company; (iii) approximately 629 acres (gross) of the former KSC steel mill site
(the "Mill Site Property") which is currently undergoing redevelopment; (iv) a
50% joint venture interest in the West Valley Material Recovery Facility and
Transfer Station ("WVMRF"), a transfer station and recycling facility located on
land acquired from the Company; (v) an approximate 74% ownership interest in
Mine Reclamation Corporation ("MRC"), the company seeking to permit a rail-haul
municipal solid waste landfill (the "Landfill Project"); and (vi) 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 property which is leased to MRC for the Landfill Project.

  In addition, the Company's financial position is enhanced by approximately
$114 million of federal net operating loss tax carryforwards ("NOLs"), as of
December 31, 1998, which arose through the KSC bankruptcy reorganization and
which are expected to reduce most of the Company's federal tax liability in the
near future.  The Company also has approximately $3.4 million of California net
operating loss 

                                       1
<PAGE>
 
carryforwards as of December 31, 1998. The federal NOL's expire between the year
2000 through 2014 while the California NOL's expire between year 2000 through
2004.

  The Company's current primary business strategy is to convert its existing
under-utilized assets into equity in new businesses joint ventures, long-term
leases, or by contributing assets in exchange for an ownership interest in
operating companies.  This strategy enables the Company to minimize its capital
investment, reduce its risk, and benefit from the operational expertise of its
strategic partners or lessees.  This strategy is illustrated by the successful
development of the Company's Fontana Union water rights into a long-term, take-
or-pay lease with Cucamonga, and by the Company's contribution of a portion of
the Mill Site Property to PMI for construction of the California Speedway
("TCS") in exchange for an ownership interest in PMI.  The Company will continue
to focus on its existing projects and asset base.  While this is the Company's
general philosophy, the Company may choose to become more directly involved in a
particular project, such as the Landfill Project, when appropriate, or if the
Company believes its active participation will enhance long-term shareholder
value.  As particular assets or projects mature, the Company regularly evaluates
whether to retain, dispose or otherwise deal with asset.

  In the past, the Company has also been engaged in a number of short-term
interim activities on the Mill Site Property including month-to-month property
rentals and the sale of existing slag and other materials at the site.  These
interim activities have historically generated a material portion of the
Company's revenues and enabled the Company to remain profitable in each full
fiscal year since emerging from the KSC bankruptcy.  However, as anticipated,
the amount of these short-term property rentals and other interim revenues
declined substantially in 1998, in connection with the planned redevelopment of
the Mill Site.

Summary of Significant Developments in 1998

  During 1998, a number of events occurred which affected the Company,
therefore, readers are encouraged to read this Report it in its entirety in
order to adequately understand the impact of these events on the Company.
However, Management would like to particularly highlight five areas:  (1) the
positive outcome of the rate litigation trial against Cucamonga; (2) the San
Diego Court's adverse ruling relative to the Landfill Project's environmental
impact report ("EIR") and its appeal; (3) approval of the Federal land exchange
that is necessary for the Landfill Project; (4) the continued work on entitling
the 406 acre Kaiser Commerce Center, a substantial portion of the Mill Site
Property, which resulted in the approval of such project by the San Bernardino
Planning Commission by a unanimous vote on March 18, 1999, with consideration of
this project by the San Bernardino County Board of Supervisors currently
scheduled for April 1999; and (5) the continued work of a committee of the Board
of Directors formed to evaluate strategic alternatives and transactions with
respect to the Company and its assets.

  1.  The Company was successful in its March 1998 trial in the rate litigation
dispute with Cucamonga.  The San Bernardino County Court ruled that Metropolitan
Water District of Southern California ("MWD") had restructured its water rates
as of July 1, 1995 resulting in a discontinuance of the lease rate. Accordingly,
the parties are required to negotiate a new substitute rate and if negotiations
are not successful, the matter will be decided by reference which is a private
trial much like an arbitration. For more detailed information on this matter,
please see "Part I, Item 1. - Business -Water Resources."

  2. In regard to the Landfill Project, in 1998, the San Diego Superior Court
issued its final ruling concluding that the environmental impact report ("EIR")
approved by the Riverside County Board of Supervisors in September 1997, was
deficient in two major areas:  the Landfill Project's impacts on the threatened
desert tortoise and Joshua Tree National Park.  For more detailed information on
this matter, please see "Part I, Item 1. - Business - Municipal Solid Waste
Management Eagle Mountain Landfill Project."  As a result of the Court's final
ruling in May 1998, the Company and MRC evaluated a number of options with
respect to the Landfill Project.  The Company and MRC ultimately decided to
appeal the Court's ruling on the new EIR.  All appeal briefs have been filed and
the matter has been scheduled for 

                                       2
<PAGE>
 
oral argument on April 20, 1999. It is anticipated that a decision from the
Court of Appeals will be announced during the third quarter of 1999.

  3. In December 1998, the U.S. Bureau of Land Management ("BLM") denied all
protests to the BLM's decision in September 1997 to approve the proposed Federal
land exchange with the Company's subsidiary, Kaiser Eagle Mountain, Inc.  This
is an important step in the development of the Landfill Project.  As
anticipated, two opponents to the Landfill Project filed appeals with the
Interior Board of Land Appeals ("IBLA") asserting that the land exchange should
not be allowed for various reasons.  Unfortunately, the land exchange is stayed
pending the outcome of these appeals.  For more information on this matter,
please see "Part I, Item 1. - Business - Municipal Solid Waste Management - 
Eagle Mountain Landfill Project."

  4.  On March 18, 1999, in connection with the entitlement of a substantial 
portion of the Mill Site, known as the Kaiser Commerce Center, the San
Bernardino County Planning Commission voted to approve the project its related
land use and environmental documentation; and to recommend final approval of the
project to the San Bernardino County Board of Supervisors. It is currently
anticipated that the San Bernardino County Board of Supervisors will begin
considering the Kaiser Commerce Center project for approval in April 1999. For
more information on this matter, please see "Part I, Item 1. - Business -
Property Development."

  5.  The Company's Board of Directors formed a special committee (the "Special
Committee") to evaluate and consider pursuing, among other things, various
strategic alternatives and transactions with respect to the Company and its
assets. The Special Committee and the Board spent a substantial amount of time
and effort in this area during 1998 and their work is ongoing. Outside legal
counsel and the investment banking firm of Merrill Lynch have been retained to
assist the Special Committee in its work.

Water Resources

  Background.  The Company, through a wholly-owned subsidiary, Fontana Water
Resources, Inc. ("FWR"), owns 50.88% of Fontana Union, a mutual water company,
which was a primary local source of water for KSC's former steel making
operations.  Fontana Union owns water rights to produce water from four distinct
surface and subsurface sources of water near Fontana, California, including:
(i) adjudicated surface and streambed flow rights from the Lytle Creek area of
the San Gabriel Mountains; (ii) adjudicated rights to the Chino Basin subsurface
aquifer; (iii) adjudicated rights to the Colton/Rialto Basin subsurface aquifer;
and (iv) unadjudicated rights to a subsurface aquifer accessed by a well at the
base of Lytle Creek (Well No. 22).  Locally available water resources such as
owned by Fontana Union continue to be increasingly important and valuable in
Southern California.

  Kaiser's ownership of Fontana Union entitles the Company to receive, annually,
its proportionate share of Fontana Union's water which historically totals
approximately 34,000 acre feet per year (an acre foot equals approximately
325,000 gallons).  In addition, when other shareholders of Fontana Union do not
take their annual proportionate shares of water, the unclaimed water for each
year from those shareholders is divided pro rata among those shareholders that
do take such water.  Currently, the Company's pro rata interest in unclaimed
water raises its effective overall share from 50.88% to approximately 55.66%.
Over time, the Company expects this supplemental source of water to be reduced
or eliminated as minority shareholders, who do not currently utilize all their
water begin to use, sell, or lease their water interests.

  Lease to Cucamonga County Water District.  In 1989, the Company leased its
shares of Fontana Union stock to Cucamonga, a local water district with an "A-"
credit rating from Moody's Investor Services.  Under the terms of the 102-year
take-or-pay lease (the "Cucamonga Lease"), Cucamonga is entitled to receive all
of the Company's proportionate share of water from the foregoing sources.

                                       3
<PAGE>
 
Cucamonga pays the Company for all of the Company's share of water based upon
fixed quantities of water at a rate of 68.13% of the Metropolitan Water District
of Southern California's (the "MWD") charge for untreated, non-interruptible
water as available through Chino Basin Municipal Water District.  Thus, on a
quarterly basis, Cucamonga pays for its proportionate share of the agreed upon
annual quantities regardless of fluctuations in actual water flows and actual
receipt and use of water, except in certain limited situations as discussed in
more detail below.  During 1998 and 1997, the Cucamonga Lease generated $5.2
million and $5.1 million, respectively, in revenues to the Company.

  Because of the 102-year lease agreement, which gives Cucamonga all of the
Company's ownership rights in Fontana Union, the Company does not consolidate
the accounts of Fontana Union for financial reporting purposes.  Substantially
all risks and costs of producing the water are borne by Cucamonga.

  Under the Cucamonga Lease, the Company and Cucamonga agreed that the gross
annual quantity of Fontana Union water from all sources (except the annual Chino
Basin agricultural pool transfer for which the Company accrues revenues for its
share in the 4th quarter), is approximately 34,000 acre feet or approximately
8,500 acre feet per quarter.  Fixing the average quantities of water stabilized
the Company's revenues and Cucamonga's payments.  The water quantities under the
Cucamonga Lease were fixed based on the historical average of water available
from the applicable water sources according to over 80 years of records.

  However, there are limited circumstances in which the agreed upon quantities
of water paid for under the Cucamonga Lease can be adjusted.  As an example, the
agreed upon quantity of water from one source of water, the Colton/Rialto wells,
can be temporarily reduced  if the average water level in certain basin index
wells drops below a specified level.  This occurred in 1996 resulting in a
temporary decrease in production.  However, in the fourth quarter of 1996, the
wells again began pumping at their historical levels because the water level in
the index wells had sufficiently increased.

  Another source of water leased by the Company to Cucamonga pursuant to the
Cucamonga Lease is the Company's proportionate share of water from what is known
as the Chino Basin agriculture pool transfers.  These transfers represent that
portion of water allocated to agricultural users in the Chino Basin, which is
not used by such agricultural users in a particular water year.  As a result,
the Company through Fontana Union is entitled to a share of this surplus water,
which Cucamonga pays for under the Cucamonga Lease.  The historical average of
annual agricultural pool transfers to Fontana Union has been approximately 4,000
acre feet but the amount has fluctuated in recent years.  For the most recent
water year, the 1997/98 water year, the agricultural transfer was 3,590 acre
feet.  For the 1998/99 water year, it is anticipated that the agricultural pool
transfer will be in the range of 3,400 to 3,900 acre feet.  See "Part 1, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a complete discussion of the revenues derived pursuant to the
Cucamonga Lease.

  The Company's future lease revenue increases are primarily dependent upon any
adjustments in the MWD water rates and other fees upon which the lease rate is
calculated.  The MWD rate established for untreated, non-interruptible water is
based on a number of factors, including the MWD need for funds to finance
capital improvements and to cover its fixed operational and overhead costs.  The
MWD water rate has increased at an average rate in excess of 8.6% per year over
the last 25 years.  The MWD rate increases are often cyclical in nature
depending upon such factors as water availability, consumption, capital projects
and available reserves.  Effective rate increases, as of July 1 of each year,
have been 12.7% in 1991, 21.2% in 1992, 18.2% in 1993, 5.3% in 1994.  As
discussed in more detail below, in 1995 a dispute arose as to MWD's rate
increase and the amount payable to the Company under the terms of the Cucamonga
Lease.  Past rate increases are not necessarily indicative of future rate
increases by MWD.

  On July 1, 1995, MWD implemented changed rates and a new rate structure.  As a
result of these changes, the Company asserted that all the changed rates and
items implemented by MWD, which must 

                                       4
<PAGE> 
be paid in order to receive untreated, non-interruptible water from MWD, are to
be included in the calculation of the MWD rate payable under the terms of the
Cucamonga Lease. Cucamonga disputed the Company's interpretation of the
Cucamonga Lease which would result in a rate increase greater than 2.7%, the
1995 rate of increase Cucamonga asserted was the appropriate rate increase.
Similarly, there is a dispute over the MWD rate and thus the Cucamonga Lease
rate for 1996, 1997 and 1998. Cucamonga asserted there was no rate increase in
1996, a 1.5% increase in 1997, and an approximately 0.6% increase in 1998.
However, the Company believes that there were increases in the Cucamonga Lease
rate in 1996, 1997 and 1998, greater than those being paid by Cucamonga.
Alternatively, the Company asserted that the MWD rate as defined in the
Cucamonga Lease had been discontinued, requiring the parties to negotiate a new
lease rate. Because the Company and Cucamonga were unable to resolve this
dispute, in 1996 the Company instituted litigation against Cucamonga in San
Bernardino County Superior Court.

     A trial on the matter was held in March 1998.  The Court concluded that the
rate MWD rates and rate structure on which the Cucamonga Lease had been based
was discontinued effective July 1, 1995.  Therefore, the terms of the Cucamonga
Lease require the parties to negotiate in good faith a new substitute rate.  If
the parties are unable to agree on a substitute rate, the matter is to be
resolved by reference, a form of private trial similar to arbitration.  There is
no specified time period in which the new substitute rate must be established.

     During the last half of 1998, the parties sought to negotiate a new
substitute rate, but were not successful. As a result of the impasse on the
negotiations, the new substitute rate will probably be determined by reference
as required under the terms of the Cucamonga Lease. The parties are in the
initial phase of the reference proceeding.

     Cucamonga has, to date, paid its obligations under the Cucamonga Lease on a
timely basis, but at a level that reflects the lower rates that the Company has
been disputing. Although the Company bills Cucamonga for the full amount it
asserts it is entitled to receive under the Cucamonga Lease, the Company has
elected to report water revenues in the amounts Cucamonga is currently paying.
Consequently, the court decision does not affect the Company's historical
financial statements. Similarly, it is not anticipated that the outcome of the
reference proceeding will affect the Company's historical financial statements,
but it may have a positive impact on the future revenues the Company receives
from Cucamonga.

     Pursuant to the Cucamonga Lease, if any of the Fontana Union water sources
become sufficiently contaminated as to be unusable after treatment and/or
blending, Cucamonga is not obligated to pay for the quantities of available but
unusable water.  The Company is aware of only one limited source of water that
has been affected by contamination.  Two water wells owned by San Gabriel Water
Company but pumping Fontana Union Water have been closed because of
contamination apparently originating from the Mid-Valley Landfill owned by San
Bernardino County.  On October 9, 1998, the California Regional Water Quality
Control Board  Santa Ana Region, determined that the Mid-Valley Sanitary
Landfill was contaminating groundwater and it issued a clean-up and abatement
order against San Bernardino County.  The closure of these two wells has, to
date, not impacted and is not currently anticipated to impact the payments
received by the Company pursuant to the Cucamonga Lease.

     Due to these water quality and quantity concerns, during the first quarter
of 1998, the Company, through its wholly-owned subsidiary Fontana Water
Resources, Inc., initiated litigation under the California Environmental Quality
Act ("CEQA") against San Bernardino County and various land owners in connection
with the proposed expansion of the Mid-Valley Sanitary Landfill owned by San
Bernardino County. Cucamonga and others have settled the contamination issues
with San Bernardino County with the County taking responsibility for all
remediation costs. Thus, many of the current contamination issues have been
resolved. However, several issues remain outstanding between the Company and San
Bernardino County. Settlement negotiations are ongoing, but there is no
assurance that there will be a satisfactory settlement of the litigation.

                                       5
<PAGE>
 
  In addition, if any of Fontana Union's water rights are challenged by a third
party, the Company and Cucamonga are obligated to share the costs of defending
such challenge.  Cucamonga also has an option to purchase the Company's Fontana
Union shares in the second half of the year 2042, at a price generally based
upon a multiple of 15 times the then current annual lease payment, as well as
the right to purchase all of the Company's Fontana Union shares for $1.00 in the
year 2092.

  The Company employed a consulting organization in its search for a lessee of
its Fontana Union shares.  The consulting agreement calls for a commission
payment of 5.42% of each payment received by the Company.

  The Company views the Cucamonga Lease as a mature, stable asset with its
primary variable being future MWD water rate changes.  Accordingly, the Company,
in a continuing effort to maximize shareholder value, regularly evaluates
various alternatives with respect to the Cucamonga Lease.  These alternatives
include, but are not limited to, retention, sale, securitization and
monetization of the Cucamonga Lease.  The Fontana Union shares and the Cucamonga
Lease are currently pledged as collateral for the Company's revolving-to-term
credit facility with Union Bank.

Investment in Penske Motorsports, Inc.

  The Company owns 1,627,923 shares, or approximately 11.73% 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 TCS was built and successfully commenced operations in June 1997; and (ii)
the subsequent sale of the Speedway Business Park, totaling approximately 54
acres to PMI in December 1996.  PMI became a publicly traded company in 1996.
PMI is traded on the Nasdaq Stock Marketsm under the symbol "SPWY".

  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, which owns and operates TCS near Los Angeles,
California; (iii) Pennsylvania International Raceway, Inc. which owns and
operates the Nazareth Motor Speedway ("Nazareth") in Nazareth, Pennsylvania;
(iv) North Carolina Motor Speedway, Inc. which owns and operates the North
Carolina Motor Speedway ("NCMS") in Rockingham, North Carolina; (v) a forty-five
percent (45%) interest in Homestead-Miami, LLC, the operator of the Metro-Dade
Homestead Motorsports Complex in Dade County, Florida; (vi) Motorsports
International Corp. ("MIC"), a motorsports apparel and memorabilia company; and
(vii) 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.

  During the first quarter of 1998, PMI announced the sale of its seven percent
(7%) interest in Grand Prix of Long Beach, Inc. (Nasdaq:GPLB), the organizer and
operator of the annual CART PPG Cup Race run on the streets of Long Beach,
California and the owner and operator of Gateway International Raceway in
Madison, Illinois and Memphis Motorsports Park in Millington, Tennessee to Dover
Downs Entertainment, Inc. for a reported $5,270,000.

  PMI promoted a total of 19 major racing events at MIS, Nazareth, TCS and NCMS
in 1998 and expects to again promote a total of 19 major racing events at these
speedways in 1999.  In addition, PMI expects Homestead-Miami Speedway to host
two major racing event weekends in 1999.

  PMI's 1999 scheduled racing events at all of its facilities, is as follows:

                                       6
<PAGE>
 
<TABLE>
<CAPTION>
         Date                           Race                                    Circuit                             Facility
<S>                       <C>                                 <C>                                           <C>
 
February 20               Alltel 200                          NASCAR Busch Series Grand National Division   North Carolina Speedway
February 21               Dura-Lube/Big Kmart 400             NASCAR Winston Cup Series                     North Carolina Speedway
March 20                  Florida Dodge Dealers 400           NASCAR Craftsman Truck                        Homestead-Miami Speedway
March 21                  PPG Dayton Indy Lights              CART PPG Dayton Indy Lights                   Homestead-Miami Speedway
March 21                  Marlboro Grand Prix of Miami        Toyota CART FedEx Championship Series         Homestead-Miami Speedway
May 1                     Winston West                        NASCAR Winston West Series                    California Speedway
May 1                     (To be named)                       Toyota Atlantic Race Series                   Nazareth Speedway
May 1                     Auto Club 300                       NASCAR Busch Series Grand National Division   California Speedway
May 2                     (To be named)                       CART PPG Dayton Indy Lights                   Nazareth Speedway
May 2                     California 500                      NASCAR Winston Cup Series                     California Speedway
May 2                     Bosch Spark Plug Grand Pix          CART FedEx Championship Series                Nazareth Speedway
May 23                    NASCAR Featherlite Series 100       NASCAR Modified Tour Featherlite Series       Nazareth Speedway
May 23                    First Union 200                     NASCAR Busch Series Grand Nation Division     Nazareth Speedway
June 11                   IROC International                  IROC                                          Michigan Speedway
June 12                   Michigan ARAC 200                   ARCA Bondo Mar-Hyde Series                    Michigan Speedway
June 13                   Kmart 400                           NASCAR Winston Cup Series                     Michigan Speedway
July 17                   USAC Silver Bullet 100              Coors Light Silver Bullet Series              Nazareth Speedway
July 18                   Burnham Boilers 100                 NASCAR's Busch North Series                   Nazareth Speedway
July 18                   Napa Autocare 200                   NASCAR Craftsman Truck Series                 Nazareth Speedway
July 24                   Michigan 200                        NASCAR Craftsman Truck Series                 Michigan Speedway
July 24                   The Detroit News 100                PPG-Dayton Indy Lights                        Michigan Speedway
July 25                   U.S. 500                            Toyota CART FedEx Championship Series         Michigan Speedway
August 21                 Michigan 200                        NASCAR Busch Series Grand National Division   Michigan Speedway
August 22                 Pepsi 400                           NASCAR Winston Cup Series                     Michigan Speedway
September 26              Sports Car Extravaganza             USRRC/FIA/GT                                  Homestead-Miami Speedway
October 23                General Mills 200                   NASCAR Busch Series Grand National Division   North Caroline Speedway
October 24                Pop Secret Microwave Popcorn 400    NASCAR Winston Cup Series                     North Carolina Speedway
October 30                California 200 Truck Race           NASCAR Craftsman Truck Series                 California Speedway
October 31                California 100 Indy Lights Race     CART PPG Dayton Indy Lights                   California Speedway
October 31                Marlboro 500                        Toyota CART FedEx Championship Series         California Speedway
November 13               Miami 300                           NASCAR Busch Series                           Miami Homestead Speedway
November 14               Pennzoil 400                        NASCAR Winston Cup                            Miami Homestead Speedway

</TABLE>

  During 1998, PMI announced plans to repurchase, from time to time, up to $10
million of PMI's common stock in open market transactions depending on market
conditions.  As of December 31, 1998, the Company had repurchased 353,900 shares
at prices varies from $19.875 to $23.25 per share.

  In February 1999, NASCAR, announced that it will retain the television, radio
and other electronic medial rights beginning with the 2000 race season for its
NASCAR(R) Winston Cup Series and NASCAR(R) Busch Series Grand National Division
events.  It is anticipated, that this packaging of media rights may enhance
television and broadcast revenues to track owners, such as PMI.  NASCAR(R) has
reported that it has no plans to change its current television rights
distribution formula of 65/25/10 that it distributed to tracks, competitors and
the owners, respectively.

  Total 1998 revenues for PMI, on a consolidated basis, were $116.9 million and
net income was $16.6 million.  Due to a two percent (2%) increase in average
shares outstanding, 1998 earnings were $1.17 per diluted share as compared to
$1.19 per diluted share in 1997.  As discussed below, the Company began
accounting for its share of PMI's net income as of April 1, 1996.  The Company's
share of PMI's net income for 1998 was $1,903,000.

  The following table sets forth the range of the low and high reported bid
price of PMI's common stock for the quarter indicated, as reported on the NASDAQ
Stock Market/sm/ System.

<TABLE>
<CAPTION>

1998                                           Low                               High
                                          -------------                      -------------
 
<S>                                       <C>                                <C>
Fourth Quarter                               $19.50                             $27.38
Third Quarter                                $16.88                             $32.50
Second Quarter                               $28.75                             $33.88
First Quarter                                $24.75                             $32.00
</TABLE>

                                       7
<PAGE>
 
     On March 23, 1999, the range of the low and high reported bid price of
PMI's common stock were $35.00 and $35.44, respectively.

     A complete discussion of PMI, its business and financial results, is found
in the Form 10-K Report for the year ended December 31, 1998 prepared and filed
by PMI.

     Agreements Affecting the Company's Ownership Interest in PMI. In connection
with the November 22, 1995 transaction whereby the Company acquired its initial
ownership interest in PMI, and in connection with the sale of Speedway Business
Park in December 1996, the Company entered into several agreements that affect
the Company's ownership interest in PMI. The November 22, 1995 Organization
Agreement contains, among other things, the terms and conditions pursuant to
which the Company acquired its initial ownership interest in PMI. The
Organization Agreement was later amended at the time of PMI's initial public
offering in March 1996. Pursuant to the Organization Agreement, the Company has
certain continuing indemnification obligations including one with respect to
various environmental matters. The Organization Agreement also grants to PMI a
right of first refusal to participate in any transaction or opportunity that
directly relates to the conduct or ownership of a motorsports complex that comes
to the Company, PSH Corp. or an affiliate of either, excluding International
Speedway Corporation ("ISC"), an owner of twenty percent (20%) of the stock of
PSH Corp., the majority owner of PMI.

     PSH Corp., PMI and the Company also entered into a Shareholders Agreement
(the "Shareholders Agreement") at the time of the November 22, 1995 transaction.
It was subsequently amended in March 1996. The Shareholders Agreement provides
that if PSH Corp. desires to transfer any shares of capital stock of PMI for
consideration to an unrelated third party, PSH Corp. must first offer such
shares to the Company on the same terms and conditions as the proposed transfer.
The Shareholders Agreement also provides that if the Company desires to transfer
any shares of capital stock of PMI for consideration to an unrelated third
party, the Company must first offer such shares to PSH Corp. at a price equal to
the average of the Nasdaq National Market closing price of PMI's shares for the
previous thirty calendar days. However, with the Company's consent, PSH Corp.
has effectively transferred its right of first refusal to ISC. Thus, ISC has the
right to purchase such shares on the same terms and conditions as PSH Corp. If
ISC elects not to purchase such shares, then PSH Corp. has the right to purchase
such shares on the same terms and conditions as the proposed transfer. In either
case, if the non-transferring party elects not to purchase such shares, then the
transferring party may transfer its shares to the unrelated third party.

     The Shareholders Agreement also provides that PSH Corp. will vote its PMI
shares in the election of directors for one nominee of the Company to the Board
of Directors of PMI.  Richard E. Stoddard, the Company's Chairman of the Board
and Chief Executive Officer, is on the Board of Directors of PMI, and is one of
the three board members constituting PMI's Executive Committee and also serves
on the Compensation Committee.  Finally, under the terms of the Shareholders
Agreement, PMI continued to pay the Company a fee of $162,000 through the first
quarter of 1997, the last quarter before the opening of TCS.

     The Company also entered into a Registration Rights Agreement with PMI
pursuant to which PMI granted incidental registration rights to the Company,
subject to certain limitations, each time PMI files a registration statement
with the Securities and Exchange Commission in connection with the sale of its
common stock.  In December 1996, as a part of the sale of Speedway Business Park
to PMI, the Company and PMI entered into a Conditional Demand Registration
Rights Agreement.  In summary, this agreement requires PMI, in the event there
should ever be an event of default on a loan secured by the PMI stock and the
lender forecloses on the PMI stock, subject to certain limitations and
conditions, to register the shares of PMI stock owned by such lenders.

                                       8
<PAGE>
 
Property Redevelopment

Mill Site Property

  Background.  From 1942 through 1983, KSC operated a steel mill in Southern
California near the junction of the Interstate 10 and Interstate 15 freeways and
approximately three miles to the northeast of Ontario International Airport.
The Mill Site Property is located approximately 45 miles east of Los Angeles in
one of California's fastest growing regions, and is served by two major
railroads, the Burlington Northern Santa Fe and the Union Pacific (formerly
Southern Pacific).  The original Mill Site Property consists of four distinct
parcels of land:  the Central Mill Site (originally approximately 595 acres
(gross)), the South Mill Site (approximately 290 acres (gross)), the West End
Property (approximately 240 acres (gross)), and the Valley Boulevard Property
(approximately 42 acres (gross)).  The property also includes approximately 35
acres used for the San Sevaine flood control channel.  As discussed in more
detail above, approximately 534 acres of the Central Mill Site Property are now
owned by PMI.  (See "Part I, Item l. - Business - Investment in PMI"),
approximately 16 acres were sold during 1997 to a third party and approximately
23 acres were contributed for the benefit of the WVMRF.  The map on the
following page illustrates the location of these four parcels and the Company's
current ownership of such parcels.

  The Mill Site Property has its own water rights, originally 2,930 acre feet
per year, that are entirely distinct from the Company's interest in Fontana
Union.  A portion of these water rights, 1,300 acre feet, was sold as a part of
a settlement of litigation and other claims with an adjoining landowner, and
another portion, 475 acre feet, was contributed with the property now owned by
The California Speedway Corporation.  Thus, the Company now owns 1,155 acre feet
of annual water rights associated with the Mill Site Property of which 630 acre
feet are jointly owned with CSI.  CSI has the right of first use of the 630 acre
feet, with payment to the Company, through June 30, 2004, with the Company
having the right of first use thereafter.

  Mill Site Redevelopment Plan.  The Company is continuing to redevelop the
remaining Mill Site Property.  Depending upon the final redevelopment plan and
after taking into account slope loss, rail road easements, the San Sevaine flood
control channel, proposed streets and highway improvements, the sewer treatment
facility, and other similar items, the Company anticipates having approximately
500 useable acres available for development.

  However, the balance of the Mill Site Property owned by the Company, requires
various entitlements and permits from San Bernardino County prior to
redevelopment.  The entitlement and permitting process formally commenced in the
second quarter of 1997 with the Company filing an application for the "Kaiser
Commerce Center" Specific Plan with San Bernardino County for all of its
property except for approximately 26 acres within the City of Rancho Cucamonga
the approximately 135 acres of property commonly referred to as the "East Slag
Pile" property and the remaining NAPA Lot and MRF property which are already
entitled.

  The Specific Plan application identified a wide variety of potential uses for
the property.  Possible uses include a rail-served distribution and commercial
park, a multi-modal rail-truck distribution center, warehousing, light
manufacturing facilities, a commercial truck stop, as well as commercial and
recreational uses.  Of course, the final use for any specific parcel of the Mill
Site Property will be dependent upon the real estate market and the needs of
potential tenants, buyers and users of a particular parcel, subject to the
general limitations imposed by the final Specific Plan.

                                       9
<PAGE>
 
               [Map illustrating property owned by the Company in

     San Bernardino County, California and Map Illustrating Proposed Major
                         Improvements to the Property]

                                       10
<PAGE>
 
  In furtherance of the entitlement process for the Kaiser Commerce Center, an
EIR prepared pursuant to the California Environmental Quality Act ("CEQA") was
prepared and released to the public in October 1998.  Approximately a dozen
comment letters were received on the draft EIR.  Responses to comments were
received and a final EIR was released to the public in February 1999.

  The San Bernardino Planning Commission received public testimony and reviewed
the Kaiser Commerce Center project over two meetings.  At the March 18, 1999
meeting of the Planning Commission, the Planning Commission voted unanimously in
favor of the Kaiser Commerce Center project and recommended its approval to San
Bernardino County Board of Supervisors.

  It is currently anticipated that the Board of Supervisors will begin
considering the Kaiser Commerce Center project in April 1999.  There are no
assurances, however, that the Kaiser Commerce Center will ultimately be approved
for development as currently proposed or of the timing and scope of the ultimate
development.

  Significant capital funds will be required to implement the infrastructure and
access improvements discussed above.  However, the Company will seek to minimize
its capital investments for these improvements by structuring joint ventures and
leases or by contributing portions of the land for an ownership interest in
operating companies seeking to develop the land.  In addition, the Company will
seek other sources of funds, if available, such as local tax increment financing
as well as Federal highway improvement funds.  In this regard, in June 1998,
Congress awarded approximately $1.5 million toward the planning costs of the
improvements to the Etiwanda/I-10 Interchange.  See "Part II, Item 7. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information.

  To further encourage development of the Mill Site Property, the Company and
the San Bernardino County Economic Development Department jointly obtained the
designation of the Mill Site Property, with the exception of the approximately
26 acre Rancho Cucamonga parcel, as a Recycling Market Development Zone
("RMDZ").  RMDZ's are intended to create incentives to attract businesses that
recycle or utilize recycled products.

  In addition to the entitlement process, as discussed in more detail below, the
Company will continue to evaluate and undertake the required environmental
remediation of portions of the Mill Site Property.  The Kaiser Commerce Center
contains only a limited area impacted requiring further environmental
investigation and possible remediation.

  As noted above, the Mill Site Property is composed of various parcels which
for historical reasons and for ease of reference are referred to as the:  Napa
Lots; Rancho Cucamonga Property; WVMRF; West End and Valley Boulevard
Properties; and the South Mill Site containing the West Slag Pile and East Slag
Pile.  All the parcels owned by the Company are debt free and are described in
greater detail below.

     NAPA Lots.  Adjoining TCS are approximately 31 acres of property, called
the "Napa Lots", that were developed into two industrial zoned, rail-served
lots.  In 1997, one of the Napa Lots, of approximately 15.7 acres, was sold to
an affiliate of Budway Enterprises Inc. ("Budway"), a distributor of steel and
other products, for approximately $2,943,000, or approximately $4.30 per square
foot resulting in a gain of $656,000 which has been deferred.  The Company
carried back approximately $1,443,000 of the sales price which is represented by
a promissory note from the buyer.  Budway has made all required note payments
through the date of this Form 10-K Report.  The Company has subordinated its
secured note receivable to approximately $6.0 million in construction and
permanent financing for a warehouse and distribution center built on the
property.  Although the Company considers the sale to have been fully
consummated during 1997, generally accepted accounting principles 

                                       11
<PAGE>
 
require the gain to be deferred and recognized under the cost recovery method,
i.e., once proceeds received from the buyer exceed the Company's basis in the
property sold.

     The remaining NAPA Lot of approximately 15 acres had some environmentally
impacted soil stock piled on a portion of the lot which was remediated in 1998
and early 1999.  This remaining lot is now available for sale.

     The WVMRF.  In June 1997, the Company, through its wholly-owned subsidiary
Kaiser Recycling Corporation ("KRC"), contributed approximately 23 acres to West
Valley MRF, LLC, the limited liability company owned fifty percent (50%) by the
Company and fifty percent (50%) by Burrtec Waste Industries, Inc.  As discussed
in greater detail below under "Waste Management-West Valley MRF", West Valley
MRF, LLC constructed and began operation of a materials recycling and waste
transfer facility in the second half of 1997.  Approximately 7 acres adjoining
the WVMRF are still currently reserved for possible contribution to West Valley
MRF, LLC if expansion of the MRF requires such property.  However, a portion of
the reserved property includes the tar pits parcel which must be remediated and,
therefore, may not ultimately be available for development.  (See "Mill Site
Environmental Matters" below.)

  West End and Valley Boulevard Properties.  The West End Property
(approximately 240 acres (gross)) is located to the West of the Central Mill
Site Property across the San Sevaine Channel.  The Valley Boulevard Property
(approximately 42 acres (gross)) is located South of the Central Mill Site and
adjoins the I-10 Freeway.  In 1989 and 1990, the Company entered into joint
venture agreements with Lusk Ontario Industrial Partners II, a California
limited partnership, whose general partner was The Lusk Company (collectively
"Lusk"), with respect to the West End Property and the Valley Boulevard
Property.  In July 1994, the Company, through a wholly owned subsidiary, Kaiser
Steel Land Development, Inc., purchased the properties out of the Lusk Joint
Ventures for a total consideration of $15,000,000.  The Company paid
approximately $9,000,000 in cash at closing and Lusk carried back $6,000,000
pursuant to a promissory note secured solely by a first deed of trust on the
properties.  Quarterly principal payments were made on the note and the
remaining balance of the note was due in full in July 1998.  The Company drew on
its existing credit facility to repay the note in June 1998.  See also "Part II,
Item 7. - Management's Discussion and Analysis of Financial Condition and
Results of Operations" in this Form 10-K Report.

  The West End Property has no known material environmental remediation
requirements although one limited area totaling approximately 7 acres require
further investigation and may require limited remediation.  Historically,
several older metal warehouse buildings were located on the West End Property
and rented out to a variety of short term tenants.  Over the past several years
the Company has been systematically demolishing and removing these buildings to
make way for the property's redevelopment.  It is currently anticipated that the
last major remaining building, the Mill Site Warehouse, will be demolished in
1999.

  In connection with the preparation for the redevelopment of the Mill Site
Property, the leases with all but two tenants have been terminated.  With
respect to the remaining two tenants one will vacate the property by December
31, 1999, and the other will remain on site until the Company gives a 30-day
written notice or the tenant moves to another location.  During 1998, the
Company also provided railroad switching services for many of the remaining
tenants on this property.

  The Valley Boulevard Property has no known environmental remediation
requirements and can be easily redeveloped upon receipt of necessary
entitlements.  If the proposed freeway and street improvements are made, the
Valley Boulevard Property will have increased freeway access and visibility.
This property could serve as a location for a hotel, fast food restaurants and
other similar types of businesses where freeway visibility and access are
important.

                                       12
<PAGE>
 
  South Mill Site - West and East Slag Piles.  The South Mill Site, containing
the West and East Slag Piles, consists of approximately 290 acres.  This
property was used by KSC primarily as a storage area for slag, a non-hazardous
rock-like byproduct of iron and steel production, as well as for the Company's
sewage and wastewater treatment plants.  The sewer treatment plant is discussed
in more detail below.

  The west portion of the South Mill Site, known as the West Slag Pile, was used
only for the storage of slag.  There is no known environmental remediation
required with respect to this property.  Although the slag is being removed and
sold by a third party contractor, thereby, producing a current revenue stream
for the Company, the amount of slag is such that it is unlikely to be cleared in
less than 4-10 years without cost to the Company.  However, if the West Slag
Pile, West End Property and the street and freeway improvements are constructed
as currently contemplated, it is anticipated that most of the remaining slag
will be utilized in the grading and construction process.  The Company is
currently pursuing the possible use of this portion of the property as a
commercial truck stop and other related uses.

  The eastern portion of the South Mill Site known as the East Slag Pile, is
also mostly covered by slag.  However, up to approximately 40 acres in the
southeast corner of this property will require some form of remediation as
discussed in "Mill Site Environmental Matters" below.  Although the Company is
exploring uses of the property that may not require the complete removal of the
hazardous materials and slag, the definitive redevelopment of this entire
property is likely to be delayed until any required remediation is completed.
This property is not included in the proposed Kaiser Commerce Center.  Depending
upon the type of environmental remediation required, this property could have
limited potential commercial and recreational uses.

  Approximately 6.5 acres of the East Slag Pile site were designated by the
California Environmental Protection Agency - Department of Toxic Substance
Control ("DTSC") for use as a corrective action management unit ("CAMU").
Certain types of impacted materials from other locations on the Mill Site
Property can be stored in the CAMU and ultimately capped.  Approval of the CAMU
was received in February 1998.  See "Mill Site Environmental Matters" below.

  Sewer Services.  The Company operates a sewage treatment facility that serves
property historically owned by the Company or KSC.  The Company currently
provides sanitary sewer services from its sewage treatment plant located on the
northeastern end of the South Mill Site property to CSI, the Budway facility,
the WVMRF and is anticipated to serve the balance of the Mill Site Property.  In
1998, total revenue of $317,000 was derived from the sewer treatment facility
with the Company receiving $88,800 of such revenue from The California Speedway
Corporation pursuant to a Sewer Service Agreement.

  The California Speedway Corporation also has the option to purchase the
Company's sewer treatment facility in certain circumstances such as if the
Company terminates the Sewer Services Agreement or the Company discontinues
providing sewer treatment services.

  Minor improvements to the sewer treatment facility were undertaken in 1998,
and additional upgrades of the sewer treatment facility may be required to
accommodate the development of the Mill Site Property and future regulatory
changes.

Mill Site Environmental Matters

  The operation of a steel mill by the Company's predecessor, KSC, resulted in
known contamination of limited portions of the Company's Mill Site Property.
The Company is subject to a 1988 consent order (the "Consent Order") with the
DTSC, which requires the Company to investigate and remediate hazardous
materials on the Mill Site Property.  Under the Consent Order, as amended, the
phased remediation is scheduled to be completed by July 2005.  The Consent
Order, as amended, provides for a 

                                       13
<PAGE>
 
general outline of the known tasks and the timing of performing such tasks. Any
particular item of investigation and/or remediation can be modified with the
consent of the DTSC.

  During 1998, as in prior years, the Company undertook a number of activities
with regard to environmental matters.  These activities included, but were not
limited to:  remediation of impacted soil on one of the NAPA Lots; remediation
of a portion of the property adjoining the WVMRF; investigation of the West Slag
Pile; removal of asbestos containing materials and lead based paint in
demolished buildings; preparation and submittal to the DTSC of a revised
remedial action plan for the tar pits; and preparation and submittal to the DTSC
of a remedial action plan for the East Slag Pile Waste Management Unit.

  In addition, in February 1998, the Company obtained approval for a CAMU from
the DTSC.  The CAMU is in the northeast portion of the East Slag Pile on land
that was previously used by a bankrupt former tenant of KSC for a waste pickling
facility and is used for the on-site disposal of affected soils and materials
from the balance of the Mill Site Property.  The CAMU has been constructed and
remains open to receive any impacted soil that may be uncovered during the
grading of the Kaiser Commerce Center.  Upon termination of the use of the CAMU,
the CAMU will be capped and closed in compliance with the DTSC's policies.  The
CAMU is a less expensive alternative than transporting the affected soils and
materials to an off-site disposal facility.

  While the Company has monitored certain groundwater wells in the past, the
DTSC requested and the Company intends to implement a supplemental groundwater
investigation study.  The principal purpose of the study upon its implementation
is to confirm historic tests that the groundwater does not require any remedial
action for hazardous substances.  A draft supplemental groundwater study was
submitted to the DTSC in 1997 for its review and comment.  It is currently
anticipated that the DTSC and the Company will agree in 1999 on the methodology
and scope of the supplemental groundwater investigation.  As a part of the
supplemental study of groundwater, in late 1996, the Company drilled the first
two test wells on TCS property.  Results from these two test wells continue to
be positive for the Company in that they do not indicate any groundwater
contamination for hazardous substances that would require remediation.

  In addition, the Company previously settled certain obligations of groundwater
contamination with the California Regional Water Quality Control Board
concerning a total dissolved solids, sulfate and organic carbon plume to which
the historic steel operations contributed.  The settlement required a $1.5
million 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 improvement 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.  In September
1998, the Company contributed an additional 7,000 acre feet of its water in
storage.  This additional contribution of water completed all of the Company's
obligations under the terms of the settlement agreement approximately 20 years
ahead of schedule.

  The Company's cost for investigation, remediation, site cleanup, and all other
environmental related activities for 1998 totaled approximately $2.4 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of this Form 10-K Report for additional
information.

  While there continue to be a number of smaller Mill Site Property
environmental projects, the major outstanding environmental issues to be
addressed, based on currently know information, are:  (i) the approximately 7
acre parcel containing the tar pits which parcel is located adjacent to the Mill
Site MRF property; (ii) the East Slag Pile waste management unit (sometimes
referred to as the East Slag Pile landfill); (iii) additional groundwater
monitoring including groundwater related items; (iv) the 

                                       14
<PAGE>
 
completion of the above described CAMU; and (iv) the investigation and possible
remediation of a limited area on the West End Property.

  The Company estimates, based upon current information, that its future
remediation and other environmental costs for the balance of its land and
related matters will be between approximately $18 million and $28.3 million
depending both upon the ultimate extent of the environmental remediation and
clean-up involved and upon which approved remediation alternatives are
eventually selected.  The Company anticipates recovery of the future remediation
costs incurred through redevelopment of the property, primarily in connection
with specific redevelopment projects or joint ventures.  This range assumes:
(a) a capping alternative can be used for the East Slag Pile waste management
unit on the East Slag Pile; (b) a capping alternative can be used for the tar
pits parcel; (c) that the CAMU can accept substantially all the impacted soil
currently scheduled for deposit into the CAMU and any newly discovered impacted
soils; and (d) no significant groundwater remediation is required.  To date, the
CAMU has been able to accept substantially all the impacted soil originally
contemplated to be deposited into the CAMU.  As of December 31, 1998, the total
short-term and long-term environmental remediation liability reflected on the
Company's balance sheet was approximately $28.3 million, the high end of the
current probable range of future remediation and other environmental costs.  See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Part II, Item 7 of the Form 10-K Report.

  Although additional environmental investigations will be conducted on the
Company's 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.  Further, the Company has provided certain
financial assurances to the DTSC in connection with anticipated remediation
activities, the primary one being the current dedication of approximately $4.8
million of Kaiser's Union Bank Credit facility.  See Part II, "Item 7. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."

  The Company is also involved, from time-to-time, in legal proceedings
concerning environmental matters.  See "Part I, Item 3. - Legal Proceedings."

Eagle Mountain Townsite

  The Eagle Mountain Townsite, which is owned debt free by the Company and
covers approximately 460 acres, consists of more than 300 houses (of which
approximately 100 have been renovated for current occupancy), a water supply and
sewage treatment system, an office building, machine shops, school facilities
and other structures.  When the Eagle Mountain iron ore mine was operational,
the Eagle Mountain Townsite provided housing for mine employees and their
families.  Except for many buildings and relating piping having asbestos
containing materials, there is no known material environmental remediation
required at Eagle Mountain.

  The Company's wholly-owned subsidiary, Kaiser Eagle Mountain, Inc., owns and
operates the Eagle Mountain Townsite. The Company currently leases a portion of
the Eagle Mountain Townsite to a private company, which operates a minimum
security prison for the State of California.  The lease for the private prison
was recently extended through June 30, 2001.  In order to redevelop the Eagle
Mountain Townsite, the Company has filed a Specific Plan with the County of
Riverside.  The Townsite Specific Plan was included in the processing of the
Landfill Project.  Implementation of the Townsite Specific Plan is an abeyance
until resolution of the landfill Project EIR appeal because it is one of the
land use approvals overturned by the San Diego Superior Court in 1998 as a part
of the EIR litigation.

                                       15
<PAGE>
 
  If the land exchange with the United States Bureau of Land Management (the
"BLM") is completed (see page 24 "Proposed BLM Land Exchange" in this Form 10-K
Report), the Eagle Mountain Townsite will expand to approximately 1,100 acres.

Other Redevelopment Opportunities

  Other Property Ownership and Development.  The Company owns a number of real
estate parcels and mineral deposits in the California desert, including the
Morris Lode Properties, an active iron ore mine leased to a third party (the
"Silver Lake Mine"), and improved and unimproved property at Lake Tamarisk, an
unincorporated community located approximately eight miles from the Eagle
Mountain site.

Municipal Solid Waste Management

The West Valley MRF

  West Valley MRF, LLC.  California law currently requires all municipalities to
recycle or divert 50% of their solid waste streams from landfills by the year
2000.  In addition, counties are required to demonstrate to the State of
California that they have at least 15 years of available landfill capacity.  In
order to meet these requirements, municipalities can arrange for transportation
of solid waste to an independent or municipally-owned materials recovery
facility, commonly referred to as "MRF", which will separate recyclable
materials for either storage or sale to a variety of users.  The residue waste
from the recycling process is disposed of at landfills.  In response to this
potential market opportunity, the Company and Burrtec Waste Industries, Inc.
("Burrtec"), a local waste hauler, entered into a joint venture agreement (the
"MRF Joint Venture").

  In 1997, the Company and Burrtec restructured their MRF Joint Venture whereby
a limited liability company, West Valley MRF, LLC was formed to construct and
operate the West Valley Material Recovery Facility.  Effective June 19, 1997, a
wholly-owned subsidiary of the Company, Kaiser Recycling Corporation ("KRC") and
West Valley Recycling & Transfer, Inc. ("WVRT"), Burrtec's wholly owned
subsidiary, entered into a Members Operating Agreement ("MOA") which is
substantially the equivalent of a joint venture agreement but for a limited
liability company.  Other ancillary and related agreements to the MOA were also
entered into as of June 19, 1997.  Pursuant to the terms of the MOA, KRC
contributed an approximately 23 acre parcel of the mill site on which Phase 1 of
the WVMRF was constructed and WVRT contributed all of the goodwill of Burrtec's
recycling business that was operated out of Riverside County entitling West
Valley MRF, LLC to all revenues generated from such business after the closing
date.  Under the terms of the MOA, KRC and the Company remain responsible for
any pre-existing environmental conditions and WVRT is responsible for
environmental issues that may arise related to the future deposit or release, if
any, of hazardous substances.

  The MOA also addresses such items as the terms and conditions for the
contribution of up to approximately 7 acres of additional property by KRC to
West Valley MRF, LLC; future capital and financing transactions; the governance
of West Valley MRF, LLC through the creation and operation of an Executive
Committee; voting rights; indemnification obligations between the members of
West Valley MRF, LLC; the daily operation of the WVMRF by WVRT pursuant to a
separate Operation and Maintenance Agreement; distribution of cash flow in
various circumstances; rights of first refusal and various rights related to a
sale or deemed sale of a member's ownership interest in West Valley MRF, LLC and
the terms of any such sale, including a non-completion provision in certain
circumstances; events of default; remedies upon the occurrence of an event of
default by KRC or WVRT including the possible purchase of a member's interest in
West Valley MRF, LLC at a discount from appraised value; and termination and
dissolution of West Valley MRF, LLC.  The Company and Burrtec have each given
their separate Performance Guaranty Agreement pursuant to which they
respectively guaranty the prompt performance of their respective subsidiary's
obligations under the MOA and in the case of Burrtec, also 

                                       16
<PAGE>
 
under the Operations and Maintenance Agreement which deals with the daily
operation of the WVMRF by WVRT.

  Financing, Construction and Operation of the WVMRF.  Phase 1 of the WVMRF,
which includes a 62,000 square foot building, sorting equipment, and related
facilities for waste transfer and recycling services, was constructed and
initially equipped, at a total cost of approximately $10.3 million, in the last
half of 1997.  It became fully operational as of January 1998.  Phase 1 of the
WVMRF is permitted to receive and process up to 2,000 tons per day of solid
waste.  The WVMRF currently receives and processes approximately 2,000 tons per
day of non-hazardous commercial and municipal solid waste.  Waste is primarily
received from jurisdictions for which Burrtec has hauling contracts, and from
the City of Ontario.  In 1998, the WVMRF entered into a contract with USA Waste
to process substantially all of the municipal solid waste generated from the
City of Ontario. Upon the construction of future phases, the WVMRF could receive
and process up to 5,000 tons per day of commercial and municipal solid waste.
Since the WVMRF is currently near or at its Phase 1 capacity of 2,000 tons per
day, the WVMRF may be expanded in 1999 to a capacity of approximately 3,500 tons
per day at an estimated cost of approximately $5.2 million.

  As discussed in detail in the Company's 1997 10-K Report, most of the
financing for Phase I was obtained through the issuance and sale of $9,500,000
in California Pollution Control Financing Authority (the "Authority") Variable
Rate Demand Solid Waste Disposal Revenue Bonds Series 1997A (the "Bonds").  This
was a tax-exempt financing transaction secured by a pledge and lien on the loan
payments made by West Valley MRF, LLC and funds that may be drawn on an
irrevocable direct pay letter of credit issued by Union Bank of California, N.A.
("Union Bank").  The Bonds are backed by a letter of credit issued by Union
Bank.  Pursuant to a Guaranty Agreement with Union Bank, the Company and KRC are
liable for fifty percent (50%) of the principal and interest on the Bonds in the
event of a default by West Valley MRF, LLC.  Burrtec and its affiliates in
effect are also liable under a separate Guaranty Agreement with Union Bank for
the other fifty percent (50%) of the principal and interest on the Bonds in the
event of a default by Borrower.

  The interest rate for the Bonds varies weekly but it was never higher than
4.45% per annum during 1998.  The Bonds have a stated maturity date of June 1,
2012, although the West Valley MRF, LLC is required, pursuant to an agreement
with Union Bank, to annually redeem a portion of the Bonds on a stated schedule.

  West Valley MRF, LLC and Union Bank have also executed a Reimbursement
Agreement, which among other things, sets the terms and conditions whereby the
West Valley MRF, LLC is:  (i) required to repay Union Bank in the event of a
draw under the letter of credit; (ii) grants the Bank certain security interests
in the property of West Valley MRF, LLC; (iii) establishes the redemption
schedule for the Bonds; and (iv) sets forth certain financial and other
covenants West Valley MRF, LLC must comply with during the term of the Bonds.
The Company and KRC have also provided to Union Bank an Environmental Guaranty
Agreement pursuant to which they are jointly and severally liable for any
liability that may be imposed on Union Bank for pre-existing environmental
conditions on the Borrower's property acquired from KRC that the Borrower fails
to timely address.  See also "Item 7.  Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."

  Potential Dispute with San Bernardino County.  San Bernardino County asserted
in February 1998, that the WVMRF's operations were in violation of the MRF's
conditional use permit because much of the waste processed at the WVMRF is
deposited into  landfills other than San Bernardino County landfills.  One of
the purported conditions in the WVMRF's conditional use permit states that the
residue from the MRF was to be deposited into San Bernardino County landfills
until November 23, 1998.  West Valley MRF, LLC believes that the purported
condition is invalid and not enforceable for a variety of reasons.  However, if
upheld, the violation of such condition could have lead to the revocation of the
conditional 

                                       17
<PAGE>
 
use permit under which the WVMRF operates. In spite of such assertion, no legal
action has ever been taken by the County with respect to this matter.

  Competition.  Although other entities have proposed to develop MRFs that would
serve the same broad geographic area as that of the WVMRF, the Company believes
that none of them has yet completed the permitting process.  However, Burrtec
does own and operate a MRF in Agua Mansa, California located approximately 15
miles from the WVMRF that could compete in very limited areas for waste that
might otherwise go to the WVMRF.  Agua Mansa is currently anticipated to have
little if any impact on the WVMRF.

Eagle Mountain Landfill Project

  Background.  Many of Southern California's current landfills are located in
urban areas and are old, unlined, and lack current environmental safeguards.
Furthermore, it is becoming increasingly expensive and difficult to permit and
open new landfills or to expand existing landfills in urban areas due to
political opposition and stringent government regulations, including recent
federal regulations.  The Company believes that Southern California will begin
to face a shortage of safe, permitted landfill capacity beginning in the next
decade.  However, the anticipated shortage in landfill capacity that was
originally predicted to occur in the 1980's and early 1990's did not materialize
as anticipated because several regional landfills were expanded and a number of
other landfills were seeking to expand their permitted capacity.  In addition,
the anticipated life of many existing landfills also increased because of better
landfill management techniques and reduced waste tonnage due to recycling and
the recent California recession.

  The Eagle Mountain Site.  The Company's 11,350 acre Eagle Mountain site,
located in the remote California desert approximately 200 miles east of Los
Angeles, consists of three large open pit mines, the Eagle Mountain Townsite and
a 52-mile private rail line that accesses the site.  The Company has leased
approximately 4,654 acres of the idled mine site and the rail line to MRC for
development of a rail-haul solid-waste landfill (the "Landfill Project").  As
discussed in more detail below, effective as of January 1, 1995, the Company,
through a wholly-owned subsidiary, Eagle Mountain Reclamation, Inc. ("EMR"),
became a 70% shareholder in MRC and, through subsequent investments in MRC, is
currently an approximately 74% shareholder in MRC.

  In anticipation of Southern California's ultimate need for new environmentally
safe landfill capacity, MRC in 1988 began the planning and permitting for a
20,000 ton per day rail-haul, non-hazardous solid waste landfill at Kaiser's
Eagle Mountain Site.  The Company believes that the Eagle Mountain site has many
unique attributes which make it particularly well-suited for a rail-haul, solid
waste landfill including, but not limited to, its remote location, arid climate,
available and suitable materials for the proposed liner system and daily cover,
and rail access.

  Current plans for operation of the landfill anticipate that non-hazardous
household solid waste will initially be delivered to MRFs and transfer
facilities throughout Southern California by municipalities and independent
waste haulers.  Recyclable and hazardous materials will be separated at these
facilities, and the remaining non-hazardous solid waste will be transported,
primarily by rail, in closed and locked containers to the Eagle Mountain
landfill.  MRC currently anticipates that the landfill's initial operations,
depending upon the level of disposal fees, could commence with a minimum of
approximately 4,000 tons of solid waste per day.

  Founding, Ownership and Restructuring of MRC.  MRC was formed in 1982 by waste
industry professionals to address the anticipated solid waste disposal problem
in Southern California.  In order to utilize Kaiser's Eagle Mountain Site, the
Company, through its subsidiary Kaiser Eagle Mountain, Inc., entered into a
lease with MRC in 1988 for the development of the Landfill Project (the "MRC
Lease").  In 1990, a subsidiary of Browning Ferris Industries ("BFI"), purchased
a 50% interest in MRC.  BFI 

                                       18
<PAGE>
 
provided a majority of MRC's funding subsequent to its initial investment, which
resulted in BFI becoming the majority owner of MRC.

  As of August 1, 1994, the ownership of MRC was restructured as part of BFI's
withdrawal from MRC.  As part of the restructuring, BFI returned to MRC all of
its common and preferred stock in MRC and paid off all of MRC's outstanding bank
indebtedness leaving MRC substantially debt free.  In addition, BFI provided MRC
with funds in excess of $5,000,000 to be used to fund ongoing development
activities.

  MRC was further restructured effective January 1, 1995, when the Company
through Eagle Mountain Reclamation ("EMR"), a wholly-owned subsidiary separate
from the subsidiary that owns the land at Eagle Mountain, acquired common stock
in MRC representing a 70% ownership interest.  This transaction was effective as
of January 1, 1995.  In exchange for the ownership interest, the MRC Lease was
amended to eliminate MRC's obligation to pay minimum rent.  MRC forgave all
current contingent non-recourse obligations the Company would have had to repay
MRC out of future royalties.

  Operation and Financing of MRC.  With the acquisition of the equity interest
in MRC, the Company, through MRC, has taken a more active role in the permitting
of the Landfill Project and in assisting MRC, as appropriate, in raising the
funds necessary to complete the permitting process.  The completion of the
Landfill Project is dependent upon, among other things, MRC's continuing ability
to raise additional equity capital.

  Although neither the Company nor any subsidiary of the Company has any
obligation to invest funds in MRC, the Company has continued, to date, to make
investments in MRC.  Through a series of private placements with existing MRC
shareholders, from July 1995 through March 31, 1999, a total of $14.5 million
has been raised by MRC, with Kaiser contributing approximately $11.0 million of
that amount.  Due to the uncertainty associated with the Landfill Project, the
Company is evaluating its continuing investment in MRC.  It is anticipated that
the Company may invest additional funds in MRC during 1999 depending upon what
course of action the Company may ultimately decide to pursue after the
announcement of the decision in the EIR appeal case discussed in more detail
below.

  MRC continues to pursue other alternatives and financing from prospective
investors as well as other means of raising funds or commitments such as the
sale of capacity rights, air space or disposal agreements.

  MRC Lease.  In connection with the reorganization of MRC, the MRC Lease was
amended effective July 29, 1994, and again amended effective January 1, 1995,
with the Company's acquisition of a 70% interest in MRC.  Under the terms of the
MRC Lease, as amended to date, MRC is responsible for substantially all project
costs and activities, including landfill design, permitting, construction and
operation.  MRC has also agreed to indemnify the Company against claims arising
from MRC's activities, including any environmental damage that may be caused to
the leased property by MRC's operations.  The MRC Lease also provides, among
other things that:  (i) the Company must give MRC notice of any proposed sale of
its interest in the Eagle Mountain property, and MRC has a right of first
refusal to purchase such interest under certain circumstances; (ii) the Company
and MRC may not participate in another project that employs a railroad in
connection with the storage or disposal of solid waste in counties surrounding
the landfill; and (iii) MRC has certain rights to terminate the MRC Lease
including:  (a) upon the Company's default under the terms of the MRC Lease; (b)
upon 180 days notice at any time during the six month period immediately
following the receipt of all the necessary permits for the Landfill Project; and
(c) at any time upon two year's notice.

  The MRC Lease was again amended as of January 1, 1996.  The amendment reduced
the amount of land that MRC leases from the Company by approximately 50%.  MRC
continues to lease from the Company all the real property necessary for the
Project.

                                       19
<PAGE>
 
  The Company maintains and may exercise all rights it has under the MRC Lease,
including the right to re-acquire the land leased to MRC through its subsidiary,
Kaiser Eagle Mountain, Inc., for the Landfill Project.  In the event the Company
re-acquires the Landfill Project, depending upon the circumstances, such as upon
MRC's default due to lack of funds, the non-BFI shareholders, at the time of the
July 1994 amendment to the MRC Lease, shall have the right to continue in the
project in some manner.

  Lease Economics.  Until January 1, 1995, MRC paid to the Company a minimum
monthly rent.  However, in conjunction with the Company's acquisition of its
equity interest in MRC, the MRC Lease was amended effective January 1, 1995, to
eliminate the minimum monthly rent.  The elimination of the minimum monthly rent
did not change the future royalty payments due the Company upon the commencement
of landfill operations.

  Once the landfill is operational, under the current terms of the MRC Lease,
the Company will receive, as landlord of the Eagle Mountain Site, the greater of
(i) a royalty of $2.00 per ton of waste received; or (ii) a royalty payment
calculated as a designated percentage of the landfill tipping fees charged by
MRC.  The future royalty payment paid to the Company by MRC is based on MRC's
gross collections, which are basically equivalent to the tipping fees to be
charged by MRC at the landfill.  In calculating gross collections, MRC may
deduct certain items, including any federal or state fees, the host fees paid to
Riverside County and other charges imposed or required to be collected at the
landfill.  Certain other revenues are also excluded from the definition of gross
collections, including any MRC revenue from salvage, recycling or reclamation
operations or from the disposal of waste from certain areas near the Landfill
Project.  In addition to the royalty payment, the Company will receive an
additional $0.15 royalty for every ton of waste transported to the landfill on
the Company's 52-mile rail line.

  The following table illustrates the royalty payment formula set forth in the
MRC Lease.

<TABLE>
<CAPTION>
    Monthly                Average                % Fee                    Net                    # Days
    Royalty         =       Daily       X      Payable to       X        Tipping         X          in
    Payment                Tonnage               Kaiser                Fee Per Ton              Operation
 
              Average
           Daily Tonnage1                        Tipping Fee Percentage Payable to Kaiser
------------------------------------         ---------------------------------------------------
<S>     <C>                                       <C>
          0  -   3,500                       10.0% on all tonnage during applicable month
      3,501  -   4,999                       10.0% on first 3,500 tons; 15.0% on balance during
                                              applicable month
      5,000  -   8,999                       15.0% on all tonnage during applicable month
      9,000  -  20,000                       18.5% on all tonnage during applicable month
------------------------------------
</TABLE> 
1  Determined over the number of operating days in a calendar month.



  The Company's revenues under the MRC Lease will be directly affected by the
amount of tonnage accepted at the Landfill Project and the applicable tipping
fees charged for such tonnage.  The amount of tonnage depends upon MRC's ability
to obtain contracts with municipalities and waste haulers for the receipt,
transfer and disposal of solid waste.  MRC has not, to date, obtained any
contract for the transfer or disposal of solid waste, although MRC is
undertaking limited marketing efforts to seek such contracts.  However, there
are no assurances that MRC will be able to secure contracts for sufficient waste
tonnage to make the Landfill Project successful.

  Disposal costs consist principally of tipping fees and transportation costs
associated with the hauling of waste to the landfill.  Tipping fees currently
vary widely among landfills, partly as a result of real and perceived landfill
capacity shortages in areas, pending closure deadlines and partly as a result of

                                       20
<PAGE>
 
increased costs of construction, operation and/or closure.  Tipping fees do not
include transportation costs, which may vary significantly depending upon such
factors as distance to the landfill and method of handling the waste.  It is
unknown at this time if disposal costs in Southern California will sufficiently
increase as to make the Eagle Mountain landfill attractive to those controlling
the disposal of waste.  See the discussion on disposal fees below.

  Government Regulation/Permitting.  Solid waste landfills are subject to
stringent federal, state and local environmental regulations.  These
regulations, among other things, require upgraded or new composite landfill
liners, leachate collection and treatment, groundwater and methane gas
monitoring, stricter siting and location criteria, closure requirements and
financial assurances (such as a surety bond) from the owner or operator.  The
Eagle Mountain landfill is designed to meet or exceed these and all other
applicable requirements.

  In order to construct and operate the Landfill Project, MRC is required to
obtain numerous government permits and approvals relating to such matters as
land use compatibility, groundwater protection, air quality emissions, habitat
protection, and rodent, pest and litter controls.  The process for obtaining
these permits and approvals is often difficult, expensive and time-consuming,
particularly because the siting of landfills is a highly political issue and
often draws opposition from environmental groups and local residents.

  At one point, MRC had received 17 of the required 20 permits and two more of
the permits were in draft form and were anticipated to be issued soon.  However,
as discussed in detail below, many of the permits were suspended or voided due
to the adverse outcome of litigation involving the environmental impact report
("EIR")/environmental impact study ("EIS") for the Landfill Project approved by
Riverside County in 1992.

  By way of background, before any significant regulatory permit may be granted
relating to the construction and operation of the Landfill Project, an EIR/EIS
must be certified and approved by the appropriate regulatory agencies.  In
October 1992, the Riverside County Board of Supervisors approved the EIR for the
Landfill Project and MRC's local land use applications.  Legal challenges to the
certification of the EIR were mounted in late 1992 by a number of individuals, a
conservation group and Eagle Crest Energy Company ("ECEC"), formerly known as
Eagle Mountain Energy Company, which is a potential competitor for the use of a
portion of the Landfill Project site.

  In July 1994, the San Diego County Superior Court issued its decisions on the
challenges to the EIR for the Landfill Project.  Of the more than seventy (70)
areas of concern initially raised by the plaintiffs in the cases, the Court
announced that it had eight (8) areas of concern in which the EIR was deficient,
thus requiring corrective action.  (This same court subsequently ruled on a new
EIR for the Landfill Project as discussed below).

  As a result of the Court's determinations, the Court set aside and declared
void the Riverside County Board of Supervisors' EIR certification and all
Riverside County approvals rendered in connection with the EIR certification.
The Court ordered activities related to the development of the landfill
suspended and directed the preparation of a new final environmental impact
report in compliance with applicable law and the Court's conclusions.  MRC and
the Company disagreed with many of the Court's conclusions and initially took
steps to appeal the decisions, but later withdrew their appeal to focus their
efforts on re-permitting the Landfill Project.

  In March 1995, MRC initiated the necessary re-permitting process by filing its
land use applications with Riverside County and has worked with the County and
BLM in the preparation of a new EIR/EIS.  The draft EIR/EIS was made available
to the public in July 1996, with the comment period on the draft EIR/EIS closing
in September 1996.  The BLM held public hearings on the draft EIR/EIS and
received 

                                       21
<PAGE>
 
extensive public comment.  In addition, by the close of the public
comment period in September 1996, numerous written comments were received.

  The new final EIR/EIS was released to the public in January 1997 and, as
discussed in more detail below, received final approval on September 9, 1997.

  Approval by Riverside County of the Landfill Project.  After approval of the
Landfill Project by the Riverside Planning Commission and after a number of
public hearings held by the Riverside County Board of Supervisors, on August 26,
1997, the Board of Supervisors, by a four to one vote, again approved the
Landfill Project.  Final approval of the Development Agreement, EIR for the
Landfill Project and related land use matters was made by the Board of
Supervisors on September 9, 1997.

  The Landfill Project was approved to receive up to 20,000 tons per day (6 days
a week) of non-hazardous municipal solid waste.  However, MRC is limited during
the first ten years of operations to 10,000 tons per day of non-County waste
plus the waste generated from within the County.  After ten years, MRC may
request an increase in daily tonnage up to the maximum of 20,000 tons, but such
increase must be reviewed by and receive the approval of an independent
scientific panel as discussed in more detail below.

State Litigation

  State Litigation-Return to Writ.  After the September 1997 approval of the new
EIR by the Riverside County Board of Supervisors, the litigation with respect to
the EIR resumed.  The state litigation surrounding the Landfill Project had two
subparts: the "return to the writ" previously issued by the San Diego Superior
Court and a newly filed lawsuit which new lawsuit was dismissed in December
1997.  On September 19, 1997, Riverside County filed with Judge Judith McConnell
of the San Diego Superior Court a return to the writ which detailed the reasons
as to how the eight defects in the former EIR were remedied by the new EIR.
Judge McConnell presided over the 1994 hearing on the adequacy of the 1992 EIR.

  Objections to the return to the writ were filed by all the previous parties to
the litigation except for ECEC.  ECEC's original objections were therefore
dismissed.  The remaining original project opponents asserted that MRC and the
Company failed in the new EIR to correct any of the deficiencies found to exist
in the EIR approved in 1992.  After receipt of briefs, on December 31, 1997,
Judge McConnell held a hearing on the objections filed by opponents to the
Landfill Project.  On the day of and just prior to the holding of such hearing,
Judge McConnell issued a tentative ruling that preliminarily concluded that the
EIR was still inadequate with respect to most of the issues raised in her 1994
decision.

  During the first quarter of 1998, Judge McConnell issued her final ruling with
respect to the new EIR.  Judge McConnell reversed herself with respect to
several of the items she initially had determined to be defective, but found
that the new EIR was still inadequate in two general areas:  (i) the threatened
desert tortoise; and (ii) impacts to Joshua Tree National Park (the "Park").
Specifically, according to Judge McConnell, there was no substantial evidence in
the record to support the new EIR's conclusion that the impact to the desert
tortoise would be mitigated to a level below significance.  In particular the
Court concluded that there was a lack of required tortoise-proof fencing and
cited the Desert Tortoise Recovery Plan that recommends no new landfills be
constructed in desert tortoise habitat.  With respect to the Park, the Court
found that the EIR improperly split its analyses of the total "wilderness
experience" into two parts:  wilderness resources and the wilderness experience.
The Court also found that there was no support for the conclusion that "non-
wilderness" areas within the Park should be treated any differently from other
areas within the Park.  The Court also expressed concerns about the effect of
the night time lighting on the Park resulting from the possible expansion of the
Eagle Mountain Townsite and also concluded that the EIR failed to analyze the
impact to biological resources of the Park as a complete and interrelated
system.

                                       22
<PAGE>
 
  CEQA Appeal.  As a result of the adverse ruling by the San Diego Superior
Court, the Company and MRC evaluated various alternatives with respect to the
Landfill Project.  The Company, MRC and Riverside County ultimately decided to
appeal the San Diego Superior Court's ruling and currently continue with the
Landfill Project.  Project opponents did not appeal any issues.  All briefs have
been filed and oral argument in the case is scheduled for April 20, 1999.  It is
currently anticipated that a decision would be announced during the third
quarter of 1999.

  In connection with the Landfill Projects EIR litigation, project opponents
filed a motion with the San Diego Superior Court seeking the award of
approximately $450,000 in attorneys' fees against MRC, the Company and Riverside
County.  Total fees and costs ultimately awarded to landfill opponents was
approximately $300,000.  The award of attorneys' fees has been appealed.
Payment of the awarded attorneys' fees will be held in abeyance pending a
decision in the appeal of EIR litigation.

  In addition during 1998, landfill opponents sought to hold MRC and the Company
in contempt of court as a result of alleged violations of Judge McConnell's 1994
and 1998 orders.  In summary, the Company undertook maintenance activities in
connection with its private rail line.  The opponents sought the imposition of a
fine of $1,000 for each item undertaken since the issuance of Judge McConnell's
order in 1994.  In September 1998, Judge McConnell ruled in favor of the Company
and MRC and found that the activities performed did not violate her orders or
the CEQA.

  The Development Agreement.  As a part of the process of considering the
Landfill Project, the Company and MRC negotiated a Development Agreement with
Riverside County.  The Development Agreement, while in final form, is not
effective until consummation of the Federal land exchange discussed below.  In
summary, the Development Agreement among Riverside County, MRC, the Company, and
two of the Company's subsidiaries, Kaiser Eagle Mountain, Inc. and Eagle
Mountain Reclamation, Inc., provides the mechanism by which MRC acquires long-
term vested land use rights for a landfill and generally governs the
relationship among the parties to the Agreement.  The Development Agreement also
addresses such items as the duties and indemnification obligations to Riverside
County; the extensive financial assurances to be provided to Riverside County;
the reservation and availability of landfill space for waste generated within
Riverside County; and events of default and remedies as well as a number of
other items.

  In addition, the financial payments to, or for the benefit of Riverside County
and others, are detailed in the Development Agreement and in the Purchase and
Sale Agreement, which is a part of the Development Agreement.  The Purchase and
Sale Agreement requires a per ton payment on non-County waste determined from a
base rate which is the greater of $2.70 per ton or ten percent (10%) of the
landfill tip fee up to 12,000 tons of non-County waste.  The 10% number
increases to 12 1/2% for all non-County waste once non-County waste exceeds
12,000 tons per day.  The per ton payment to the County also increases as volume
increases.  The per ton payments on non-County Waste to Riverside County are
summarized as follows:

<TABLE>
<CAPTION>
  Average Tons Per Day of 
     Non-County Waste                          Payment to Riverside County
================================================================================
 
<S>                                       <C>
       0      7,000                         Greater of 10% (12.5% once volume
                                          exceeds 12,000 tpd) or $2.70 ("Base")
  7,000   -  10,000                                      Base plus $.80
 
  10,000     12,000                                       Base + $1.30
 
  12,000  -  16,000                                       Base + $2.30
 
  16,000  -  20,000                                       Base + $3.30
================================================================================
</TABLE>

                                       23
<PAGE>
 
  Other major payments include:  (i) partial funding for up to four rail
crossings with $1 million due at the commencement of construction of the
landfill and an additional $1 million over the course of landfill operations;
(ii) financial assistance for the host community, Lake Tamarisk, comprised of
$500,000 due at the commencement of construction of the landfill plus an
additional approximately $1.5 million due over the course of landfill
operations; and (iii) funding for non-California Environmental Quality Act
reduction air emission programs of $600,000 over the course of operations.

  The initial term of the Development Agreement is fifty years.  However, the
term can be extended to November 30, 2088.  In order to obtain an increase in
the initial 50-year term of the Development Agreement and/or an increase in the
initial 10,000 tons per day limit on out-of-County waste, an independent
scientific panel will be convened to review such a request.  The scientific
panel will be made up of five independent scientists and engineers selected by
the University of Riverside, California (the "University") with the approval of
the Company and MRC.  If the University and the Company/MRC are unable to agree
on the panel members, two members are to be selected by the University, two by
the Company/MRC and the fifth member is to be selected by the other four
members.  Alternative procedures are in place in the event the University does
not participate in the selection of the panel members for any reason.  The panel
will conduct its review within eight months of any request for capacity
expansion.  The panel, in effect, is to limit its review to confirming that MRC
has substantially complied with all development approvals, the environmental
mitigation measures and all regulatory permits and that the potential
environmental impacts of the landfill are the same as identified in the EIR.
Various appeal procedures are available depending upon the initial and final
findings of the panel.

  Environmental Trust Fund.  Pursuant to the terms of the Development Agreement
and other related documents, $.90 of the per ton payment made to Riverside
County by MRC on out-of-County municipal solid waste will be deposited into an
environmental trust.  In addition, MRC directly pays $.90 per ton into the
environmental trust for in-County waste deposited into the landfill.  Funds in
the environmental trust are to be used within Riverside County for:  (a) the
protection, acquisition, preservation, and restoration of parks, open space,
biological habitat, scenic, cultural, and scientific resources; (b) the support
of environmental education and research; (c) the mitigation of the Project's
environmental impacts; and (d) the long term monitoring of the above mentioned
items.

  Finally, MRC has agreed to pay $.10 per ton of municipal solid waste deposited
into the landfill to the National Parks Foundation for the benefit of the
National Park Service.

  Proposed BLM Land Exchange.  Of the approximately 11,350 acres located at the
Eagle Mountain site, the Company currently owns 1,800 acres in fee and has
various possessory mining claims with respect to the remaining 9,550 acres.  In
addition, the Company owns in fee approximately 3,200 acres along the 52-mile
railroad right-of-way.  The major remaining portion of the Company's railroad
right-of-way consists of various private leases and an operating grant from the
BLM.

  In conjunction with the landfill permitting process, the Company plans to
transfer to the BLM approximately 2,800 acres of Kaiser-owned property along the
railroad right-of-way, which has been identified as prime desert tortoise
habitat, in exchange for fee ownership of approximately 3,500 acres of land
within the Landfill Project area.  Specifically, the Company will receive fee
ownership of various non-fee mining interests currently held by the Company near
the large open pits.

  After extensive review and analysis, in October 1993, the BLM issued its
Record of Decision approving the land exchange with the Company.  The decision
of the BLM approving the land exchange was challenged by the filing of appeals
with the Interior Board of Land Appeals ("IBLA"), the agency having immediate
appellate jurisdiction over the BLM's decision.  However, as discussed in more
detail below, in March 1995, the BLM announced that it would join in Riverside
County's additional environmental review, and requested that the IBLA remand the
decision on appeal for further agency action.

                                       24
<PAGE>
 
  In a separate but related action to the land exchange, the Company and the BLM
also entered into discussions with respect to the extension of the Company's
right-of-way to use the railroad, a right-of-way for an existing road and the
transfer to the Company of property rights with respect to land at the Eagle
Mountain Townsite.  All issues with respect to the right-of-way were also
resolved as a part of the BLM's 1993 Record of Decision.  The BLM issued a new
right-of-way for the Kaiser railroad and a new joint right-of-way for the Eagle
Mountain road and its extension to Kaiser and the Metropolitan Water District of
Southern California.  These right-of-way grants were also appealed to the IBLA.

  The Record of Decision also approved the termination of the reversionary
interest with respect to approximately 460 acres within the Eagle Mountain
Townsite.  This portion of the Record of Decision was also appealed to the IBLA.
On March 10, 1995, the BLM announced that it would join with Riverside County's
new environmental review by preparing a new or supplemental EIS for the proposed
land exchange.  This additional review put the land exchange on hold pending
completion of the new environmental review process.

  The BLM is the lead Federal agency for the EIS.  The National Parks Service
("NPS") has been a cooperating agency for the EIS.  The final EIR/EIS was
distributed in January 1997 after a series of public hearings held by the BLM
and after the conclusion of an over 60 day public comment period.  In September,
1997, the BLM announced that it had approved the proposed land exchange.
Objections were received during the statutory protest period.  All objections
were answered and denied by the BLM in December 1998, paving the way for the
land exchange to proceed.  At the same time, the BLM granted the requested
rights-of-way.  However, as anticipated, the same opponents as in the state EIR
litigation filed an appeal of the BLM's decision with the IBLA.  These appeals
have stayed the land exchange until their resolution.  It is difficult to
predict when a decision may be obtained from the IBLA, but one is currently
anticipated by the end of 1999.

  Competition.  The solid waste disposal industry is highly competitive with a
few large, integrated waste management firms and a significant number of
smaller, independent operators.  The number of competitors have diminished, but
their size has greatly increased as a result of mergers and acquisitions of
waste hauler and management companies.

  Assuming the Landfill Project is ultimately permitted, the success of the
Landfill Project depends largely upon MRC's ability to secure solid waste
disposal contracts from municipalities and waste haulers in this highly
competitive environment.  The ability of MRC to secure such waste disposal
contracts is predicated upon a number of factors including, but not limited to,
MRC's ability to (i) charge disposal fees comparable to those of its
competitors; (ii) provide financial and environmental safeguards against
potential liability; (iii) provide sufficient long-term capacity; and (iv)
commence operations prior to the expansion of existing landfills or the opening
of other large capacity, rail-haul landfills.  Currently, there are over 15
major existing municipal solid waste landfills in Southern California serving
the same geographic area as that proposed by the Landfill Project (primarily Los
Angeles, Orange, Riverside and San Bernardino Counties).  While a number of
Southern California landfills are scheduled to close in the next several years
as they reach capacity, several of them, including El Sobrante Landfill in
Riverside County and Mid-Valley Sanitary Landfill in San Bernardino County
recently received approvals for major expansions.  Other landfills such as
Puente Hills in Los Angeles County, are in the process of expanding the
permitted capacities of their existing facilities.

  The Company is also currently aware of at least two other enterprises seeking
to develop rail-haul, solid waste disposal facilities which would be located in
Southern California and would compete directly with the Landfill Project.  These
proposed cut-and-fill landfills include:  (i) a landfill to be developed in a
desert site in San Bernardino County by Rail Cycle of Los Angeles, a joint
venture between Waste Management, Inc. (now owned by USA Waste) and the Santa Fe
Railway Company, Inc.; and (ii) Mesquite Regional Landfill to be developed in
Imperial County by a partnership including Western 

                                       25
<PAGE>
 
Waste Industries (now owned by USA Waste) and SP Environmental Systems, Inc., an
affiliate of the Southern Pacific Transportation Company. Both projects are
being developed by well established waste management companies, which control
significant waste streams in Southern California as a result of their waste
hauling businesses. Both of these rail haul projects received certification of
their respective EIRs in late 1995. The Mesquite Regional Landfill is considered
much further along in the permitting process than the Eagle Mountain Landfill
Project because it is ready for construction subject to the receipt of a few
technical permits. The EIR for the Mesquite Regional Landfill and the EIR for
Rail Cycle were subject to separate legal challenges which are now concluded
without further action on such EIRs required. The Rail Cycle project is also
contingent upon the approval of a business tax by the voters, which has failed
once. In addition, the Rail Cycle project and associated personnel also have
been the subject of a criminal grand jury investigation which may alter the
prospects of this particular project from potentially becoming a viable
competitor.

  Competition also extends to rail-haul landfills in the states of Arizona, Utah
and Washington.  In Utah, East Carbon Development Corp. operates a rail-haul
landfill capable of receiving waste from Southern California and it is actively
marketing its services to waste generators in Southern California.  In addition,
BFI, the former majority shareholder of MRC, operates a landfill in La Paz
County, Arizona, with planned rail access, which will compete for Southern
California waste.

  To a lesser extent, the Landfill Project will also compete with alternatives
to landfills, such as recycling and "waste-to-energy" projects.

  Disposal Fees.  While the Company believes that it will take several years for
MRC's projected disposal fees to be aligned at competitive levels with other
urban landfills, it also currently believes that the advantages afforded by the
Eagle Mountain site should enable it, in the long-term, to compete effectively
with both existing and other proposed landfills.  Over the past several years,
there has been a general reduction in disposal or "tipping fees" in several
areas of Southern California.  The reduction in tipping fees was accelerated
with the bankruptcy of Orange County, California.  As a means of generating
revenue, Orange County reduced its tipping fee to out-of-county trash from
$38.50 to as low as $18.00 per ton depending upon the length of the time
commitment.  Trash generated within Orange County still pays approximately
$38.50 per ton tipping fee.  Riverside County also adopted a two-tier tipping
fee structure.  The tipping fee would generally be $30.00 for direct haul to a
landfill and $25.00 if the waste is processed through a transfer station or
materials recycling facility.  Facing the loss of waste from its system, San
Bernardino County dropped its tipping fee from $35.50 per ton to $28.50 per ton
for fifteen (15) year commitments.

  Risk Factors.  Management believes that the advantages afforded by the Eagle
Mountain site should enable it, in the long-term, to compete effectively with
both existing and other proposed landfills provided the Landfill Project can be
permitted.  In addition, the success of the Landfill Project depends upon the
development of the anticipated shortage in landfill capacity in Southern
California over the next several years.  The landfill capacity storage
anticipated in the 1980's and early 1990's did not materialize as soon as
predicted.  However, there is no assurance that the Company is currently able or
will be able to compete effectively with anticipated landfill space and pricing
competition or that other forms of competition will not result.  Furthermore,
there is no assurance that the Landfill Project can obtain all the necessary
permits or that it can be successful in defending against legal challenges to
the Landfill Project.  To date, MRC has not been successful in litigation
challenging the adequacy of the EIR.  Finally, there is a risk that sufficient
and suitable financing may not be made available to MRC in order to allow it to
continue to pursue the Landfill Project.

Employees

  As of March 30, 1999, Kaiser had 19 full-time and 2 part-time employees.  In
addition, as of March 30, 1999, MRC, the Company's subsidiary, had 4 full-time
employees.

                                       26
<PAGE>
 
Item 2.  PROPERTIES

Office Facilities

  The Company's principal offices are located at 3633 East Inland Empire
Boulevard, Suite 850, Ontario, California 91764.  The Company leases
approximately 7,500 square feet in Ontario, California, pursuant to a lease
agreement expiring in August 1999.  The Company anticipates renegotiating its
current lease for an additional 2 or 3 years, but for less space.  The Company
also maintains offices on the Mill Site Property and at the Eagle Mountain site.
MRC leases an office in Palm Desert, California for a term that was extended in
1998, to August 1999 and maintains an office at the Eagle Mountain site.

Eagle Mountain, California

  The Kaiser Eagle Mountain idle iron ore mine and the adjoining Eagle Mountain
Townsite are located in Riverside County, approximately ten miles northwest of
Desert Center, California.  Desert Center is located on Interstate 10 between
Indio and Blythe.  The heavy duty maintenance shops and electrical power
distribution system have been kept substantially intact since the 1982 shutdown.
The Company also owns several buildings, a water distribution system, a sewage
treatment facility, and related infrastructure.  The Eagle Mountain Townsite
includes more than 300 single family homes, approximately 100 of which have been
renovated and are currently in use.  Most of the houses in use are leased to
Management and Training Corporation ("MTC") for use in conjunction with a
permitted 500-bed community-custody facility operated under a contract with the
California Department of Corrections.  Utilization of the remaining houses and
related facilities will require additional renovation activities plus approval
by Riverside County of a Townsite Specific Plan.

  In and around the Eagle Mountain area the Company has various possessory
mining claims on approximately 9,550 acres and holds approximately 1,800 acres
in fee simple.  In addition, the Company and BLM are working toward a land
exchange.  See "Part I, Item 1. - Business - Eagle Mountain Landfill Project"
with respect to the proposed land transfer between the Company and the BLM.

  The Company owns six deep water wells, of which two are currently being used,
and two booster pump stations that serve the Eagle Mountain mine and townsite.

Railroad

  To transport ore from the Eagle Mountain mine to the mill site (see below),
KSC constructed a 52-mile heavy duty rail line connecting the mine to the main
Southern Pacific rail line at Ferrum, California.  The Company owns in fee
approximately 10% of the 52-mile railroad right-of-way.  The major remaining
portion of the railroad right-of-way consists of various private leases and an
operating right-of-way from the BLM.  The railroad is included in the lease to
MRC for the Landfill Project.  See "Part I, Item 1. - Business."

Fontana, California

  With the acquisition of approximately 534 acres by The California Speedway
Corporation for the construction of TCS and related facilities, the contribution
and reservation of property for the West Valley MRF and the sale of a NAPA Lot,
the Company now owns approximately 629 acres (gross) near Fontana, California.
All of the Company's property is debt free.  Located on the Mill Site Property
is extensive infrastructure, including, water and sewage treatment facilities,
and one major industrial building.  All other major buildings previously on the
Mill Site Property have been demolished as part of the redevelopment of the Mill
Site Property.  The Company has historically had a number of short-term lease
arrangements with unaffiliated entities for portions of this Mill Site Property.

                                       27
<PAGE>
 
  There is one active deep water well on the property, with capacity
significantly in excess of the current water needs for the property.  This well
is now currently used only for irrigation purposes by TCS.  See "Part I, Item 1.
- Business."  The Company originally had adjudicated water rights to extract
2,930 acre-feet of water per year for use on the property.  However, the Company
as part of the transaction with PMI and the Company's agreement to sell a
portion of these water rights to CSI, an adjoining landowner, in connection with
the settlement of certain disputes and litigations with such company, the
Company owns the following water rights associated with the Mill Site Property:
(i) 525 annual acre feet; (ii) 475 annual acre feet as tenants in common with
The California Speedway Corporation which has the right of first use; and (iii)
630 acre feet as tenants in common with CSI, with CSI having the first right of
use, with payment to the Company, through June 30, 2004 and the Company having
the first right of use thereafter.  Pursuant to a settlement agreement reached
with the California Regional Water Quality Control Board in 1993, the Company is
obligated to contribute 1,000 acre feet of water per year for 25 years for the
purposes of a regional de-salter project.  In 1995, the Company contributed
18,000 acre feet of water in storage, which satisfied the Company's obligation
under the settlement agreement for the first 18 years.  In 1998, the Company
contributed an additional 7,000 acre feet of water in storage.  Thus, the
Company's obligations are now fully satisfied.

  Further, the DTSC has determined that limited portions of the property require
environmental remediation.  The Company is working with the DTSC to remediate
the impacted areas.  As discussed in "Part I, Item 1. - Business  Property
Redevelopment - Mill Site Environmental Matters," the Company undertook a number
of remediation activities in 1998.  See "Part 1, Item 1. - Business."

Lake Tamarisk, California

  Lake Tamarisk is an unincorporated community located two miles northwest of
Desert Center, California and approximately 8 miles from the Eagle Mountain
mine.  This community has 150 improved lots situated around two recreational
lakes and a nine-hole golf course.  With 70 homes and a 150-space mobile home
park, the community has an average year-round population in excess of 150.  Lake
Tamarisk Development Corporation ("LTDC"), a wholly owned subsidiary of the
Company, owns 77 improved lots including one residential structure.  LTDC also
owns a 240 acre parcel of unimproved land across the highway from the main
entrance to Lake Tamarisk.

Other Real Estate Properties

  The Company owns numerous small land parcels and iron ore deposits in the high
desert area of Southern California and in Huerfano and Archuleta Counties in
Colorado, including the Silver Lake Mine west of Baker, California and
approximately 190 acres near Afton Canyon, California.

Fontana Union Water Company

  The Company, through a wholly owned subsidiary, owns 7,632.63 shares or
approximately 51% of the outstanding stock of Fontana Union, a California mutual
water company.  These shares entitle the Company (or its lessee) to receive, at
cost, its proportionate share of Fontana Union's water.  Fontana Union owns
surface and groundwater rights in the Fontana, California area with annual
average production of approximately 34,000 acre-feet (plus approximately 3,500-
4,000 acre feet relating to the annual Chino Basin agricultural pool transfer).
The Company's shares of Fontana Union stock are currently leased to Cucamonga.
The Fontana Union shares and the lease of such shares to Cucamonga are currently
pledged as collateral for the Company's $30,000,000 revolving-to-term credit
facility.  See "Part I, Item 1. - Business - Water Resources." and "Item 3.
Legal Proceedings."

                                       28
<PAGE>
 
Item 3.  LEGAL PROCEEDINGS

  The Company, in the normal course of its business, is involved in various
claims and legal proceedings. A number of litigation matters previously reported
have settled and such settlements did not have a material adverse impact on the
Company's financial statements. Except for those matters described below,
management believes these matters will not have a material adverse effect on
Kaiser's business or financial condition. Significant legal proceedings,
including those, which may have a material adverse effect on the Company's
business or financial condition, are summarized as follows:

Litigation

  Eagle Mountain EIR Litigation.  This litigation involved legal challenges to
the EIR for the Landfill Project certified by the Riverside County Board of
Supervisors in October 1992.  These cases were heard in the San Diego County
Superior Court in 1994.  The Court's decisions required MRC to prepare a new
EIR, which was completed and certified in September 1997.  The original
litigation against the EIR was resumed before Judge Judith McConnell of the San
Diego County Superior Court.  In February 1998, the San Diego County Superior
Court announced its final decision and concluded that the new EIR was still
deficient in two principal respects.  The Court's two remaining areas of concern
involve the threatened desert tortoise and Joshua Tree National Park. The
Superior Court's decision has been appealed. It is currently anticipated that a
decision in the appeal will be announced in the third quarter of 1999. Related
to the EIR litigation was the award of approximately $300,000 of attorneys' fees
to project opponents. This matter has also been appealed. For a more extensive
discussion of this litigation, please see "Part I, Item 1. - Municipal Solid
Waste Management - Eagle Mountain Landfill Project."

  Centennial Insurance.  In November 1997, Centennial Insurance Company
commenced litigation in San Bernardino County Superior Court seeking
approximately $115,000 in damages from the Company and other defendants related
to the alleged theft of property from the Company's West End Property that was
stored in a semi-truck of a common carrier leasing a site from the Company
(Centennial Insurance Company, v. Kaiser Resources Inc., et al., San Bernardino
County Superior Court - Rancho Cucamonga Division, Case No. RCV 30545).  Defense
of the matter is being handled by the Company's insurance carrier.

  Cucamonga Litigation.  In 1996, the Company initiated legal action against
Cucamonga.  The dispute involved amounts owed to the Company under the terms of
its lease of Fontana Union Water stock to Cucamonga.  The dispute arose out of a
change made by the Metropolitan Water District in its water rates and rate
structure effective July 1, 1995.  After a trial on the matter, the San
Bernardino County Superior Court ruled that the lease rate had been discontinued
effective July 1, 1995.  Thus, the parties are required to negotiate in good
faith a substitute lease rate as provided under the terms of the lease with
Cucamonga.  The parties have been unable to negotiate a new substitute rate.
Thus, the matter will be resolved in a reference proceeding which is like a
private trial.  For more detailed information, please see "Part I, Item 1. -
Water Resources - Lease to Cucamonga County Water District."

  Apollo Wood Litigation.  In late 1997, the Company and two individual officers
of the Company were served with a complaint brought by Apollo Wood Recovery,
Inc. in San Bernardino Superior Court seeking unspecified damages, but which are
estimated to exceed $100,000.  The plaintiff is a tenant on the Company's Mill
Site Property.  In summary, the complaint alleges that the Company and two
officers of the Company falsely represented the status of the permitting of the
property on which Plaintiff operates its business, committed fraud, interfered
with the plaintiff's business, engaged in unfair trade practices and other
similar causes of action.  The Company believes the lawsuit is without merit and
is vigorously defending such lawsuit.  (Apollo Wood Recovery, Inc. v. Kaiser
Ventures Inc., Terry L. Cook, Lee Redmond, Apollo Wood & Metal Recycling Ltd.,
Shirley Isom Construction Company, Troy Isom and Does 1 through 40, San
Bernardino Superior Court, Case No. SCN 42863.)

  Mushegain Litigation.  The Company was named as a defendant in Federal court
litigation alleging the improper deposit of materials on property owned by
plaintiffs.  [Mary Mushegain, as Trustee of the 

                                       29
<PAGE>
 
Mushegain 1988 Family Trust dated February 7, 1989, as Trustee of the Mushegain
Survivor's Trust dated January 9, 1996, as Trustee of the Mushegain
Grandchildren's Trust dated January 9, 1996, and as Trustee of the Mushegain
Marital Trust dated January 9, 1996 - Plaintiffs, vs. The California Speedway
Corporation; a Delaware corporation, et al; United States District Court,
Central District of California; Case No. 98-6786 ER (Mex)]. In summary, the site
in question was leased to a company that has ceased business operations. This
bankrupt company, pursuant to a contract with The California Speedway
Corporation, performed wood recycling work in connection with the demolition of
the structures on the property acquired by The California Speedway Corporation.
It is alleged that wood and other materials, including some hazardous materials
such as the constituents of railroad ties, were eventually placed into trenches
on the property. The Company vigorously denies that it may have any
responsibility for any work performed by a contractor of The California Speedway
Corporation and is vigorously defending the litigation.

  Asbestos Suits.  The Company along with KSC are currently named in
approximately fifteen (15) active asbestos lawsuits.  The Company and KSC have
been previously named in other asbestos suits but for various reasons those
suits are not currently being pursued.  Most of the plaintiffs alleged that they
worked in ship yards in the Oakland/San Francisco, California area in the 1940's
and that KSC was in some manner associated with one or more shipyards or has
successor liability from another "Kaiser" entity.  Most of these lawsuits are
third party premises claims claiming injury resulting from exposure to asbestos
and involve multiple defendants.  The Company anticipates that it will be named
as a defendant in additional asbestos lawsuits.  All of the complaints are non-
specific.  As such it is not practical at this time to determine the true nature
and extent of the claims against the Company and KSC.  To date, several, but not
all, of the plaintiffs have agreed that they will not personally pursue the
Company, but they have been granted the right to pursue the Company's insurance
coverage, to the extent there is coverage.  The Company currently believes that
it does have insurance coverage for at least a portion of the claims and has
tendered these suits for defense.  The Company also currently believes that it
has various defenses to these claims, including the discharge granted to it in
connection with KSC's bankruptcy reorganization.  The KSC bankruptcy estate,
through KSC Recovery has been incurring defense costs, which should in large
part be reimbursed by insurance.  However, there currently is a dispute as to
the amount of insurance coverage, if any.  Asbestos litigation is an evolving
area of the law and the factual discovery with respect to many of these lawsuits
has not been completed.

  City of Ontario Litigation.  On February 27, 1996, the City of Ontario,
California served on the Company a complaint filed in San Bernardino County
Superior Court (City of Ontario v. Kaiser Ventures Inc., et al.; Case No. RCV
17334).  In sum, the complaint alleges that a plume or plumes containing organic
carbon, dissolved solids and mercury originating from the Company's Mill Site
Property due to activities of KSC and/or a former tenant of the Mill Site
Property have impacted one of the City of Ontario's water wells.  Ontario seeks
reimbursement for remedial costs, replacement of the allegedly impacted well and
replacement or improvement or refurbishment of related facilities.

  The Company challenged Ontario's ability to bring this litigation given the
KSC bankruptcy and the discharge granted to the Company.  In April, 1996,
Ontario brought a declaratory judgment action in the U.S. District Court for the
District of Colorado in Bankruptcy ("the U.S. Bankruptcy Court") against the
Company, (City of Ontario v. Kaiser Ventures Inc., Adversary Proceeding No. 96-
1215 MSK).  In the U.S. Bankruptcy Court action, Ontario in effect sought a
determination that the matters and damages alleged in its California lawsuit
were not discharged as a part of the KSC bankruptcy proceedings.

  The Company and the City reached a settlement concerning the matter before the
U.S. Bankruptcy Court which was approved by the U.S. Bankruptcy Court in
October.  Under the terms of the settlement, the Company has agreed to waive its
bankruptcy-related defenses to the City's prosecution of claims for groundwater
contamination caused by mercury or other priority pollutants.  In return, the
City agreed to dismiss the California litigation as to all claims related to
total dissolved solids, total dissolved carbons and sulfates, and to be bound by
the 1993 Settlement Agreement between Kaiser and the California 

                                       30
<PAGE>
 
Regional Water Quality Control Board. The City has informed the Company that its
recent well tests do not indicate the presence of mercury. However, the City
continues to assert that the Company is responsible for the impact of total
dissolved solids at the well. The City has not yet filed an amended complaint.
The Company and the City of Ontario are continuing to engage in informal
discovery and discussions. The Company currently believes it has numerous
defenses in the litigation.

Bankruptcy 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 "KSC Plan"), the Company established a
subsidiary, KSC Recovery, 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.  All litigation and bankruptcy administration costs are borne by KSC
Recovery, which maintains a cash reserve from previous litigation and other
recoveries to fund anticipated ongoing litigation and administration costs.  All
major remaining claims in the bankruptcy estate were settled in 1995, with
completion of one major settlement occurring in 1996.  Resolution of these
claims allowed for a distribution of cash and stock to most of the unsecured
creditors of the KSC bankruptcy estate in the second quarter of 1996.
Consistent with KSC Recovery's role solely as an agent of the former KSC
creditors, the Company's consolidated statements of operations and cash flows do
not reflect any of KSC Recovery's activities.  Because of the minimum activities
of the KSC bankruptcy estate, the Bankruptcy Court terminated its supervision
over the estate in October 1996.

  From time-to-time, various other environmental and similar types of claims,
such as the asbestos litigation mentioned above, that relate to KSC pre-
bankruptcy activities are asserted against KSC Recovery and the Company.  In
connection with the KSC Plan, the Company, as the reorganized successor to KSC,
was discharged from all liabilities that may have arisen prior to confirmation
of the KSC Plan, except as otherwise provided by the KSC Plan and by law.
Although the Company believes that in general all pre-petition claims were
discharged under the KSC Plan, in the event any of these claims or other similar
claims are ultimately determined to survive the KSC bankruptcy, it could have a
material adverse effect on the Company.


Item 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

  Not applicable.

                                       31
<PAGE>
 
                                    PART II
                                        
Item 5.  MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

  The Company's Common Stock commenced trading on the NASDAQ Stock Market(sm) in
the fourth quarter of 1990 under the symbol "KSRI."  In June 1993, Kaiser
changed its name to Kaiser Resources Inc. and symbol to "KRSC."  Most recently,
the Company changed its name, in June 1995, to Kaiser Ventures Inc., but its
trading symbol remained the same.  The following table sets forth the range of
the high and low reported bid price of the Company's Common Stock for the
periods indicated, as reported on the NASDAQ Stock Market(sm).

<TABLE>
<CAPTION>
                                                         Low         High
                                                         ---         ----
<S>                                                      <C>         <C>  
1998:
Fourth quarter........................................   $   8.25   $  11.38
Third quarter.........................................   $   8.00   $  12.13
Second quarter........................................   $   9.88   $  14.25
First quarter.........................................   $   9.50   $  12.75
 
1997:
Fourth quarter........................................   $  10.00   $  15.06
Third quarter.........................................   $  10.75   $  14.88
Second quarter........................................   $   7.50   $  10.50
First quarter.........................................   $   8.50   $  10.75
</TABLE>

  As of March 23, 1999, there were approximately 2,264 holders of record of the
Company's Common Stock.

  As of March 23, 1999, the Company held 136,919 shares that are deemed
outstanding but reserved for issuance to the former general unsecured creditors
of KSC pursuant to the KSC Plan.

  The Company has neither declared nor paid any cash dividends on its Common
Stock since emerging from the KSC bankruptcy in November 1988.  Any future
decisions by the Company to pay cash on other dividends will depend upon its
growth, profitability, financial condition and other factors the Board of
Directors may deem relevant.  No assurance can be given that the Company will
pay dividends at any time in the future.

                                       32
<PAGE>
 
Item 6.  SELECTED FINANCIAL DATA

  The information presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, related notes and other
financial information included herein.

<TABLE>
<CAPTION>
Selected Statement of Income Data
for the years ended December 31:                   1998           1997           1996           1995           1994
                                                -----------   ------------   ------------   ------------   -------------
 
<S>                                             <C>           <C>            <C>            <C>            <C>
Total revenues...............................   $ 9,873,000    $10,006,000    $15,331,000    $11,053,000    $12,471,000
 
Costs and expenses...........................     7,315,000      7,815,000      7,066,000      7,938,000      8,593,000
                                                -----------    -----------    -----------    -----------    -----------
 
Income from operations.......................     2,558,000      2,191,000      8,265,000      3,115,000      3,878,000
 
Net interest expense (income)................     1,083,000        672,000        819,000        665,000       (155,000)
                                                -----------    -----------    -----------    -----------    -----------
 
Income before income tax provision
   and extraordinary loss....................     1,475,000      1,519,000      7,446,000      2,450,000      4,033,000
 
Taxes currently payable......................        12,000         43,000         92,000            ---        125,000
Deferred tax expense.........................       126,000         74,000        840,000        721,000            ---
Deferred tax expense credited to equity......       105,000        554,000      3,945,000        335,000      1,621,000
                                                -----------    -----------    -----------    -----------    -----------
 
Income before extraordinary loss.............     1,232,000        848,000      2,569,000      1,394,000      2,287,000
 
Extraordinary loss (net of taxes)............           ---            ---            ---            ---      2,233,000
                                                -----------    -----------    -----------    -----------    -----------
 
Net income...................................   $ 1,232,000    $   848,000    $ 2,569,000    $ 1,394,000    $    54,000
                                                ===========    ===========    ===========    ===========    ===========
 
Earnings per share
   Before extraordinary loss
   Basic.....................................   $       .12    $       .08    $       .24    $       .13    $       .21
   Diluted...................................   $       .11    $       .08    $       .24    $       .13    $       .21
   Net Income
   Basic.....................................   $       .12    $       .08    $       .24    $       .13    $       .01
   Diluted...................................   $       .11    $       .08    $       .24    $       .13    $       .01
 
Basic Weighted average
number of shares outstanding.................    10,664,000     10,536,457     10,485,943     10,456,353     10,435,878
 
Diluted Weighted average
number of shares outstanding.................    10,840,000     10,740,357     10,729,645     10,653,950     10,671,154
</TABLE>


<TABLE>
<CAPTION>
Selected Balance Sheet Data
as of December 31:                                  1998            1997            1996            1995           1994
                                                -------------   -------------   -------------   ------------   -------------
 
<S>                                             <C>             <C>             <C>             <C>            <C>
Cash, cash equivalents and
   short-term investments....................   $  3,409,000    $  4,330,000    $  8,482,000    $ 10,937,000   $  6,829,000
Working capital..............................     (2,487,000)     (4,685,000)     (1,240,000)      2,821,000     (3,567,000)
Total assets.................................    142,942,000     139,265,000     134,067,000     126,803,000    114,350,000
Long-term debt...............................     13,750,000       8,982,000       8,102,000       5,342,000      5,700,000
Long-term environmental                          
   remediation reserves......................     24,465,000      24,673,000      26,466,000      32,176,000     28,439,000
Stockholders' equity.........................     87,838,000      86,204,000      81,448,000      68,697,000     66,802,000
</TABLE>

(1) The deferred tax expense credited to equity represents taxes that are
    recorded by the Company for financial reporting purposes, but are not
    payable due to the Company's utilization of Net Operating Loss ("NOL")
    benefits from losses arising prior to and through the KSC bankruptcy.
    Although the amount of this benefit is not included in net income,
    stockholders' equity is increased in an amount equal to the NOL tax benefit
    reported.  NOL carryforwards at December 31, 1998, were approximately $114
    million and $3.4 million, for federal and California income tax purposes,
    respectively.

(2) The earnings per share amounts prior to 1997 have been restated as required
    to comply with Statement of Financial Accounting Standards No. 128, Earnings
    Per Share.  For further discussion of earnings per share and the impact of
    Statement No. 128, see the notes to the consolidated financial statements
    beginning on page 66.

                                       33
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

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 asset development
company pursuing project opportunities and investments in 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 11.73% 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 74%
interest in Mine Reclamation Corporation ("MRC"), the developer of the Eagle
Mountain Landfill Project (the "Landfill Project"); (iv) a 50% joint venture
interest in the West Valley MRF ("WVMRF"), a transfer station and recycling
facility located on land acquired from the Company; (v) approximately 629 acres
of the former Kaiser Steel Corporation ("KSC") steel mill site (the "Mill Site
Property") which is currently undergoing redevelopment; and (vi) 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 redevelopment of industrial and commercial
parcels of land near TCS and the WVMRF.

Summary of Significant Developments in 1998

  During 1998, a number of events occurred which affected the Company,
therefore, readers are encouraged to read this Report it in its entirety in
order to adequately understand the impact of these events on the Company.
However, Management would like to particularly highlight five areas:  (1) the
positive outcome of the rate litigation trial against Cucamonga;(2) the San
Diego Court's adverse ruling relative to the Landfill Project's environmental
impact report ("EIR") and its appeal; (3) approval of the Federal land exchange
that is necessary for the Landfill Project; (4) the continued work on entitling
the 406 acre Kaiser Commerce Center, a substantial portion of the Mill Site
Property, which resulted in the approval of such project by the San Bernardino
Planning Commission by a unanimous vote on March 18, 1999, with consideration of
this project by the San Bernardino County Board of Supervisors currently
scheduled for April 1999; and (5) the continued work of a committee of the Board
of Directors formed to evaluate strategic alternatives and transactions with
respect to the Company and its assets. For a detailed discussion on these areas,
please see "Part I, Item 1. - Business."

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.  Property redevelopment revenues primarily reflect revenues from
long-term redevelopment activities at the Mill Site Property, including water
and waste water treatment revenues; housing rental income, aggregate and 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
(i.e., PMI) and, starting in 1998, joint ventures (i.e., West Valley MRF) which
the Company accounts for under the equity method.

                                       34
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

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, royalty revenues from the sale of
recyclable revert materials and other miscellaneous short-term activities.
Revenues from these activities are declining rapidly as the development of the
remaining Mill Site property proceeds.

Summary of Revenue Sources

  Due to the developmental 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.  As a result, the Company's reported share of undistributed equity in
the earnings of PMI will likely be fluctuate significantly from quarter to
quarter.

Results of Operations

Analysis of Results for the Years Ended December 31, 1998 and 1997

  An analysis of the significant components of the Company's resource revenues
for the years ended December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
 
                                                          1998               1997           % Inc. (Dec)
                                                    ----------------   ----------------   ----------------
<S>                                                 <C>                <C>                <C>
Ongoing Operations
 Water resource..................................        $5,201,000        $ 5,143,000                  1%
 Property redevelopment..........................         1,487,000          1,213,000                 23%
 Income from equaity method investments..........         1,943,000          2,003,000                 (3%)
                                                         ----------        -----------                ----
  Total ongoing operations.......................         8,631,000          8,359,000                  3%
                                                         ----------        -----------                ----
 
Interim Activities
 Lease, service and other........................         1,242,000          1,647,000                (25%)
                                                         ----------        -----------                ----
 
  Total interim activities.......................         1,242,000          1,647,000                (25%)
                                                         ----------        -----------                ----
 
  Total resource revenues........................        $9,873,000        $10,006,000                 (1%)
                                                         ==========        ===========                ====
 
Revenues as a Percentage of Total Resource
Revenues:
 Ongoing operations..............................                87%                84%
 Interim activities..............................                13%                16%
                                                         ----------        -----------
 
  Total resource revenues........................               100%               100%
                                                         ==========        ===========
</TABLE>

  Resource Revenues.  Total resource revenues for 1998 were $9,873,000, compared
to $10,006,000 for 1997.  Revenues from ongoing operations increased 3% during
the year to $8,631,000 from $8,359,000 in 1997, while revenues from interim
activities declined 25% to $1,242,000 from $1,647,000 in 1997.  Revenues from
ongoing operations as a percentage of total revenues increased to 87% in 1998
from 84% in 1997.

                                       35
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

  Ongoing Operations. Water lease revenues under the Company's 102-year take-or-
pay lease with Cucamonga were $5,201,000 during 1998 compared to $5,143,000 for
1997.  The slight increase in water revenues primarily reflects:  (a) an
increase, as of July 1, 1998, in the lease rate being paid by Cucamonga from
$351.75 to $354.00 per acre foot; and (b) an increase, effective January 1,
1998, in the Company's effective interest in Fontana Union from 55.66% to
57.33%, due to a decline in the number of Fontana Union shareholders taking
water.  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 report
revenues on the basis of amounts Cucamonga is currently paying. The total amount
of lease payments in dispute as of December 31, 1998 is approximately
$1,895,000. In addition, MWD has stated that it may further refine its rate
structure in the future.

  Property redevelopment revenues were $1,487,000 for 1998 compared to
$1,213,000 for 1997. The 23% increase from 1997 is primarily a result of higher
sewer treatment plant and other revenues.

  Income from equity method investments decreased slightly to $1,943,000 for
1998 compared to $2,003,000 for 1997.  The $60,000 decrease is primarily the
result of:  (a) the reduction in the management fee which the Company had
received from PMI through March 31, 1997 ($163,000) partially offset by
increases in the Company's share of the reported net income of PMI for the year
($63,000), of which the Company recorded its 11.53% weighted average share, and
equity income from the operation of the WVMRF ($40,000).  The Company's equity
interest in PMI increased during the fourth quarter of 1998, from 11.51% to
11.73% as a result of a stock repurchase plan implemented by PMI.  As previously
disclosed, 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 1998 were $1,242,000
compared to $1,647,000 for 1997.  The 25% decrease in revenues from interim
activities in 1998 is primarily attributable to:  (a) lower revenues from tenant
rental and services and from sales of metallics and scrap at the Mill Site
Property due to the continuing real estate redevelopment activities ($356,000);
and (b) lower tenant service and miscellaneous revenue at Eagle Mountain
($50,000).

  Resource Operating Costs.  Resource operating costs are those costs directly
related to the resource revenue sources.  Total resource operating costs for
1998 decreased to $3,468,000 from $3,654,000 in 1997.  Operations and
maintenance costs for 1998 were $1,260,000 compared to $1,311,000 for 1997. The
4% decrease in 1998 operations and maintenance costs was primarily due to lower
maintenance and supplies for buildings and equipment at both the Mill Site
Property and Eagle Mountain ($96,000) plus lower security costs at the Mill Site
Property ($45,000), partially offset by higher property tax expense ($25,000)
and outside labor and professional expenses at both the Mill Site Property and
Eagle Mountain ($67,000).  Administrative support expenses for 1998 decreased 6%
to $2,208,000 from $2,343,000 for 1997. This decrease was primarily due to:  (a)
lower insurance expense ($122,000); (b) lower outside legal and professional
costs ($79,000); and (c) lower employee compensation expenses ($38,000) being
partially offset by higher depreciation expense mainly related to the recently
completed sewer plant improvements at the Mill Site Property ($109,000).

  Corporate General and Administrative Expenses.  Corporate general and
administrative expenses for 1998 decreased 8% to $3,847,000 from $4,161,000 for
1997.  The decrease was due to lower 

                                       36
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

compensation and related expenses ($393,000) and lower insurance expense
($40,000) being partially offset by higher professional and outside consulting
expenses ($117,000).

  Net Interest Expense.  Net interest expense for 1998 was $1,083,000 compared
to $672,000 in 1997. The increase was due primarily to:  (a) higher interest
expense ($122,000) associated with the $4,650,000 in additional long term debt
($9,750,000 in additional borrowings under the Company's Union Bank revolving-
to-term credit facility less the $5,102,000 payoff of the Lusk note which
occurred in June 1998); (b) lower capitalized interest relating to the
development of the Mill Site Property ($180,000); (c) an increase in the
amortization of deferred loan fees ($88,000); and (d) lower interest income from
lower cash/investment balances ($17,000).

  Income and Income Tax Provision.  The Company recorded income before income
tax provision of $1,475,000 for 1998, and 3% decrease from the $1,519,000
recorded in 1997.  A provision for income taxes of $243,000 was recorded in 1998
as compared with $671,000 in 1997.  Over 90% of the tax provisions for 1998 and
1997 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 1998, the Company reported net income of $1,232,000, or $.12
per share, a 45% increase from the $848,000, or $.08 per share, reported for
1997.

Analysis of Results for the Years Ended December 31, 1997 and 1996

  An analysis of the significant components of the Company's resource revenues
for the years ended December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
 
                                                          1997               1996           % Inc. (Dec)
                                                    ----------------   ----------------   ----------------
<S>                                                 <C>                <C>                <C>
Ongoing Operations
 Water resource..................................       $ 5,143,000        $ 4,505,000                 14%
 Property redevelopment..........................         1,213,000          1,120,000                  8%
 Income from equity method investments...........         2,003,000          1,539,000                 30%
 Mill Site land sale.............................               ---          6,371,000               (100%)
                                                        -----------        -----------               ----- 
                                                                                                           
  Total ongoing operations.......................         8,359,000         13,535,000                (38%)
                                                        -----------        -----------               ----- 
                                                                                                           
Interim Activities                                                                                         
 Lease, service and other........................         1,647,000          1,796,000                 (8%)
                                                        -----------        -----------               ----- 
                                                                                                           
  Total interim activities.......................         1,647,000          1,796,000                 (8%)
                                                        -----------        -----------               -----  
 
  Total resource revenues........................       $10,006,000        $15,331,000                (35%)
                                                        ===========        ===========               =====
 
Revenues as a Percentage of Total Resource
Revenues:
 Ongoing operations..............................                84%                88%
 Interim activities..............................                16%                12%
                                                        -----------        -----------
 
  Total resource revenues........................               100%               100%
                                                        ===========        ===========
</TABLE>

  Resource Revenues.  Total resource revenues for 1997 were $10,006,000,
compared to $15,331,000 for 1996.  Revenues from ongoing operations decreased
38% during the year to $8,359,000 from $13,535,000 in 1996, while revenues from
interim activities declined 8% to $1,647,000 from $1,796,000 in 1996.  Comparing
1997 revenues from ongoing operations to 1996 without the Mill Site Property
land sale shows an increase of 17 %, or $1,195,000, to $8,359,000 from
$7,164,000.  Revenues from ongoing 

                                       37
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

operations as a percentage of total revenues decreased to 84% in 1997 from 88%
in 1996; however, excluding the Mill Site land sale in 1996, ongoing operations
represented 80%.

  Ongoing Operations. Water lease revenues under the Company's 102-year take-or-
pay lease with Cucamonga were $5,143,000 during 1997 compared to $4,505,000 for
1996.  The 14% increase in water revenues during the year reflects: (a) two rate
increases, as of February 1, 1997, and July 1, 1997 in the effective non-
interruptible untreated water rate being paid by Cucamonga from $346.00 to
$351.00 per acre foot and then to $351.75 per acre foot, respectively; (b) a
return to the maximum amount of water that Cucamonga (through Fontana Union) can
draw from the Colton/Rialto Basin wells; and (c) an increase in the Chino Basin
agricultural pool transfer relating to increased agricultural usage and the
overstatement of estimates in prior years.  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 report revenues on the basis of amounts Cucamonga is
currently paying. The total amount of lease payments in dispute as of December
31, 1997 is approximately $1,236,000. In addition, MWD has stated that it may
further refine its rate structure in the near future.

  Property redevelopment revenues were $1,213,000 for 1997 compared to
$1,120,000 for 1996.  The 8% increase from 1996 is primarily a result of:  (a)
the reclassification of the Mill Site Property sewer treatment plant service
fees as property redevelopment revenues as a result of the Company's renovation
of the plant and its renewed commitment to provide sewer services to PMI and
future Mill Site Property tenants and owners ($292,000) higher iron ore and
aggregate sales ($78,000), partially offset by; and (b) residual expenses
associated with offsite improvements for the Speedway Business Park property
that the Company sold to PMI in December 1996 ($242,000).

  Income from equity method investments increased to $2,003,000 for 1997
compared to $1,539,000 for 1996.  The $951,000 increase in Company's share of
the reported net income of PMI for the year, of which the Company recorded its
11.51% weighted average share, was partially offset by the $487,000 reduction in
the management fee which the Company received from PMI through March 31, 1997.
The Company's equity interest in PMI declined, as of June 1, 1997, from 12.29%
to 11.51% as a result of the approximate 907,000 shares that PMI issued in
connection with the acquisition of a majority interest in North Carolina Motor
Speedway, Inc.  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.

  Mill Site Property land sale revenues in 1996 represent 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
1,627,923 shares.

  Interim Activities.  Revenues from interim activities for 1997 were $1,647,000
compared to $1,796,000 for 1996.  The 8% decrease in revenues from interim
activities in 1997 is primarily attributable to:  (a) lower revenues from tenant
services and from sales of metallics and scrap ($230,000); and (b) revenues from
the reclassification of the sewer treatment plant service fees as property
redevelopment revenues ($217,000), being partially offset by increases in tenant
rental revenue ($87,000), railroad switching revenue ($91,000), and slag revenue
($121,000).  It is anticipated that in 1998, these revenues will continue to
decline due to the continuing redevelopment of the Mill Site Property.

                                       38
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

  Resource Operating Costs.  Resource operating costs are those costs directly
related to the resource revenue sources.  Total resource operating costs for
1997 increased to $3,654,000 from $3,229,000 in 1996.  Operations and
maintenance costs for 1997 were $1,311,000 compared to $1,092,000 for 1996. The
20% increase in 1997 operations and maintenance costs was primarily due to
higher property tax expense associated with the completed offsite improvements
for portions of the Mill Site Property ($104,000) and increased maintenance and
supplies costs for buildings and equipment ($112,000).  Administrative support
expenses for 1997 increased 10% to $2,343,000 from $2,137,000 for 1996.  This
increase was primarily due to increases in insurance expense relating to the
addition of environmental pollution insurance coverage for the Mill Site
Property ($73,000), depreciation expense relating to the newly completed
railroad and sewer plant improvements at the Mill Site Property ($59,000), and
legal costs associated with both the CCWD water lease rate dispute and Mill Site
Property tenants claims ($132,000) being partially offset by lower salaries and
outside professional costs ($56,000).

  Corporate General and Administrative Expenses.  Corporate general and
administrative expenses for 1997 increased 8% to $4,161,000 from $3,837,000 for
1996. The increase is due to higher compensation and related expenses ($75,000)
and higher professional and outside consulting expenses ($253,000).

  Net Interest Expense.  Net interest expense for 1997 was $672,000 compared to
$819,000 in 1996.  The decrease was due primarily to a decrease in amortization
of loan fees ($633,000), being partially offset by lower interest income from
lower cash/investment balances ($76,000) and higher interest expense ($410,000)
due to higher average borrowings under the Union Bank credit facility.

  Income and Income Tax Provision.  The Company recorded income before income
tax provision of $1,519,000 for 1997, an 80% decrease from the $7,446,000
recorded in 1996.  Comparing 1997 to 1996 without the sale of the Speedway
Business Park sale, pre-tax income increased 41% or $444,000 to $1,519,000 from
$1,075,000.  A provision for income taxes of $671,000 was recorded in 1997 as
compared with $4,877,000 in 1996. Over 90% of the tax provisions for 1997 and
1996 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 1997, the Company reported net income of $848,000, or $.08
per share, a 67% decrease from the $2,569,000, or $.24 per share, reported for
1996.

  Mill Site Land Sale.  During 1997, the Company sold approximately 15.7 acres
of the Mill Site Property to McLeod Properties, Fontana LLC for $2,943,000, or
$4.30 per square foot, for use as a rail-truck intermodal distribution facility
for Budway Trucking, Inc.  The transaction closed on September 30, 1997 at which
time the Company received $1,500,000 in cash and a note receivable for
$1,443,000.  The Company agreed to subordinate its note receivable to a
construction/permanent loan in order to facilitate the construction of a
building on the property.  Although the Company considers the sale to have been
fully consummated during 1997 generally accepted accounting principles require
the gain of $656,000 to be deferred and recognized as cash collections are
received on its subordinated note receivable.

                        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 $921,000 to $3,409,000 at
December 31, 1998 from $4,330,000 at December 31, 1997.  Included in cash and
cash equivalents is $2,545,000 and $1,984,000 held solely for the benefit of MRC
at December 31, 1998 and 1997, respectively.  The decrease in cash and cash
equivalents is due primarily to: (a) capital expenditures ($4,480,000); (b)
environmental remediation costs ($2,547,000); (c) payoff of the Lusk note
($5,102,000); and (d) the payment of loan fees ($50,000) being offset by:  (a)
collections on notes receivable ($456,000); (b) borrowings under the Company's
Union Bank revolving-to-term 

                                       39
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

credit facility ($9,750,000); (c) equity fundings by the MRC minority partners
($897,000); (d) the issuance of common stock relating to the exercise of stock
options ($133,000); and (e) cash provided by operations ($22,000).

  Working Capital.  During 1998, current assets decreased $1,431,000 to
$5,848,000 while current liabilities decreased $3,629,000 to $8,335,000.  The
decrease in current assets resulted primarily from the $921,000 decrease in cash
and cash equivalents, a $200,000 decline in accounts receivable and a decrease
in the current portion of the note receivable ($310,000) from the Mill Site land
sale in 1997 to McLeod Properties, Fontana LLC (Budway Trucking, Inc.). The
decrease in current liabilities resulted primarily from a decrease in
anticipated 1999 environmental remediation expenditures ($2,249,000) and the
payment of accruals ($1,380,000). Included in current liabilities for 1998 is
$585,000 in accounts payable and accrued liabilities relating to MRC.  As a
result, working capital increased during 1998 by $2,198,000 to a negative
$2,487,000 at December 31, 1998.

  Real Estate.  Real estate increased $513,000 during 1998 due to continuing
redevelopment of the Mill Site properties.

  Investments.  There was a $1,943,000 increase in the Company's investments in
PMI and WVMRF during 1998.  The increase is due to the Company's recording of
its equity share of PMI's and WVMRF's income during 1998 of $1,903,000 and
$40,000, respectively.

  Other Assets.  The increase in other assets ($2,652,000) is related to
capitalized landfill permitting and development costs incurred by MRC
($3,034,000) and capital improvements at the Mill Site and Eagle Mountain
($326,000) being partially offset by: (a) an increase in accumulated
depreciation as of December 31, 1998 ($441,000); (b) collections of the long
term portion of the note receivable ($146,000); and (c) the amortization of
deferred loan fees ($121,000).

  Environmental Remediation.  As is discussed extensively in "Part I, Item 1.-
Business - 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
$18 million and $29 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 elected, in 1996, 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 $25.5 million in remediation and other
environmental costs expended through December 31, 1998.  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 three years and the Company's ability to better estimate the probable
range of future remediation and other environmental costs.

  As of December 31, 1998, the total short-term and long-term environmental
liabilities including remediation reflected on the Company's balance sheet were
approximately $28.3 million, the high end of the probable range of future
remediation and other environmental costs, which declined from the $30.7 million
as of December 31, 1997.  The decrease is a result of the $2.4 million in
remediation and other environmental costs incurred in 1998 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 

                                       40
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

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.  Of December 31, 1998, the Company had $13,750,000 in long-
term debt, solely comprised of borrowings under the Company's $30,000,000
revolving-to-term credit facility with Union Bank.  The Lusk note, associated
with the 1994 purchase of West End and Valley Blvd properties ($5.1 million as
of December 31, 1997), was paid-off in June 1998 with borrowings under the Union
Bank revolving-to-term credit facility.

  Other Long-term Liabilities.  The minor increase in other long-term
liabilities is primarily due to: (a) the reclassification of $2,249,000 of the
environmental remediation reserve from a current to a long term liability which
was offset by $2,457,000 in environmental remediation activities undertaken
during 1998; (b) an increase in deferred tax liabilities ($126,000); and (c) an
increase in accrued liabilities ($89,000).

  Minority Interest and Other Liabilities.  As of December 31, 1998, the Company
has recorded $3,775,000 of minority interest relating to the approximately 26%
ownership interest in MRC the Company does not own.

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

  Impact of the Year 2000 Issue.  The Year 2000 Issue is the result of computer
programs being written using two digits rather than four to define the
applicable year.  Any computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.  This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.

  Based on a recent assessment, the Company determined that all of the software
currently in use on its computer system will properly utilize dates beyond
December 31, 1999.  The Company has determined that it has no exposure to
contingencies related to the Year 2000 Issue for the services it has sold.

  The Company has initiated informal communications with all of its significant
business associates to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 Issue.  The
Company believes that the failure of its customers to convert their computer
systems to be compliant with the Year 2000 Issue will not have a material effect
on the Company.

                         Section 3:  Business Outlook
                                        
  The statements contained in this Business Outlook are based upon current
operations and 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,
the 11.73% equity ownership in PMI and the 50% equity ownership of the West
Valley MRF, 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.  

                                       41
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

In addition, the Company continues to evaluate these completed projects and
investments in light of how to best provide maximum value to its shareholders.

  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 (now called Inland Empire Utilities Agency (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 nearly 8.6%
per year during the past 25 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 for the next 2-4 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.  In March
1998, the San Bernardino Superior Court ruled that the Lease Rate had been
discontinued as of July 1, 1995.  Thus, the parties are required to negotiate in
good faith a substitute Lease Rate.  If the parties are unable to negotiate a
substitute Lease Rate, the matter is resolved through reference, a private trial
much like arbitration.

  In regard to the Company's 11.73% 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 will be the
continued success of TCS that is on land acquired from the Company.  The
continued success of TCS, coupled with the results of the other major racing
events schedule for PMI's MIS, Nazareth, North Carolina and Homestead speedways
and PMI's other motorsports related operations, will determine the amount of
income from equity method investments the Company reports in the future.

  In regard to the WVMRF, the most significant factors affecting the Company's
future equity income from the WVMRF will be the securing of additional resources
of municipal waste for processing and disposal.  At the end of 1998, the
facility was operating at full capacity and had begun to explore the potential
of expanding the processing capabilities of the facility under its existing
permits.

  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 approximately 496 acres (gross) of the Company's Mill Site
Property and the re-permitting of the Eagle Mountain Landfill by MRC, the
Company's 74% 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 Form 10-K Report, there are also numerous risks associated
with the redevelopment of the remaining Mill Site Property and completing the
re-permitting of the Landfill Project that could materially impact the Company's
future revenues and net income from these projects.

  In regard to the redevelopment of approximately 445 acres (gross) of the Mill
Site Property, the Company is currently undertaking efforts to obtain the
entitlement and permits necessary for a variety of possible commercial,
industrial and recreational uses.  These efforts, which will continue through
the first half of 1999, 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 1999, up to
approximately $3.8 million for required environmental remediation and
approximately $2.1 million for real estate entitlement and improvement
expenditures.  The $3.8 million to be spent in 1999 for required environmental
remediation is a component of the $18-29 million estimate to complete all
remaining required remediation for the Mill Site Property.  In addition,
substantial capital expenditures beyond the $2.1 million projected for 1999 will
be required to complete the necessary on-site and off-site improvements for the
redevelopment of remaining Mill Site Property.

                                       42
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

  Although neither the Company nor any subsidiary of the Company has any
obligation to invest funds in MRC, the Company has, to date, continued to make
investments in MRC.  Through a series of private placements with existing MRC
shareholders, from July 1995 through December 31, 1998, a total of $14.5 million
has been raised by MRC, with Kaiser contributing approximately $11 million of
that amount.  The Company's 1998 advances approximated $2.8 million out of a
total funding of $3.7 million.  The Company has also approved advances to MRC
totaling $1.2 million for 1999, which together with the minority shareholders
advances will fund MRC through September 30, 1999.

  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 $30,000,000 revolving-to-term credit
facility (less $4,850,000 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 1998, a total of approximately $8.4 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, 1998, are
estimated to be approximately $114 million for federal purposes and $3.4 million
for California purposes.  The federal NOLs expire in varying amounts over a
period from year 2000 to 2014 while the California NOLs expire from 2000 through
2004.

  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.


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  Please see Item 14 of this Form 10-K Report for financial statements and
supplementary data.


Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

      Not Applicable.

                                       43
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

                                   PART III
                                        

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  Information required by this item is incorporated by reference from the
Executive Compensation Section of the Company's Proxy Statement for its 1999
Annual Meeting of Stockholders (the "1999 Proxy Statement"), a definitive copy
of which will be filed within 120 days of December 31, 1998.


Item 11.  EXECUTIVE COMPENSATION

  Information required by this item is incorporated by reference from the
Executive Compensation Section of the 1999 Proxy Statement.


Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

  Information required by this item is incorporated by reference from the
Security Ownership of Principal Shareholders and Management Section of the 1999
Proxy Statement.


Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  Information required by this item is incorporated by reference from the 1999
Proxy Statement.

                                       44
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

                                    PART IV
                                        

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
          FORM 8-K


(a)  The following financial statements and financial schedules are filed as a
     part of this report:
<TABLE>
<CAPTION>
 
<S>    <C>                                                            <C>
  (1)  Financial Statements                                            Page
       --------------------                                            ----
 
       Report of Independent Auditors................................... 58
 
       Consolidated Balance Sheets...................................... 59
 
       Consolidated Statements of Income................................ 61
 
       Consolidated Statements of Cash Flows............................ 62
 
       Consolidated Statements of Changes in Stockholders' Equity....... 63
 
       Notes to Consolidated Financial Statements....................... 64
 
  (2)  Financial Statement Schedules
       -----------------------------
 
       II   Valuation and Qualifying Accounts and Reserves.............. 84
</TABLE>

  All other schedules are omitted because they are not required, are
inapplicable, or the information is included in the Consolidated Financial
Statements or Notes thereto.

(b)  Reports on Form 8-K.

  The following reports on Form 8-K have been filed during the last quarter of
the period covered by this Form 10-K Report to the date of this report.

     None.

(c)  Exhibits.  The following exhibits are filed as part of this Form 10-K:

                                       45
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

                                 EXHIBIT INDEX

(*  Indicates compensation plan, contract or arrangement)

<TABLE>
<CAPTION>
  Exhibit
  Number                                               Document Description
------------      -----------------------------------------------------------------------------------------
 
<S>                  <C>
   2.1               Second Amended Joint Plan of Reorganization as Modified, as filed with the United
                     States Bankruptcy Court for the District of Colorado on September 9, 1988,
                     incorporated by reference from Exhibit 2.1 of the Company's Form 10-K Report for the
                     year ended December 31, 1988.
 
   2.2               Second Amended Joint Plan of Reorganization Modification, as filed with the United
                     States Bankruptcy Court on September 26, 1988, incorporated by reference from Exhibit
                     2.2 of the Company's Form 10-K Report for the year ended December 31, 1988.
 
   2.3               United States Bankruptcy Court Order dated October 4, 1988, confirming the Second
                     Amended Joint Plan of Reorganization as Modified, incorporated by reference from
                     Exhibit 2.3 of the Company's Form 10-K Report for the year ended December 31, 1988.
 
   4.1               Restated Certificate of Incorporation of Kaiser Steel Corporation filed with the
                     Secretary of State of Delaware on November 17, 1988, incorporated by reference from
                     Exhibit D(i) to the Company's Form 8-A dated November 21, 1988.
 
   4.1.1             Certificate of Amendment to Restated Certificate of Incorporation of Kaiser Steel
                     Resources, Inc. filed with the Delaware Secretary of State on October 2, 1990,
                     incorporated by reference from the Company's Form 8-K Report dated September 18, 1990.
 
   4.1.2             Certificate of Amendment to Restated Certificate of Incorporation of Kaiser Steel
                     Resources, Inc. changing the Corporation's name to Kaiser Resources Inc., filed with
                     the Delaware Secretary of State on June 14, 1993, incorporated by reference from
                     Exhibit 4.1.2 of the Company's Form 10-K Report for the year ended December 31, 1993.
 
   4.1.3             Certificate of Amendment to Restated Certificate of Incorporation of Kaiser Resources
                     Inc. changing the Corporation's name to Kaiser Ventures Inc., filed with the Delaware
                     Secretary of State on June 19, 1995.
 
   4.2               Amended and Restated Bylaws of Kaiser Steel Resources, Inc., effective March 22,
                     1989, incorporated by reference from Exhibit 3.2 of the Company's Form 10-K Report
                     for the year ended December 31, 1989.
 
   4.2.1             Amendment to Amended and Restated Bylaws of Kaiser Steel Resources, Inc., effective
                     November 18, 1991, incorporated by reference from Exhibit 3.2.1 of the Company's Form
                     10-K Report for the year ended December 31, 1991.
</TABLE>

                                       46
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (Continued)
                                        
<TABLE>
<CAPTION>
  Exhibit
  Number                                               Document Description
------------      -----------------------------------------------------------------------------------------
<S>                  <C>
   10.1              Lease Entered Into Between Kaiser Eagle Mountain, Inc., and Mine Reclamation
                     Corporation, dated November 30, 1988, incorporated by reference from Exhibit 10.1 of
                     the Company's Form 10-K Report for the year ended December 31, 1988.
 
   10.1.1            First Amendment dated December 18, 1990, to Lease dated November 30, 1990 between
                     Kaiser Eagle Mountain, Inc. and Mine Reclamation Corporation, incorporated by
                     reference from the Company's Form 8-K Report dated December 18, 1990.
 
   10.1.2            Second Amendment dated July 29, 1994, to Lease dated November 30, 1990, between
                     Kaiser Eagle Mountain, Inc. and Mine Reclamation Corporation, incorporated by
                     reference from Exhibit 4 of the Company's Form 10-Q Report for the period ending June
                     30, 1994.
 
   10.1.3            Third Amendment dated January 29, 1995, but effective as of January 1, 1995, to Lease
                     dated November 30, 1990, between Kaiser Eagle Mountain, Inc. and Mine Reclamation
                     Corporation, incorporated by reference from Exhibit 10.1.3 of the Company's Form 10-K
                     Report for the year ended December 31, 1994.
 
   10.1.4            Fourth Amendment dated effective January 1, 1996, between Kaiser Eagle Mountain, Inc.
                     and Mine Reclamation Corporation incorporated by reference from Exhibit 10.1.4 of the
                     Company's Form 10-K Report for the year ended December 31, 1995.
 
   10.1.5            Settlement Agreement dated June 30, 1994, by  and among Mine Reclamation Corporation,
                     Browning-Ferris Industries, Inc., BFI Riverside, Inc., BFI California, Inc., Kaiser
                     Eagle Mountain, Inc., and Kaiser Resources Inc., incorporated by reference by the
                     Company's Form 10-Q Report for the period ending June 30, 1994.
 
   10.1.6            Stock Acquisition Agreement between Eagle Mountain Reclamation, Inc. and Mine
                     Reclamation Corporation dated January 13, 1995, incorporated by reference from
                     Exhibit 10.1.5 of the Company's Form 10-K Report for the year ended December 31, 1994.
 
   10.1.7            Indemnification Agreement dated September 9, 1997 among Riverside County, Mine
                     Reclamation Corporation, Kaiser Eagle Mountain, Inc. Eagle Mountain Reclamation, Inc.
                     and Kaiser Ventures Inc, incorporated by reference from Exhibit 10.1 of the Company's
                     Form 10-Q Report for the period ended September 30, 1997.
 
   10.1.8            Development Agreement to be executed upon consummation of federal land exchange among
                     Riverside County, Mine Reclamation Corporation, Kaiser Eagle Mountain, Inc. Eagle
                     Mountain Reclamation, Inc. and Kaiser Ventures Inc., incorporated by reference from
                     Exhibit 10.2 of the Company's Form 10-Q Report for the period ended September 30,
                     1997.
</TABLE>

                                       47
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (Continued)
                                        
<TABLE>
<CAPTION>
  Exhibit
  Number                                               Document Description
------------      -----------------------------------------------------------------------------------------
 
<S>                  <C>
   10.2              Dissolution Agreement among Lusk-Kaiser Fontana Joint Venture, Kaiser Steel
                     Resources, Inc., The Lusk Company, Service Mortgage Company and Lusk Ontario
                     Industrial Partners II, effective September 30, 1992, incorporated by reference from
                     Exhibit 10.2.4 of the Company's Form S-2 (Registration No. 33-56234).
 
   10.2.1            Dissolution Agreement among Lusk-Kaiser West End Joint Venture, Kaiser Resources
                     Inc., The Lusk Company, Service Mortgage Company and Lusk-Ontario Industrial Partners
                     II, dated July 31, 1994, incorporated by reference from Exhibit 10.2.7 of the
                     Company's Form 10-K Report for the year ended December 31, 1994.
 
   10.2.3            Dissolution Agreement among Lusk-Kaiser Valley Boulevard Joint Venture, Kaiser
                     Resources Inc., The Lusk Company, Service Mortgage Company and Lusk-Ontario
                     Industrial Partners II, dated July 31, 1994, incorporated by reference from Exhibit
                     10.2.7 of the Company's Form 10-K Report for the year ended December 31, 1994.
 
   10.3              Eagle Mountain Lease Between Management and Training Corporation and Kaiser Steel
                     Corporation, dated November 16, 1987, incorporated by reference from Exhibit 10.4 of
                     the Company's Form 10-K Report for the year ended December 31, 1988.
 
   10.3.1            First Amendment dated July 1, 1990, to Lease between Management and Training
                     Corporation and Kaiser Steel Resources, Inc., incorporated by reference from Exhibit
                     10.3.1 of the Company's Form 10-K Report for the year ended December 31, 1990.
 
   10.3.2            Second Amendment dated November 16, 1992, to Lease dated November 16, 1987 between
                     Management and Training Corporation and Kaiser Steel Resources, Inc., incorporated by
                     reference from Exhibit 10.3.2 of the Company's Form S-2 Registration No. 33-56234).
 
   10.3.3            Third Amendment to Eagle Mountain Lease between Management and Training Corporation
                     and Kaiser Steel Resources, Inc. dated November 16, 1997, incorporated by reference
                     from Exhibit 10.3.3 of the Company's Form 10-K Report for the year ended December 31,
                     1998.

   10.3.4            Fourth Amendment to Eagle Mountain Lease between Management and Training Corporation
                     and Kaiser Ventures Inc. dated February 1, 1999.
 
   10.4*             Amended and Restated Employment Agreement between Kaiser Ventures Inc. and Richard E.
                     Stoddard, incorporated by reference from Exhibit 10.4 of the Company's Form 10-K
                     Report for the year ended December 31, 1998.
 
   10.5*             Employment Agreement between Kaiser Ventures Inc. and Gerald A. Fawcett, incorporated
                     by reference from Exhibit 10.5 of the Company's 10-K Report for the year ended
                     December 31, 1998.
</TABLE>

                                       48
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (Continued)

<TABLE>
<CAPTION>
  Exhibit
  Number                                               Document Description
------------      -----------------------------------------------------------------------------------------
 
<S>                  <C>
   10.6*             Employment Agreement between Kaiser Ventures Inc. and Pamela M. Catlett, dated
                     effective June 17, 1996, incorporated by reference from Exhibit 10.1 of the Company's
                     Form 10-Q Report for quarter ended June 30, 1996.
 
   10.7*             Employment Agreement between Kaiser Ventures Inc. and Terry L. Cook dated effective
                     June 17, 1996, incorporated be reference from Exhibit 10.2 of the company's Form 10-Q
                     Report for quarter ended June 30, 1996.
 
   10.8*             Employment Agreement between Kaiser Ventures Inc. and Lee R. Redmond III, dated
                     effective June 17, 1996 incorporated by reference from Exhibit 10.3 of the Company's
                     Form 10-Q Report for the quarter ended June 30, 1996.
 
   10.9*             Employment Agreement between Kaiser Ventures Inc. and Anthony Silva dated effective
                     January 15, 1998, incorporated by reference from Exhibit 10.9 of the Company's Form
                     10-K Report for the year ended December 31, 1998.
 
   10.10*            Employment Agreement between Kaiser Ventures Inc. and James F. Verhey, dated
                     effective June 17, 1996 incorporated by reference Exhibit 10.10 of the Company's Form
                     10-Q Report for the quarter ended June 30, 1996.
 
   10.10.1*          First Amendment to Employment Agreement dated effective January 15, 1998 between
                     Kaiser Ventures Inc and James F. Verhey, incorporated by reference from Exhibit
                     10.10.1 of the Company's Form 10-K Report for the year ended December 31, 1998.
 
   10.11             Lease Agreement between American Trading Estate Properties, Landlord and Kaiser
                     Resources Inc., Tenant, dated June 6, 1994, incorporated by reference from Exhibit
                     10.8 of the Company's Form 10-K Report for the year ended December 31, 1994.
 
   10.12             Environmental Agreement, State of California, Health and Welfare Agency, Department
                     of Health Services, Consent Order Health and Safety Code Sections 205, 25355.1(a)(B),
                     25355.5(a)(C), dated August 22, 1988, incorporated by reference from Exhibit 10.14 of
                     the Company's Form 10-K Report for the year ended December 31, 1988.
 
   10.12.1           Amendment issued as of November 13, 1997 by the California Environmental Protection
                     Agency to Consent Order dated August 22, 1988 issued by the State Department of
                     Health Services to Kaiser Steel Corporation, incorporated by reference from Exhibit
                     10.12.1 of the Company's Form 10-K Report for the year ended December 31, 1998.
 
   10.13             Environmental Agreement, California Regional Water Quality Control Board, Santa Ana
                     Region, Cleanup and Abatement Order No. 87-121, dated August 26, 1987, incorporated
                     by reference from Exhibit 10.15 of the Company's Form 10-K Report for the year ended
                     December 31, 1988.
</TABLE>

                                       49
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (Continued)
                                        
<TABLE>
<CAPTION>
  Exhibit
  Number                                               Document Description
------------     -------------------------------------------------------------------------------------------
 
<S>                 <C>
   10.13.1          Environmental Agreement, California Regional Water Quality Control Board, Santa Ana
                    Region, Cleanup and Abatement Order No. 91-40, dated March 11, 1991, incorporated by
                    reference from Exhibit 10.11.1 of the Company's Form S-2 (Registration No. 33-56234).
 
   10.13.2          Settlement Agreement between Kaiser Resources Inc. and California Regional Water
                    Quality Control Board, Santa Ana Region, dated October 21, 1993, incorporated by
                    reference from Exhibit 10.11.2 of the Company's Form 10-K Report for the year ended
                    December 31, 1993.
 
   10.14            Lease of Corporate shares of Fontana Union Water Company coupled with Irrevocable Proxy
                    between Kaiser Resources Inc. and Cucamonga County Water District dated July 1, 1993,
                    incorporated by reference from Exhibit 1 to Form 10-Q dated June 30, 1993.
 
   10.15            Assignment from Kaiser Steel Resources, Inc. to KSC Recovery, Inc., dated December 29,
                    1989, incorporated by reference from Exhibit 10.20 of the Company's Form 10-K Report
                    for the year ended December 31, 1989.
 
   10.16*           Amended, Restated and Substituted Kaiser Steel Resources, Inc. 1989 Stock Plan,
                    incorporated by reference from the Company's Proxy Statement for the Special Meeting of
                    Stockholders held on October 2, 1990.
 
   10.17*           Kaiser Steel Resources, Inc. 1992 Stock Option Plan, as amended, incorporated by
                    reference from Exhibit 10.16 of the Company's Form S-2 (Registration No. 33-56234).
 
   10.18*           Kaiser Ventures Inc. 1995 Stock Plan incorporated by reference from Exhibit 10.15 of
                    the Company's 10-K Report for the year ended December 31, 1995.
 
   10.18.1*         First Amendment to Kaiser Ventures Inc. 1995 Stock Option Plan incorporated by
                    reference from Exhibit 4.1.1 of the Company's Form S-8 Registration Statement
                    (Registration No. 333-17843).
 
   10.19            Third Amended Plan of Reorganization of Fontana Union Water Company dated September 26,
                    1990, incorporated by reference from Exhibit 10.18 of the Company's Form S-2
                    (Registration No. 33-56234).
 
   10.20            Settlement Agreement among Fontana Union Water Company, Kaiser Steel Resources, Inc.,
                    San Gabriel Valley Water Company and Cucamonga County Water District dated February 7,
                    1992, incorporated by reference from Exhibit 10.19 of the Company's Form S-2
                    (Registration No. 33-56234).
 
 
</TABLE>

                                       50
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (Continued)
                                        
<TABLE>
<CAPTION>
 
  Exhibit
  Number                                              Document Description
------------     ------------------------------------------------------------------------------------------
 
<S>                 <C>
   10.21            Organization Agreement, dated November 22, 1995 by and among PSH Corp., Kaiser
                    Ventures Inc. and Penske Motorsports, Inc. (f/k/a Penske Speedway Holdings Corp.),
                    incorporated by reference from Exhibit 10.23 of the Company's 8-K Report dated
                    November 22, 1995.
 
   10.21.1          First Amendment to Organization Agreement dated March 21, 1996, by and among PSH
                    Corp., Kaiser Venture Inc., and Penske Motorsports, Inc. incorporated by reference
                    from Exhibit 10.20.1 of the Company's Form 10-K Report for the year ended December 31,
                    1995.
 
   10.22            Shareholders Agreement, dated November 22, 1995 by and among PSH Corp., Kaiser
                    Ventures Inc. and Penske Motorsports, Inc. (f/k/a Penske Speedway Holdings Corp.)
                    incorporated by reference from Exhibit 10.24 of the Company's 8-K Report dated
                    November 22, 1995.
 
   10.22.1          First Amendment to Shareholders Agreement, dated March 21, 1996, between Penske
                    Motorsports, Inc. and Kaiser Ventures Inc., incorporated by reference from Exhibit
                    10.21.1 of the Company's Form 10-K Report for the year ended December 31, 1995.
 
   10.23            Water Rights Agreement, dated November 21, 1995 by and among Kaiser Ventures Inc.,
                    Kaiser Inc. and The California Speedway Corporation (successor by merger to Speedway
                    Development Corporation) incorporated by reference from Exhibit 10.22 of the Company's
                    Form 10-K Report for the year ended December 31, 1995.
 
   10.24            Access Agreement, dated as of November 22, 1995 by and among Kaiser Ventures Inc.,
                    Kaiser Land Development, Inc. and The California Corporation incorporated by reference
                    from Exhibit 10.23 of the Company's Form 10-K Report for the year ended December 31,
                    1995.
 
   10.25            Sewer Services Agreement, dated as of November 21, 1995 between Kaiser Ventures Inc.
                    and The California Speedway Corporation (successor by merger to Speedway Development
                    Corporation) incorporated by reference from Exhibit 10.24 of the Company's Form 10-K
                    Report for the year ended December 31, 1995.
 
   10.26            Purchase Agreement and Escrow Instructions (without exhibits) dated October 8, 1996,
                    among Kaiser Ventures Inc., The California Speedway Corporation and Penske
                    Motorsports, Inc. incorporated by reference from Exhibit 10.1 of the Company's Form
                    10-Q Report for the quarter ended September 30, 1995.
</TABLE>

                                       51
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (Continued)
                                        
<TABLE>
<CAPTION>
 
 
  Exhibit
  Number                                              Document Description
------------     ------------------------------------------------------------------------------------------
 
<S>                 <C>
   10.27            Conditional Demand Registration Report Agreement between Penske Motorsports, Inc. and
                    Kaiser Ventures Inc., incorporated by reference from Exhibit 10.28 of the Company's
                    Form 10-K Report for the year ended December 31, 1996.
 
   10.28            Revolving Credit and Term Loan Agreement between Fontana Water Resources, Inc. and
                    Union Bank, dated September 30, 1994, (Excluding the exhibits), incorporated by
                    reference from Exhibit 10.21 of the Company's Form 10-K Report for the year ended
                    December 31, 1994.
 
   10.28.1          First Amendment of Credit and Term Loan Agreement between Fontana Water Resources,
                    Inc. and Union Bank, dated January 30, 1997, incorporated by reference from Exhibit
                    10.29.1 of the Company's Form 10-K Report for the year ended December 31, 1996.
 
   10.28.2          Guaranty executed by Kaiser Resources Inc. in favor of Union Bank, dated September 30,
                    1994, incorporated by reference from Exhibit 10.21.1 of the Company's Form 10-K Report
                    for the year ended December 31, 1994.
 
   10.28.3          First Amendment to Guaranty by Kaiser Ventures Inc. in favor of Union Bank dated
                    January 30, 1997 incorporated by reference from Exhibit 10.29.3 of the Company's 10-K
                    Report for the year ended December 31, 1996.
 
   10.28.4          First Amendment to Pledge and Security Agreement; Second Amendment to Guaranty; First
                    Amendment to Stock Pledge Agreement; and Guarantor Consent by Kaiser Ventures Inc. in
                    favor of Union Bank dated August 14, 1997, incorporated by reference form Exhibit
                    10.29.4 of the Company's 10-K Report for the year ended December 31, 1998.
 
   10.28.5          Second Modification of Deed of Trust and Assignment of Leases and Rents dated as of
                    August 14, 1997 by Fontana Water Resources, Inc. and Union Bank of California,
                    incorporated by reference form Exhibit 10.29.5 of the Company's10-K Report for the
                    year ended December 31, 1998.
 
   10.28.6          Second Amendment to Revolving Credit and Term Loan Agreement dated August 14, 1997 by
                    Fontana Water Resources, Inc. and Union Bank of California, incorporated by reference
                    form Exhibit 10.29.6 of the Company's10-K Report for the year ended December 31, 1998.
 
   10.29            Settlement Agreement among Kaiser Resources Inc., KSC Recovery, Inc., Kaiser Coal
                    Corporation, the UMWA Combined Benefit Fund and the UMWA 1992 Benefit Plan dated
                    December 1, 1994, incorporated by reference from Exhibit 10.22 of the Company's 10-K
                    Report for the year ended December 31, 1994.
</TABLE>

                                       52
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (Continued)
                                        
<TABLE>
<CAPTION>
 
 
  Exhibit
  Number                                              Document Description
------------     ------------------------------------------------------------------------------------------
 
<S>                 <C>
   10.30            Promissory Note of McLeod Properties, Fontana LLC, dated September 30, 1997 payable to
                    the order of Kaiser Ventures Inc., incorporated by reference from Exhibit 10.3 of the
                    Company's 10-Q Report for the period ended September 30, 1997.
 
   10.30.1          Guaranty Agreement of Budway Enterprises, Inc. and V.M. McLeod dated September 30,
                    1997, incorporated by reference from Exhibit 10.3.1 of the Company's 10-Q Report for
                    the period ended September 30, 1997.
 
   10.30.2          Subordinated Deed of Trust, Assignment of Leases and Rents and Security Agreement
                    dated September 30, 1997 given by McLeod Properties, Fontana LLC for the benefit of
                    the Kaiser Ventures Inc., incorporated by reference from Exhibit 10.3.2 of the
                    Company's 10-Q Report for the period ended September 30, 1997.
 
   10.31            Members Operating Agreement dated June 19, 1997 between Kaiser Recycling Corporation
                    and West Valley Recycling & Transfer, Inc., incorporated by reference from Exhibit
                    10.1 of the Company's 10-Q Report for the period ended June 30, 1997.
 
   10.31.1          Performance Guaranty and Indemnification Agreement (KRC Obligations) dated June 19,
                    1997 given by Kaiser Ventures Inc. for the benefit of West Valley MRF, LLC and West
                    Valley Recycling & Transfer, Inc., incorporated by reference from Exhibit 10.1.1 of
                    the Company's 10-Q Report for the period ended June 30, 1997.
 
   10.32            Loan Agreement dated as of June 1, 1997 between West Valley MRF, LLC and California
                    Pollution Control Financing Authority, incorporated by reference from Exhibit 10.2 of
                    the Company's 10-Q Report for the period ended June 30, 1997.
 
   10.32.1          Indenture Agreement dated as of June 1, 1997 between California Pollution Control
                    Financing Authority and BNY Western Trust Company for the benefit of $9,500,000
                    California Pollution Control Financing Authority Variable Rate Demand Solid Waste
                    Disposal Revenue Bonds (West Valley MRF, LLC Project) Series 1997A, incorporated by
                    reference from Exhibit 10.2.1 of the Company's 10-Q Report for the period ended June
                    30, 1997.
 
   10.33            Remarketing Agreement dated as of June 1, 1997, and among West Valley MRF, LLC and
                    Westhoff, Cone & Holmstedt and Smith Barney, Inc. with regard to $9,500,000 California
                    Pollution Control Financing Authority Variable Rate Demand Stock Waste Disposal
                    Revenue Bonds (West Valley MRF, LLC Project) Series 1997A, incorporated by reference
                    from Exhibit 10.3 of the Company's 10-Q Report for the period ended June 30, 1997.
</TABLE>

                                       53
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (Continued)
                                        
<TABLE>
<CAPTION>
 
 
  Exhibit
  Number                                              Document Description
------------     ------------------------------------------------------------------------------------------
 
<S>                 <C>
   10.34            Reimbursement Agreement dated as of June 1, 1997 between West Valley MRF, LLC and
                    Union Bank of California, N.A., incorporated by reference from Exhibit 10.4 of the
                    Company's 10-Q Report for the period ended June 30, 1997.
 
   10.34.1          Guaranty and Mandatory DSR Agreement dated as of June 1, 1997 given by Kaiser Ventures
                    Inc. and Kaiser Recycling Corporation for the benefit of Union Bank of California,
                    N.A., incorporated by reference from Exhibit 10.4.1 of the Company's 10-Q Report for
                    the period ended June 30, 1997.
 
   10.35            Environmental Compliance Agreement dated as of June 19, 1997 between West Valley MRF,
                    LLC and Union Bank of California, N.A., incorporated by reference from Exhibit 10.5 of
                    the Company's 10-Q Report for the period ended June 30, 1997.
 
   10.35.1          Environmental Guaranty Agreement dated as of June 19, 1997 given by Kaiser Ventures
                    Inc. and Kaiser Recycling Corporation for the benefit of Union Bank of California,
                    N.A., incorporated by reference from Exhibit 10.5.1 of the Company's 10-Q Report for
                    the period ended June 30, 1997.
 
   21               The Company has nine active subsidiaries.  Fontana Water Resources, Inc., Kaiser Eagle
                    Mountain, Inc., Kaiser Steel Corporation, Kaiser Steel Land Development, Inc., Kaiser
                    Waste Treatment, Inc., Kaiser Recycling Corporation, Kaiser Reclamation, Inc.,  and
                    KSC Recovery, Inc. are incorporated under the laws of the State of Delaware.  Lake
                    Tamarisk Development Corporation is incorporated under the laws of the State of
                    California.  KSC Recovery, Inc.'s activities are limited to those permitted by the
                    Second Amended Joint Plan of Reorganization as modified (Exhibit 2.1 of this Report).
 
   23               Consent of Ernst & Young LLP.
 
   24               Power of Attorney (included in the signature page).
 
   27               Financial Data Schedule.
 
 
 
</TABLE>

                                       54
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

                                  SIGNATURES


   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

   Date:  March 31, 1999

                              KAISER VENTURES INC.


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


  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

                              (Power of Attorney)

                                       55
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

  Each person whose signature appears below constitutes and appoints RICHARD E.
STODDARD and JAMES F. VERHEY as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Form 10-K and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.

<TABLE>
<CAPTION>
              Signature                                 Title                           Date
              ---------                                 -----                           ----
<S>                                     <C>                                        <C>
1.  Principal Executive Officer
 
 
   /s/ Richard E. Stoddard              President, Chief Executive                 March 31, 1999
-------------------------------------   Officer and Chairman of the
   Richard E. Stoddard                  Board (Principal Executive Officer)
 
 
2.  Principal Financial and
    Accounting Officer
 
 
   /s/ James F. Verhey                  Executive Vice President, and              March 31, 1999
-------------------------------------   Chief Financial Officer (Principal
   James F. Verhey                      Financial and Accounting Officer)
</TABLE>

                                       56
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>
                 Signature                             Title                      Date
                 ---------                             -----                      ----
<S>                                                   <C>                    <C>
 
4.  Directors
 
   /s/ Ronald E. Bitonti                              Director               March 31, 1999
--------------------------------------------
   Ronald E. Bitonti
 
   /s/ Todd G. Cole                                   Director               March 31, 1999
--------------------------------------------
   Todd G. Cole
 
   /s/ Gerald A. Fawcett                           Vice Chairman             March 31, 1999
--------------------------------------------
   Gerald A. Fawcett
 
   /s/ Gary E. Gibbons                                Director               March 31, 1999
--------------------------------------------
   Gary E. Gibbons
 
   /s/ Reynold C. MacDonald                           Director               March 31, 1999
--------------------------------------------
   Reynold C. MacDonald
 
   /s/ William J. Morgan                              Director               March 31, 1999
--------------------------------------------
   William J. Morgan
 
   /s/ Charles E. Packard                             Director               March 31, 1999
--------------------------------------------
   Charles E. Packard
 
   /s/ Thomas S. Rabone                               Director               March 31, 1999
--------------------------------------------
   Thomas S. Rabone
 
   /s/ Lyle B. Stevenson                              Director               March 31, 1999
--------------------------------------------
   Lyle B. Stevenson
 
   /s/ Marshall F. Wallach                            Director               March 31, 1999
--------------------------------------------
   Marshall F. Wallach
</TABLE>

                                       57
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES


                         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, 1998 and 1997,
and the related consolidated statements of income, cash flows, and stockholders'
equity for each of the three years in the period ended December 31, 1998.  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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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
January 22, 1999

                                       58
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES


                          CONSOLIDATED BALANCE SHEETS
                               as of December 31
                                        


<TABLE>
<CAPTION>
                                                                     1998                        1997
                                                              ------------------         --------------------
<S>                                                           <C>                        <C>  
ASSETS
Current Assets
   Cash and cash equivalents...............................         $  3,409,000                 $  4,330,000
  Accounts receivable and other, net of allowance for
   doubtful accounts of $303,000 and $299,000,
   respectively............................................            2,339,000                    2,539,000
  Note receivable..........................................              100,000                      410,000
                                                                    ------------                 ------------
 
                                                                       5,848,000                    7,279,000
                                                                    ------------                 ------------
 
Investment in common stock of Penske Motorsports, Inc......           45,784,000                   43,881,000
                                                                    ------------                 ------------
 
Investment in Fontana Union Water Company..................           16,108,000                   16,108,000
                                                                    ------------                 ------------
 
Investment in West Valley MRF..............................            2,549,000                    2,509,000
                                                                    ------------                 ------------
 
Real Estate
 Land and improvements.....................................           15,621,000                   15,621,000
 Real estate in development................................           40,607,000                   40,094,000
                                                                    ------------                 ------------
 
                                                                      56,228,000                   55,715,000
                                                                    ------------                 ------------
 
Other Assets
 Note Receivable...........................................              714,000                      860,000
 Landfill permitting and development.......................           12,641,000                    9,607,000
 Buildings and equipment (net).............................            2,949,000                    3,064,000
 Other assets..............................................              121,000                      242,000
                                                                    ------------                 ------------
 
                                                                      16,425,000                   13,773,000
                                                                    ------------                 ------------
 
Total Assets...............................................         $142,942,000                 $139,265,000
                                                                    ============                 ============
</TABLE>




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

                                       59
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES


                          CONSOLIDATED BALANCE SHEETS
                               as of December 31
                                        


<TABLE>
<CAPTION>
                                                                    1998                        1997
                                                             -------------------         -------------------
<S>                                                          <C>                         <C> 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
   Accounts payable.......................................          $    708,000                $  1,479,000
   Accrued liabilities....................................             3,822,000                   4,311,000
   Current portion of long-term debt......................                   ---                     120,000
   Environmental remediation..............................             3,805,000                   6,054,000
                                                                    ------------                ------------
 
                                                                       8,335,000                  11,964,000
                                                                    ------------                ------------
 
Long-term Liabilities
   Deferred gain on sale of real estate...................               656,000                     656,000
   Accrued liabilities....................................             1,774,000                   1,685,000
   Deferred tax liabilities...............................             2,349,000                   2,223,000
   Long-term debt.........................................            13,750,000                   8,982,000
   Environmental remediation..............................            24,465,000                  24,673,000
                                                                    ------------                ------------
 
                                                                      42,994,000                  38,219,000
                                                                    ------------                ------------
 
Total Liabilities.........................................            51,329,000                  50,183,000
                                                                    ------------                ------------
 
Minority Interest.........................................             3,775,000                   2,878,000
                                                                    ------------                ------------
 
Commitments and Contingencies
 
Stockholders' Equity
   Common stock, par value $.03 per share, authorized
    13,333,333 shares; issued and outstanding
    10,685,257 and 10,591,240 respectively................               321,000                     318,000
   Capital in excess of par value.........................            74,741,000                  74,342,000
   Retained earnings since November 15, 1988..............            12,776,000                  11,544,000
                                                                    ------------                ------------
 
Total Stockholders' Equity................................            87,838,000                  86,204,000
                                                                    ------------                ------------
 
Total Liabilities and Stockholders' Equity................          $142,942,000                $139,265,000
                                                                    ============                ============
</TABLE>



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

                                       60
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES


                       CONSOLIDATED STATEMENTS OF INCOME
                        for the Years Ended December 31


<TABLE>
<CAPTION>
                                                                          1998          1997          1996
                                                                       -----------   -----------   -----------
<S>                                                                    <C>           <C>           <C>
Resource Revenues
 Ongoing Operations
  Water resource....................................................   $ 5,201,000   $ 5,143,000   $ 4,505,000
  Property redevelopment............................................     1,487,000     1,213,000     1,120,000
  Income from equity method investments.............................     1,943,000     2,003,000     1,539,000
  Mill Site land sale...............................................           ---           ---     6,371,000
                                                                       -----------   -----------   -----------
 
     Total ongoing operations.......................................     8,631,000     8,359,000    13,535,000
                                                                       -----------   -----------   -----------
 
 Interim Activities
  Lease, service and other..........................................     1,242,000     1,647,000     1,796,000
                                                                       -----------   -----------   -----------
 
     Total resource revenues........................................     9,873,000    10,006,000    15,331,000
                                                                       -----------   -----------   -----------
 
Resource Operating Costs
 Operations and maintenance.........................................     1,260,000     1,311,000     1,092,000
 Administrative support expenses....................................     2,208,000     2,343,000     2,137,000
                                                                       -----------   -----------   -----------
 
     Total resource operating costs.................................     3,468,000     3,654,000     3,229,000
                                                                       -----------   -----------   -----------
 
Income from Resources...............................................     6,405,000     6,352,000    12,102,000
 
 Corporate general and administrative expenses......................     3,847,000     4,161,000     3,837,000
                                                                       -----------   -----------   -----------
 
Income from Operations..............................................     2,558,000     2,191,000     8,265,000
 
 Net interest expense...............................................     1,083,000       672,000       819,000
                                                                       -----------   -----------   -----------
 
Income before Income Tax Provision..................................     1,475,000     1,519,000     7,446,000
 
 Income tax provision
  Currently payable.................................................        12,000        43,000        92,000
  Deferred tax expense..............................................       126,000        74,000       840,000
  Deferred tax expense credited to equity...........................       105,000       554,000     3,945,000
                                                                       -----------   -----------   -----------
 
Net Income..........................................................   $ 1,232,000   $   848,000   $ 2,569,000
                                                                       ===========   ===========   ===========
 
Basic Earnings Per Share............................................          $.12          $.08          $.24
                                                                       ===========   ===========   ===========
 
Diluted Earnings Per Share..........................................          $.11          $.08          $.24
                                                                       ===========   ===========   ===========
 
Basic Weighted Average Number of Shares Outstanding.................    10,664,000    10,536,000    10,486,000
 
Diluted Weighted Average Number of Shares Outstanding...............    10,840,000    10,740,000    10,730,000
</TABLE>



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

                                       61
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES


                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                        for the Years Ended December 31


<TABLE>
<CAPTION>
                                                                      1998                 1997                 1996
                                                               ------------------   ------------------   ------------------
<S>                                                            <C>                  <C>                  <C>
Cash Flows from Operating Activities
 Net income.................................................         $ 1,232,000          $   848,000          $ 2,569,000
 Provision for income tax which is credited to equity.......             105,000              554,000            3,945,000
 Income from equity method investments......................          (1,943,000)          (1,840,000)            (889,000)
 Deferred tax expense.......................................             126,000               74,000              840,000
 Depreciation and amortization..............................             552,000              389,000              952,000
 Gain on sale of Speedway Business Park.....................                 ---                  ---           (6,371,000)
 Allowance for doubtful accounts............................               4,000               13,000               36,000
 Changes in assets:
   Receivable and other.....................................             196,000              865,000               77,000
 Changes in liabilities:
   Current liabilities......................................            (361,000)             684,000           (2,810,000)
   Long-term accrued liabilities............................             111,000                  ---              306,000
                                                                     -----------          -----------          -----------
 
 Net cash flows from operating activities...................              22,000            1,587,000           (1,345,000)
                                                                     -----------          -----------          -----------
 
Cash Flows from Investing Activities
 Minority interest and other liabilities....................             897,000            1,260,000              670,000
 Proceeds from the sale of Mill Site Real Estate............                 ---            1,500,000            5,000,000
 Collection of note receivable..............................             456,000              174,000                  ---
 Proceeds from the CSI Settlement...........................                 ---                  ---            3,661,000
 Capital expenditures.......................................          (4,480,000)          (7,174,000)          (9,273,000)
 Environmental remediation expenditures.....................          (2,547,000)          (1,496,000)          (6,595,000)
 Environmental insurance proceeds (net).....................                 ---                  ---            2,582,000
 Investment in Penske Motorsports, Inc......................                 ---                  ---              232,000
 Other investments..........................................                 ---             (759,000)            (268,000)
                                                                     -----------          -----------          -----------
 
 Net cash flows from investing activities...................          (5,674,000)          (6,495,000)          (3,991,000)
                                                                     -----------          -----------          -----------
 
Cash Flows from Financing Activities
 Issuance of common stock...................................             133,000              196,000              121,000
 Borrowings under revolver-to-term credit facility..........           9,750,000            2,000,000            3,000,000
 Principal payments on revolver-to-term credit facility and
  note payable..............................................          (5,102,000)          (1,240,000)            (240,000)
 
 Payment of loan fees.......................................             (50,000)            (200,000)                 ---
                                                                     -----------          -----------          -----------
 
 Net cash flows from financing activities...................           4,731,000              756,000            2,881,000
                                                                     -----------          -----------          -----------
 
Net Changes in Cash and Cash Equivalents....................            (921,000)          (4,152,000)          (2,455,000)
 
Cash and Cash Equivalents at Beginning of Year..............           4,330,000            8,482,000           10,937,000
                                                                     -----------          -----------          -----------
 
Cash and Cash Equivalents at End of Year....................         $ 3,409,000          $ 4,330,000          $ 8,482,000
                                                                     ===========          ===========          ===========
</TABLE>



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

                                       62
<PAGE>
 
                     KAISER VENTURES INC. AND SUBSIDIARIES


           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              for the Years Ended December 31, 1998, 1997 and 1996
                                        


<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, 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
                                           ----------           --------       -----------       -----------        -----------
 
   Increase in investment in
       Penske Motorsports, Inc.
       due to issuance of stock...                ---                ---         2,937,000               ---          2,937,000
 
   Provision for income tax,
       credited to equity.........                ---                ---           554,000               ---            554,000
 
   Issuance of shares of
       common stock...............            103,126              3,000           414,000               ---            417,000
 
   Net Income.....................                ---                ---               ---           848,000            848,000
                                           ----------           --------       -----------       -----------        -----------
 
Balance at December 31, 1997......         10,591,240            318,000        74,342,000        11,544,000         86,204,000
                                           ----------           --------       -----------       -----------        -----------
 
   Provision for income tax,
       credited to equity.........                ---                ---           105,000               ---            105,000
 
   Issuance of shares of
       common stock...............             94,017              3,000           294,000               ---            297,000
 
   Net Income.....................                ---                ---               ---         1,232,000          1,232,000
                                           ----------           --------       -----------       -----------        -----------
 
Balance at December 31, 1998......         10,685,257           $321,000       $74,741,000       $12,776,000        $87,838,000
                                           ==========           ========       ===========       ===========        ===========
</TABLE>




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

                                       63
<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, 1998, 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 11.73% interest
in Penske Motorsports, Inc. ("PMI"), a public professional motorsports company
that has developed the California Speedway ("TCS") on land acquired from the
Company; (iii) approximately a 74% interest in Mine Reclamation Corporation
("MRC"), the developer of the Eagle Mountain Landfill Project (the "Landfill
Project"); (iv) a 50% joint venture interest in the West Valley MRF ("WVMRF"), a
transfer station and recycling facility located on land acquired from the
Company; (v) approximately 650 acres of the former Kaiser Steel Corporation
("KSC") steel mill site (the "Mill Site Property") which is currently undergoing
redevelopment; and (vi) 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
redevelopment of industrial and commercial parcels of land adjoining the
California Speedway and the WVMRF.

  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., Kaiser Recycling Corporation, 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, including water and waste water treatment revenues; housing
rental income, aggregate and 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 (i.e., PMI) and, starting in 1998, joint
ventures (i.e., West Valley MRF) which the Company accounts for under the equity
method.

                                       64
<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, royalty revenues from the
sale of recyclable revert materials and other miscellaneous short-term
activities. Revenues from these activities are declining rapidly as the
development of the remaining Mill Site property proceeds.


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 4.)

     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, KSC Recovery's cash on hand and potential future
recoveries funds all costs and expenses of KSC Recovery. It is anticipated that
the bankruptcy estate of KSC Recovery expects to make all final distributions
within the next 18 to 24 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.

                                       65
<PAGE>
 
Real Estate

  In accordance with Financial Accounting Standards Board ("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.

Investment in West Valley MRF, LLC

  The Company accounts for its investment in West Valley MRF, LLC under the
equity method of accounting because of the Company's 50% ownership interest.

Deferred Costs

  Included in other assets are deferred loan fees of $1,036,000 (net of $915,000
of amortization) which were incurred in 1994 and 1997 and which are being
amortized over the life of the related loan on a straight-line basis.
Amortization of these deferred loan fees is included in net interest expense,
and was $121,000,  $34,000, and $666,000 for 1998, 1997, and 1996, respectively.
Acceleration of the amortization of loan fees in 1996 was due to the
renegotiation of the revolving-to-term credit facility.  Acceleration of the
amortization of loan fees in 1998 was due to a reduction in the expected life of
the related loan.

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.

Earnings Per Share

  In 1997, the FASB issued Statement No. 128, Earnings per Share (FASB 128).
FASB 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share.  

                                       66
<PAGE>
 
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported diluted earnings
per share. All earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to the FASB 128 requirements.

Stock Options

  The Company accounts for its stock compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and intends to continue to do so.  (See Note 13.)

Financial Statement Restatement and Reclassifications

  The Company has reclassified certain amounts in its Consolidated Financial
Statements for the years ended in 1996 and 1997 in order to conform with the
1998 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 AND OTHER

  Accounts receivable as of December 31 consisted of the following:
<TABLE>
<CAPTION>
                                                                         1998                       1997
                                                                  ------------------         -------------------
 
<S>                                                               <C>                        <C>
Cucamonga County Water District................................          $1,807,000                  $1,641,000
Penske Motorsports, Inc........................................              24,000                     157,000
Other..........................................................             811,000                   1,040,000
                                                                         ----------                  ----------
                                                                          2,642,000                   2,838,000
 
Allowance for doubtful accounts                                            (303,000)                   (299,000)
                                                                         ----------                  ----------
   Total.......................................................          $2,339,000                  $2,539,000
                                                                         ==========                  ==========
</TABLE>

                                       67
<PAGE>
 
Note 4.  CUCAMONGA LEASE

     The Company, through a wholly-owned subsidiary, Fontana Water Resources,
Inc., leases its 50.88% ownership of the capital stock of Fontana Union, a
mutual water company, to Cucamonga County Water District ("Cucamonga") pursuant
to a take-or-pay lease (the "Cucamonga Lease") that terminates in the year 2092.
In 1996, the Company instituted litigation against Cucamonga due to a dispute
concerning the amount payable to the Company pursuant to the terms of the
Cucamonga Lease. The dispute centers on the Company's assertion that either the
MWD Rate in the Cucamonga Lease was discontinued on July 1, 1995, or that the
Lease Rate should be interpreted to include all the changed rates and items
implemented by Metropolitan Water District of Southern California ("MWD") since
July 1, 1995. A five-day trial on the matter was held in March 1998. The Court
ruled, in favor of the Company, that the rate on which the Cucamonga Lease had
been based was discontinued effective July 1, 1995. Therefore the terms of the
Cucamonga Lease require the parties to negotiate in good faith a new substitute
MWD rate. If the parties are unable to agree on a substitute MWD rate, the
matter in effect goes to reference which is a private trial similar to
arbitration. There is no specified time period in which the new MWD rate must be
established. Cucamonga continues to pay under the terms of the Cucamonga Lease,
but at a rate substantially less than the Lease Rate that the Company maintains
it is entitled to receive pursuant to the Cucamonga Lease. 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 report revenues on
the basis of amounts Cucamonga is currently paying. The total amount of lease
payments in dispute as of December 31, 1998 is approximately $1,895,000.

Note 5.  INVESTMENT IN PENSKE MOTORSPORTS, INC.

     The Company, as of December 31, 1998, owns 1,627,923 shares, or
approximately 11.73% of the common stock of PMI. As previously discussed, 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 stockholders' equity, the Company 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 May 1997, the Company increased its equity investment in PMI by
$3,128,000, as a result of PMI's issuance of stock related to its acquisition of
a majority of the common stock of North Carolina Motor Speedway Inc. The Company
also recorded corresponding increases in deferred income taxes and capital in
excess of par value of approximately $191,000 and $2,937,000, respectively.

                                       68
<PAGE>
 
  In addition, due to the seasonal nature of racing, PMI's earnings fluctuate
significantly from quarter to quarter.  As a result, the Company's reported
share of PMI's net income/loss will, on a quarterly basis, reflect the seasonal
nature of PMI's business.

  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, in Brooklyn, Michigan; (ii) The California
Speedway Corporation, which owns and operates California Speedway near Los
Angeles, California; (iii) Pennsylvania International Raceway, Inc. which owns
and operates the Nazareth Motor Speedway in Nazareth, Pennsylvania; (iv) North
Carolina Motor Speedway, Inc. which owns and operates the North Carolina Motor
Speedway in Rockingham, North Carolina; (v) a forty-five percent (45%) interest
in Homestead-Miami, LLC, the operator of the Metro-Dade Homestead Motorsports
Complex:  in Dade County, Florida; (vi) Motorsports International Corp., a
motorsports apparel and memorabilia company; and (vii) 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.

  On an unaudited basis, total 1998 revenues for PMI, on a consolidated basis,
were $117 million with net income of $17 million, or $1.17 per share. The
Company's share of undistributed equity in the earnings of PMI for 1998, was
$1,903,000 net of residual expenses. Total 1997 revenues for PMI, on a
consolidated basis, were $110 million with a net income of $16 million, or $1.19
per share. The Company's share of undistributed equity in the earnings of PMI
for 1997, was $1,840,000 net of residual expenses. 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.

  The fair market value of the Company's 1,627,923 shares of PMI stock as of
December 31, 1998 is approximately $43 million.  The condensed balance sheets of
PMI as of December 31, are as follows:

<TABLE>
<CAPTION>
                                                                  1998                      1997
                                                            -----------------         -----------------
                                                               (unaudited)
<S>                                                         <C>                       <C>
Current Assets...........................................        $ 10,408,000              $  9,551,000
Property and Equipment...................................         247,421,000               224,666,000
Other Assets.............................................          52,705,000                57,555,000
                                                                 ------------              ------------
     Total Assets........................................        $310,534,000              $291,772,000
                                                                 ============              ============
 
Current Liabilities......................................        $ 26,564,000              $ 39,713,000
Long-Term Debt...........................................          61,442,000                47,278,000
Other Liabilities........................................             369,000                   738,000
Deferred taxes...........................................          22,413,000                13,349,000
Stockholders' Equity.....................................         199,746,000               190,694,000
                                                                 ------------              ------------
     Total Liabilities and Stockholders' Equity..........        $310,534,000              $291,772,000
                                                                 ============              ============
</TABLE>


Note 6.  INVESTMENT IN WEST VALLEY MRF, LLC

  The Company and Burrtec Waste Industries, Inc. ("Burrtec"), a privately-held
company, completed their revised agreement for the development, construction and
operation of the WVMRF, a municipal solid waste transfer and recovery facility.
Effective June 19, 1997, Kaiser Recycling Corporation ("KRC") and West Valley
Recycling & Transfer, Inc. ("WVRT"), Burrtec's wholly owned subsidiary, which
are equal members of the newly created limited liability company, West Valley
MRF, LLC, entered into a Members Operating Agreement which is substantially the
equivalent of a joint venture agreement 

                                       69
<PAGE>
 
but for a limited liability company. The construction and start up of the WVMRF
was completed during December 1997.

  Pursuant to the terms of the Members Operating Agreement, KRC contributed
approximately 23 acres of Mill Site property on which the WVMRF was constructed
while WVRT contributed all of Burrtec's recycling business that was operated
within Riverside County, thereby entitling WVMRF to receive all revenues
generated from this business after the closing date.

  Most of the financing for the projected cost of the WVMRF of approximately
$10,300,000, including reimbursement of most of the previously incurred
development costs of Burrtec and the Company, was obtained through the issuance
and sale of $9,500,000 in California Pollution Control Financing Authority (the
"Authority") Variable Rate Demand Solid Waste Disposal Revenue Bonds (West
Valley MRF, LLC Project) Series 1997A (the "Bonds").  The Bonds are secured by
an irrevocable letter of credit issued by Union Bank of California, N.A. ("Union
Bank").  The Bonds have a stated maturity date of June 1, 2012, although West
Valley MRF, LLC is required, pursuant to its agreement with Union Bank, to
annually redeem a portion of the Bonds on a stated schedule.  Pursuant to a
Guaranty Agreement with Union Bank, the Company and Burrtec are each liable for
fifty percent (50%) of the principal and interest on the Bonds in the event of a
default by the West Valley MRF, LLC.

  The Company is accounting for its investment in West Valley MRF, LLC under the
equity method.

  On an audited basis, gross revenues for the WVMRF for 1998 were $12.1 million
while gross revenues from inception through December 31, 1997 amounted to $2.4
million. The Company's share of undistributed equity in the earnings of WVMRF
during 1998 was $40,000 and immaterial during 1997. The condensed unaudited
balance sheets of West Valley MRF, LLC as of December 31, are as follows:

<TABLE>
<CAPTION>
                                                                     1998                   1997
                                                             --------------------   --------------------
 
<S>                                                          <C>                    <C>
Current Assets............................................            $ 1,915,000            $ 1,493,000
Property and Equipment (net)..............................             11,240,000             11,173,000
Other Assets..............................................              2,476,000              3,256,000
                                                                      -----------            -----------
     Total Assets.........................................            $15,631,000            $15,922,000
                                                                      ===========            ===========
 
Current Liabilities.......................................            $ 1,715,000            $ 2,023,000
Other Liabilities.........................................                621,000                187,000
CPCFA Bonds Payable.......................................              9,200,000              9,400,000
Stockholders' Equity......................................              4,095,000              4,312,000
                                                                      -----------            -----------
     Total Liabilities and Stockholders' Equity...........            $15,631,000            $15,922,000
                                                                      ===========            ===========
</TABLE>


Note 7.  MINE RECLAMATION CORPORATION

  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 has not received any rent payments from MRC since 1994, 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.

  Through a series of private placements with existing MRC shareholders, from
July 1995 through December 31, 1998, a total of $14.5 million has been raised by
MRC, with Kaiser contributing 

                                       70
<PAGE>
 
approximately $11 million of that amount. The Company's 1998 advances
approximated $2.8 million out of a total funding of $3.7 million. As a result of
these equity fundings, the Company's ownership interest in MRC as of December
31, 1998 is approximately 74%. The Company has also approved advances to MRC
totaling $1.2 million for 1999, which together with the minority shareholders
advances will fund MRC through September 30, 1999.

  The environmental impact report ("EIR") received approvals from the Riverside
County Planning Commission and Board of Supervisors in 1997.  However, on
February 17, 1998, Judge McConnell issued her final ruling with respect to the
EIR, in which she found the EIR inadequate in two general areas:  1) the
threatened desert tortoise; and 2) impacts to Joshua Tree National Park.  The
Company decided to appeal this decision.  If the appeal is adverse to the
Company and MRC, they will again re-evaluate the Landfill Project.  Depending
upon the course of action ultimately selected by MRC and the Company, there
could be a material adverse impact to the financial statements of the Company,
including a possible write down of the Company's investment in MRC to the lower
of cost or fair market value.


Note 8.  NOTE RECEIVABLE

  As of December 1998, the Company has a note receivable from McLeod Properties,
Fontana LLC (Budway Trucking, Inc.) in the amount of $814,000, of which $100,000
has been included in current assets and the balance, of $714,000, classified as
long term.  The outstanding balance of the note bears interest at 10% per annum
with quarterly payments of $25,000 plus accrued interest with the remaining
balance due October 2004.  The Company has agreed to subordinate its note
receivable to a construction/permanent loan in order to facilitate the
construction of a building on the property.  (See Note 15, Sale of Mill Site
Real Estate.)


Note 9.  BUILDINGS AND EQUIPMENT (Net)

  Buildings and equipment (net) as of December 31 consisted of the following:

<TABLE>
<CAPTION>
                                                                        1998                     1997
                                                                  ----------------         ----------------
 
<S>                                                               <C>                      <C>
Buildings and structures.......................................       $ 2,095,000              $ 2,076,000
Machinery and equipment........................................         3,141,000                2,834,000
                                                                      -----------              -----------
                                                                        5,236,000                4,910,000
Accumulated depreciation.......................................        (2,287,000)              (1,846,000)
                                                                      -----------              -----------
   Total.......................................................       $ 2,949,000              $ 3,064,000
                                                                      ===========              ===========
</TABLE>


Note 10.    ACCRUED LIABILITIES - CURRENT

  The current portion of accrued liabilities as of December 31 consisted of the
following:
<TABLE>
<CAPTION>
 
                                                                       1998                    1997
                                                                  ---------------         ---------------
 
<S>                                                               <C>                     <C>
Environmental insurance settlement costs.......................        $1,313,000              $1,313,000
Compensation and related employee costs........................           545,000               1,008,000
Other..........................................................         1,964,000               1,990,000
                                                                       ----------              ----------
   Total.......................................................        $3,822,000              $4,311,000
                                                                       ==========              ==========
</TABLE>

                                       71
<PAGE>
 
Note 11.  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 $18 million and $29
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 $25.5 million in
remediation and other environmental costs expended through december 31, 1998.
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, 1998, the total short-term and long-term environmental
remediation liabilities reflected on the Company's balance sheet was
approximately $28.3 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:

<TABLE>
<CAPTION>
                                                    1998                    1997
                                            ---------------------   ---------------------
 
<S>                                         <C>                     <C>
Beginning Estimated Liability                        $30,727,000             $32,223,000
 
 Remediation Costs Incurred                           (2,457,000)             (1,496,000)
                                                     -----------             -----------
 
Ending Estimated Liability                            28,270,000              30,727,000
 
 Less:  Current Portion                               (3,805,000)             (6,054,000)
                                                     -----------             -----------
 
Long-term Portion                                    $24,465,000             $24,673,000
                                                     ===========             ===========
</TABLE>

  See Note 19, "Commitments and Contingencies" for further information.


Note 12.  LONG-TERM DEBT

  As of december 31, 1998, the Company had $13,750,000 in long-term debt solely
comprised of borrowings under the Company's $30,000,000 revolving-to-term credit
facility with Union Bank.

  The Company, through fwr, had a 6-year, $30,000,000 revolving-to-term credit
facility with Union Bank at floating interest rates (8.1% at december 31, 1998),
and collateralized by the Company's shares of Fontana Union and the lease of
those shares to Cucamonga.  The borrowing base available under the credit
facility is limited to the discounted present value of an eight-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 $25,150,000 as of December 31, 1998.  The net available funds under the
$30,000,000 revolving-to-term credit facility (less $4,850,000 reserved for
financial assurances required by the dtsc and relating to environmental
remediation on the Mill Site Property; $500,000 in an unused outstanding standby
letter of credit; and $13,750,000 in outstanding loans) was $10,900,000 as of
December 31, 1998.

                                       72
<PAGE>
 
  Total interest expense incurred in 1998, 1997, and 1996 was $1,086,000
$980,000, and $743,000, respectively.

Note 13.  STOCKHOLDERS' EQUITY

Equity Transactions

  During 1998, 1997 and 1996 the Company recorded transactions directly to
stockholders' equity other than changes resulting from net income or equity
transactions with shareholders.  These transactions include deferred tax expense
credited to equity due to the utilization of the Company's reorganization NOL
carryforwards, and the increase in equity due to the Penske Motorsports, Inc.
("PMI"), Initial Public Offering in March 1996 and PMI's purchase of North
Carolina Motor Speedway ("NCMS") in May 1997.  These amounts for the years ended
December 31, 1998, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                       1998               1997               1996
                                                 ----------------   -----------------   ---------------
 
<S>                                              <C>                <C>                 <C>
Deferred tax expense credited to equity.......           $105,000          $  554,000       $ 3,945,000
Investment increase in Penske
 Motorsports, Inc.............................                ---           2,937,000         6,116,000
                                                         --------          ----------       -----------

                                                         $105,000          $3,491,000       $10,061,000
                                                         ========          ==========       ===========
</TABLE>

Common Stock Outstanding

  At December 31, 1998 and 1997, Kaiser Ventures Inc. common stock has a par
value of $0.03 and 13,333,333 authorized shares, of which 10,685,257 and
10,591,240 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, 1998, 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.

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.  The Company incurred no compensation expense during 1998,
1997 and 1996.

  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 859,102 reserved shares as of December 31, 1998.  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-

                                       73
<PAGE>
 
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, 1998, 1997 and 1996 and activities during the years
ending on those dates is presented below:

<TABLE>
<CAPTION>
                                            1998                        1997                         1996
                                 -------------------------   --------------------------   ---------------------------
                                               Weighted-                     Weighted-                   Weighted-
                                                Average                       Average                     Average 
                                                Exercise                      Exercise                    Exercise
                                  Options        Price          Options        Price        Options        Price   
                                  -------        -----          -------        -----        -------        ----- 
 
<S>                               <C>           <C>             <C>           <C>            <C>           <C>
Outstanding at beginning of
   Year.......................    1,471,161       $11.28         1,431,161      $11.35          809,661      $11.63
Granted.......................       53,000        10.67            44,000        8.05          639,000       10.87
Exercised.....................      (21,200)        6.17            (4,000)       5.83          (17,500)       6.89
Forfeited.....................          ---          ---               ---         ---              ---         ---
                                 ----------                     ----------                   ----------    
                                                                                                           
Outstanding at end of year....    1,502,961       $11.33         1,471,161      $11.28        1,431,161      $11.35
                                 ==========                     ==========                   ==========    
                                                                                                           
Options exercisable at year                                                                                
   End........................      836,837       $11.41           676,987      $11.08          497,791      $11.29 
                                 ==========                     ==========                   ==========    
                                                                                                           
Weighted-average fair value                                                                                
   of options granted during                                                                               
   the year...................   $     2.27                     $     1.55                   $     2.87    
</TABLE>

  The following table summarizes information about fixed stock options
outstanding as of December 31, 1998:

<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             5.7             179,811            $    5.70                  166,811           $    5.69
$7.51 to 17.58             6.0           1,323,150            $   12.10                  670,026           $   12.83
</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 as indicated below:

<TABLE>
<CAPTION>
                             1998               1997                1996
                       ----------------   ----------------   ------------------
<S>                    <C>                <C>                <C> 
Net Earnings
 As reported                 $1,232,000           $848,000           $2,569,000
 Pro forma                   $  757,000           $263,000           $2,160,000
 
Earnings per share
 (Basic)
 As reported                 $     0.12           $   0.08           $     0.24
 Pro forma                   $     0.07           $   0.02           $     0.20
 
Earnings per share
 (Diluted)
 As reported                 $     0.11           $   0.08           $     0.24
 Pro forma                   $     0.07           $   0.02           $     0.20
</TABLE>

                                       74
<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 1998, 1997 and 1996 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>
                            1998               1997                1996
                      ----------------   ----------------   -------------------
 
<S>                   <C>                <C>                <C>
Volatility                       .313               .255                  .254
Risk-free interest rate          6.00%              6.38%                 5.74%
Expected life in years           2.05               2.10                  2.67
Forfeiture rate                  0.00%              0.00%                 0.00%
Dividend yield                   0.00%              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, 1998, 56,000 of these options remain vested and unexercised.

 
Note 14.      EARNINGS PER SHARE

  The following table sets forth the computation of basic and diluted earnings
per share:

<TABLE>
<CAPTION>
                                                                    1998                        1997                     1996
                                                              -----------------          ------------------         ---------------
<S>                                                           <C>                        <C>                        <C> 
Numerator:

   Net Income..............................................         $ 1,232,000                 $   848,000             $ 2,569,000
 
   Numerator for basic earnings per share
       -income available to common stockholders............         $ 1,232,000                 $   848,000             $ 2,569,000
 
   Numerator for diluted earnings per share
       -income available to common stockholders............         $ 1,232,000                 $   848,000             $ 2,569,000
 
Denominator:
 
   Denominator for basic earnings per share
       -weighted-average shares............................          10,664,000                  10,536,000              10,486,000
 
   Effect of dilutive options..............................             176,000                     204,000                 244,000
                                                                    -----------                 -----------             -----------
 
   Denominator for diluted earnings per share
       -adjusted weighted-average shares and
       assumed conversions.................................          10,840,000                  10,740,000              10,730,000
                                                                    ===========                 ===========             ===========
 
   Basic earnings per share................................         $       .12                 $       .08             $       .24
                                                                    ===========                 ===========             ===========
 
   Diluted earnings per share..............................         $       .11                 $       .08             $       .24
                                                                    ===========                 ===========             ===========
</TABLE>

  For additional disclosures regarding the outstanding employee stock options
see Note 13.

  The following table discloses the number of vested and outstanding options
during 1998, 1997 and 1996 that were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
antidilutive.

                                       75
<PAGE>
 
<TABLE>
<CAPTION>
                                                                 1998                        1997                        1996
                                                                 ----                        ----                        ----
<S>                                                          <C>                          <C>                         <C>
   Number of antidilutive options.....................          478,000                     364,000                     272,000
 
   Range of option prices
       for the antidilutive options...................      $11.25 - 17.58              $11.25 - 17.58              $10.50 - 17.58
</TABLE>


Note 15.  SALE OF MILL SITE REAL ESTATE

  During 1997, the Company sold approximately 15.7 acres of its Mill Site
Property to McLeod Properties, Fontana LLC (Budway Trucking, Inc.) for
$2,943,000, or $4.30 per square foot, for use as a rail-truck intermodal
distribution facility for Budway Trucking, Inc.  The transaction closed on
September 30, 1997 at which time the Company received $1,500,000 in cash and a
note receivable for $1,443,000.  The Company has agreed to subordinate its note
receivable to a construction/permanent loan in order to facilitate the
construction of a building on the property.  Although the Company considers the
sale to have been fully consummated during 1997, generally accepted accounting
principles require the gain of $656,000 to be deferred and recognized under the
cost recovery method, once proceeds received from the buyer exceed the Company's
basis in the property sold.

  During 1996 the Company sold 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.


Note 16.  SUPPLEMENTAL CASH FLOW INFORMATION

  The Company paid interest during 1998, 1997, and 1996 of $1,042,000, $968,000,
and $674,000, respectively.

  Income taxes paid in 1998, 1997 and 1996 were $48,000, $92,000 and $20,000,
respectively.

  During 1998, the Company issued $142,000 of common stock for payment of 1997
bonuses.  During 1997, the Company issued $360,000 of common stock for payment
of 1996 bonuses and 1997 compensation.

  During 1997 the Company carried back a note receivable for $1,443,000 from
McLeod Properties, Fontana LLC (Budway Trucking, Inc.) from the sale of 15.7
acres of Mill Site real estate.

  During 1997, in connection with the contribution of the land to the West
Valley MRF, LLC, the Company reclassified $1,485,000 of land to the investment
in West Valley MRF, LLC.

  As a result of the acquisition by PMI of 70% of the common stock of NCMS
during 1997, the Company increased its investment in PMI by $3,128,000 and
recorded corresponding increases in deferred income taxes and stockholders
equity of $191,000 and $2,937,000, respectively.

  During 1997 and 1996, the Company capitalized interest and property taxes on
property real estate under development of $187,000 and $382,000, respectively.
There was no capitalization of interest or property taxes during 1998.

  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.

                                       76
<PAGE>
 
  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.

 
Note 17.      INCOME TAXES

  The income tax provisions for the years ended December 31, 1998, 1997 and 1996
are composed of the following:
<TABLE>
<CAPTION>
                                                         1998                  1997                  1996
                                                    --------------        --------------        --------------
<S>                                                 <C>                   <C>                   <C>
Current tax expense:
   Federal.......................................         $    ---              $  5,000            $   56,000
   State.........................................           12,000                38,000                36,000
                                                          --------              --------            ----------
                                                            12,000                43,000                92,000
                                                          --------              --------            ----------
Deferred tax expense credited to equity:
   Federal.......................................          105,000               554,000             3,945,000
   State.........................................              ---                   ---                   ---
                                                          --------              --------            ----------
                                                           105,000               554,000             3,945,000
                                                          --------              --------            ----------
Deferred tax expense:
   Federal.......................................              ---                   ---                   ---
   State.........................................          126,000                74,000               840,000
                                                          --------              --------            ----------
                                                           126,000                74,000               840,000
                                                          --------              --------            ----------
                                                          $243,000              $671,000            $4,877,000
                                                          ========              ========            ==========
</TABLE>

  In accordance with FASB 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.

  Deferred tax liabilities (assets) are comprised of the following as of
December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                       1998                             1997
                                                                       ----                             ----
                                                              
<S>                                                                <C>                           <C>
   Land held for development..................................        $  2,604,000                  $  1,711,000
   Investment in Fontana Union................................           6,392,000                     6,440,000
   Investment in Penske Motorsports Inc.......................          13,501,000                    13,332,000
   Depreciation...............................................              73,000                        56,000
                                                                      ------------                  ------------
                                                                        22,570,000                    21,539,000
                                                                      ------------                  ------------
                                                                                                  
   Groundwater remediation....................................            (684,000)                     (690,000)
   Insurance Proceeds.........................................            (700,000)                   (1,659,000)
   Investment in MRC..........................................          (1,823,000)                   (1,837,000)
   Accounts receivable reserve................................            (187,000)                     (193,000)
   Other......................................................          (2,227,000)                   (1,825,000)
   Loss carryforwards.........................................         (39,599,000)                  (38,870,000)
                                                                      ------------                  ------------
                                                                       (45,220,000)                  (45,074,000)
                                                                      ------------                  ------------
   Deferred tax asset valuation allowance.....................          24,999,000                    25,758,000
                                                                      ------------                  ------------
                                                                      $  2,349,000                  $  2,223,000
                                                                      ============                  ============
</TABLE>

  The net change in the valuation allowance during 1998, 1997 and 1996 was a
reduction of $759,000, $1,731,000 and $7,841,000, respectively.

  A reconciliation of the effective income tax rate to the federal statutory
rate, for financial reporting purposes, is as follows:

                                       77
<PAGE>
 
<TABLE>
<CAPTION>
                                                                     1998           1997           1996
                                                                 ------------   ------------   -------------
 
<S>                                                              <C>            <C>            <C>
Federal statutory rate........................................          34.0%          34.0%          34.0%
Increase resulting from state tax, net of federal benefit.....           8.1            6.1            5.1
Other.........................................................           1.5            3.6            2.4
Additional recognition of pre-reorganization benefits.........           3.6           30.2           21.5
Increase in valuation allowance on state NOLs.................           ---            ---            6.2
Non taxable equity earnings...................................         (30.7)         (29.8)          (4.0%)
                                                                       -----          -----           ----
                                                                        16.5%          44.1%          65.2%
                                                                       =====          =====           ====
</TABLE>

          The consolidated Net Operating Loss ("NOL") carryforwards available
for federal income tax purposes as of December 31, 1998, are approximately
$114,000,000 and will expire over a period from year 2000 through 2014.  The
amount of NOL carryforwards available for California state tax purposes as of
December 31, 1998, are approximately $3,400,000 and will expire over a period
from year 2000 through 2004.  There may be 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 $566,000 of investment tax credit
carryforwards available.  The credits will expire in the years 1999 through 2000
and can be utilized only after the NOL is exhausted.


Note 18.  LEASED ASSETS AND SIGNIFICANT CUSTOMERS

Long-Term Leases

  The Company has long-term lease agreements with Cucamonga pursuant to the
Cucamonga Lease (Note 4), and Management Training Corporation ("MTC").  Minimum
lease payments expected to be received by the Company through the next five
years are as follows:

<TABLE>
<CAPTION>
   Year Ending           Cucamonga
   December 31             Lease                MTC Lease                 Total 
   -----------             -----                ---------                 -----
<S>                  <C>                     <C>                    <C>
      1999              $5,201,000               $760,000              $ 5,961,000
      2000              $5,201,000               $763,000              $ 5,964,000
      2001              $5,201,000               $381,000              $ 5,582,000
      2002              $5,201,000               $    ---              $ 5,201,000
      2003              $5,201,000               $    ---              $ 5,201,000
</TABLE>

  The amounts for the Cucamonga Lease are based upon:  (a) the quantities of
water as of December 31, 1998, 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 $655,000 on an annual basis)
and; (c) projections by MWD which forecast no rate increases in the disputed
rate over the next 5 years.

  In January 1999, the Company and MTC signed the fourth amendment to MTC's
lease for a portion of Eagle Mountain.  This amendment increased the minimum
monthly rental rate effective February 1999, by 3% to $63,600, and extended the
term through June 30, 2001.

  The net book values of Fontana Union and Eagle Mountain at December 31, 1998
were $16,108,000 and $10,619,000, respectively.  Only a portion of Eagle
Mountain is being utilized for the MTC Lease.

                                       78
<PAGE>
 
Significant Customers

  The Company received substantial portions of its revenue from the following
customers:

<TABLE>
<CAPTION>
   Year Ended         Cucamonga 
   December 31         Lease                 MTC Lease
   -----------         -----                 ---------
 
<S>                 <C>                   <C>
      1998              $5,201,000            $729,000
      1997              $5,143,000            $714,000
      1996              $4,505,000            $709,000
</TABLE>


Note 19.  COMMITMENTS AND CONTINGENCIES

Environmental Contingencies

  As discussed in Note 11 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 $18 million and $29 million, depending upon which approved
remediation alternatives are eventually selected.

  Although ongoing environmental investigations are being conducted on the
Company's 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 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 $4.8 million of Kaiser's Union Bank Credit facility.

  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.  In
September 1998, the Company contributed an additional 7,000 acre feet of its
water in storage.  This additional contribution of water completed all of the
Company's obligations under the terms of the settlement agreement approximately
20 years ahead of schedule.  The Company remains contingently liable for any
impacts the groundwater plume may have on water wells owned by third parties.
The City of Ontario, California has 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 if it
should arise.

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.

                                       79
<PAGE>
 
  Total expense relative to these plans for the years ended December 31, 1998,
1997, and 1996 was $191,000, $223,000, and $199,000, respectively.

Letters of Credit

  At December 31, 1998, the Company had guaranteed letters of credit outstanding
on its behalf to third parties totaling $158,000.  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 20.  LEGAL PROCEEDINGS

  The Company, in the normal course of its business, is involved in various 
claims and legal proceedings. A number of litigation matters previously reported
have settled and such settlements did not have a material adverse impact on the
Company's financial statements. Except for those matters described below,
management believes these matters will not have a material adverse effect on
Kaiser's business or financial condition. Significant legal proceedings,
including those, which may have a material adverse effect on the Company's
business or financial condition, are summarized as follows:

Litigation

  Eagle Mountain EIR Litigation.  This litigation involved legal challenges to
the EIR for the Landfill Project certified by the Riverside County Board of
Supervisors in October 1992.  These cases were heard in the San Diego County
Superior Court in 1994.  The Court's decisions required MRC to prepare a new
EIR, which was completed and certified in September 1997.  The original
litigation against the EIR was resumed before Judge Judith McConnell of the San
Diego County Superior Court.  In February 1998, the San Diego County Superior
Court announced its final decision and concluded that the new EIR was still
deficient in two principal respects.  The Court's two remaining areas of concern
involve the threatened desert tortoise and Joshua Tree National Park.  The
Superior Court's decision has been appealed.  It is currently anticipated that a
decision in the appeal will be announced in the third quarter of 1999. Related 
to the EIR litigation was the award of approximately $300,000 of attorneys' fees
to project opponents. This matter has also been appealed.

  Centennial Insurance.  In November 1997, Centennial Insurance Company
commenced litigation in San Bernardino County Superior Court seeking
approximately $115,000 in damages from the Company and other defendants related
to the alleged theft of property from the Company's West End Property that was
stored in a semi-truck of a common carrier leasing a site from the Company
(Centennial Insurance Company, v. Kaiser Resources Inc., et al., San Bernardino
County Superior Court  Rancho Cucamonga Division, Case No. RCV 30545).  Defense
of the matter is being handled by the Company's insurance carrier.

  Cucamonga Litigation.  In 1996, the Company initiated legal action against
Cucamonga.  The dispute involved amounts owed to the Company under the terms of
its lease of Fontana Union Water stock to Cucamonga.  The dispute arose out of a
change made by the Metropolitan Water District in its water rates and rate
structure effective July 1, 1995.  After a trial on the matter, the San
Bernardino County Superior Court ruled that the lease rate had been discontinued
effective July 1, 1995.  Thus, the parties are required to negotiate in good
faith a substitute lease rate as provided under the terms of the lease with
Cucamonga.  The parties have been unable to negotiate a new substitute rate.
Thus, the matter will be resolved in a reference proceeding which is like a
private trial.

  Apollo Wood Litigation.  In late 1997, the Company and two individual officers
of the Company were served with a complaint brought by Apollo Wood Recovery,
Inc. in San Bernardino Superior Court seeking unspecified damages, but which are
estimated to exceed $100,000.  The plaintiff is a tenant on the Company's Mill
Site Property.  In summary, the complaint alleges that the Company and two
officers of the Company falsely represented the status of the permitting of the
property on which Plaintiff operates its business, committed fraud, interfered
with the plaintiff's business, engaged in unfair trade practices and other
similar causes of action.  The Company believes the lawsuit is without merit and
is vigorously defending such lawsuit.  (Apollo Wood Recovery, Inc. v. Kaiser
Ventures Inc., Terry L. Cook, Lee Redmond, Apollo Wood & Metal Recycling Ltd.,
Shirley Isom Construction Company, Troy Isom and Does 1 through 40, San
Bernardino Superior Court, Case No. SCN 42863.)

  Mushegain Litigation.  The Company was named as a defendant in Federal court
litigation alleging the improper deposit of materials on property owned by
plaintiffs.  [Mary Mushegain, as Trustee of the 

                                       80
<PAGE>
 
Mushegain 1988 Family Trust dated February 7, 1989, as Trustee of the Mushegain
Survivor's Trust dated January 9, 1996, as Trustee of the Mushegain
Grandchildren's Trust dated January 9, 1996, and as Trustee of the Mushegain
Marital Trust dated January 9, 1996 Plaintiffs, vs. The California Speedway
Corporation; a Delaware corporation, et al; United States District Court,
Central District of California; Case No. 98-6786 ER (Mex)]. In summary, the site
in question was leased to a company that has ceased business operations. This
bankrupt company, pursuant to a contract with The California Speedway
Corporation, performed wood recycling work in connection with the demolition of
the structures on the property acquired by The California Speedway Corporation.
It is alleged that wood and other materials, including some hazardous materials
such as the constituents of rail road ties, were eventually placed into trenches
on the property. The Company vigorously denies that it may have any
responsibility for any work performed by a contractor of The California Speedway
Corporation and is vigorously defending the litigation.

  Asbestos Suits.  The Company along with KSC are currently named in
approximately fifteen (15) active asbestos lawsuits.  The Company and KSC have
been previously named in other asbestos suits but for various reasons those
suits are not currently being pursued.  Most of the plaintiffs alleged that they
worked in ship yards in the Oakland/San Francisco, California area in the 1940's
and that KSC was in some manner associated with one or more shipyards or has
successor liability from another "Kaiser" entity.  Most of these lawsuits are
third party premises claims claiming injury resulting from exposure to asbestos
and involve multiple defendants.  The Company anticipates that it will be named
as a defendant in additional asbestos lawsuits.  All of the complaints are non-
specific.  As such it is not practical at this time to determine the true nature
and extent of the claims against the Company and KSC.  To date, several, but not
all, of the plaintiffs have agreed that they will not personally pursue the
Company, but they have been granted the right to pursue the Company's insurance
coverage, to the extent there is coverage.  The Company currently believes that
it does have insurance coverage for at least a portion of the claims and has
tendered these suits for defense.  The Company also currently believes that it
has various defenses to these claims, including the discharge granted to it in
connection with KSC's bankruptcy reorganization.  The KSC bankruptcy estate,
through KSC Recovery has been incurring defense costs, which should in large
part be reimbursed by insurance.  However, there currently is a dispute as to
the amount of insurance coverage, if any.  Asbestos litigation is an evolving
area of the law and the factual discovery with respect to many of these lawsuits
has not been completed.

  City of Ontario Litigation.  On February 27, 1996, the City of Ontario,
California served on the Company a complaint filed in San Bernardino County
Superior Court (City of Ontario v. Kaiser Ventures Inc., et al.; Case No. RCV
17334).  In sum, the complaint alleges that a plume or plumes containing organic
carbon, dissolved solids and mercury originating from the Company's Mill Site
Property due to activities of KSC and/or a former tenant of the Mill Site
Property have impacted one of the City of Ontario's water wells.  Ontario seeks
reimbursement for remedial costs, replacement of the allegedly impacted well and
replacement or improvement or refurbishment of related facilities.

  The Company challenged Ontario's ability to bring this litigation given the
KSC bankruptcy and the discharge granted to the Company.  In April, 1996,
Ontario brought a declaratory judgment action in the U.S. District Court for the
District of Colorado in Bankruptcy ("the U.S. Bankruptcy Court") against the
Company, (City of Ontario v. Kaiser Ventures Inc., Adversary Proceeding No. 96-
1215 MSK).  In the U.S. Bankruptcy Court action, Ontario in effect sought a
determination that the matters and damages alleged in its California lawsuit
were not discharged as a part of the KSC bankruptcy proceedings.

  The Company and the City reached a settlement concerning the matter before the
U.S. Bankruptcy Court which was approved by the U.S. Bankruptcy Court in
October.  Under the terms of the settlement, the Company has agreed to waive its
bankruptcy-related defenses to the City's prosecution of claims for groundwater
contamination caused by mercury or other priority pollutants.  In return, the
City agreed to dismiss the California litigation as to all claims related to
total dissolved solids, total dissolved carbons and sulfates, and to be bound by
the 1993 Settlement Agreement between Kaiser and the California 

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<PAGE>
 
Regional Water Quality Control Board. The City has informed the Company that its
recent well tests do not indicate the presence of mercury. However, the City
continues to assert that the Company is responsible for the impact of total
dissolved solids at the well. The City has not yet filed an amended complaint.
The Company and the City of Ontario are continuing to engage in informal
discovery and discussions. The Company currently believes it has numerous
defenses in the litigation.

Bankruptcy 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 "KSC Plan"), the Company established a 
subsidiary, KSC Recovery, 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. All litigation and bankruptcy administration costs are borne by KSC 
Recovery, which maintains a cash reserve from previous litigation and other 
recoveries to fund anticipated ongoing litigation and administration costs. All 
major remaining claims in the bankruptcy estate were settled in 1995, with 
completion of one major settlement occurring in 1996. Resolution of these claims
allowed for a distribution of cash and stock to most of the unsecured creditors 
of the KSC bankruptcy estate in the second quarter of 1996. Consistent with KSC 
Recovery's role solely as an agent of the former KSC creditors, the Company's 
consolidated statements of operations and cash flows do not reflect any of KSC 
Recovery's activities. Because of the minimum activities of the KSC bankruptcy 
estate, the Bankruptcy Court terminated its supervision over the estate in 
October 1996.

  From time-to-time, various other environmental and similar types of claims, 
such as the asbestos litigation mentioned above, that relate to KSC 
pre-bankruptcy activities are asserted against KSC Recovery and the Company. In 
connection with the KSC Plan, the Company, as the reorganized successor to KSC, 
was discharged from all liabilities that may have arisen prior to confirmation 
of the KSC Plan, except as otherwise provided by the KSC Plan and by law. 
Although the Company believes that in general all pre-petition claims were 
discharged under the KSC Plan, in the event any of these claims or other similar
claims are ultimately determined to survive the KSC bankruptcy, it could have a
material adverse effect on the Company.


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<PAGE>
 
Note 21.  QUARTERLY FINANCIAL DATA (Unaudited)

<TABLE>
<CAPTION>
                                                  First           Second           Third           Fourth 
                                                 Quarter          Quarter         Quarter          Quarter    
                                                 -------          -------         -------          ------- 
1998
 
<S>                                          <C>                <C>               <C>             <C>
Resource revenues.........................      $1,673,000        $3,066,000        $2,416,000      $2,718,000
                                                                                                
Income (loss) from operations.............      $ (371,000)       $1,113,000        $  586,000      $1,230,000
                                                                                                
Income (loss) before income tax provision.      $ (586,000)       $  854,000        $  332,000      $  875,000
                                                                                                
Net (loss) income.........................      $ (339,000)       $  491,000        $  189,000      $  891,000
                                                                                                
Earnings (loss) per share.................                                                      
 Basic....................................      $     (.03)       $      .05        $      .02      $      .08
 Diluted..................................      $     (.03)       $      .05        $      .02      $      .07
                                                                                                
1997                                                                                            
                                                                                                
Resource revenues.........................      $1,837,000        $3,221,000        $2,977,000      $1,971,000
                                                                                                
Income (loss) from operations.............      $ (112,000)       $1,288,000        $1,149,000      $ (134,000)
                                                                                                
Income (loss) before income tax provision.      $ (295,000)       $1,051,000        $  873,000      $ (110,000)
                                                                                                
Net (loss) income.........................      $ (174,000)       $  604,000        $  493,000      $  (75,000)
                                                                                                
Earnings (loss) per share.................                                                      
 Basic....................................      $     (.02)       $      .06        $      .05      $     (.01)
 Diluted..................................      $     (.02)       $      .06        $      .05      $     (.01)
                                                                                                
1996                                                                                            
                                                                                                
Resource revenues.........................      $2,017,000        $2,408,000        $2,323,000      $8,583,000
                                                                                                
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........................                                                      
 Basic....................................      $      .01        $      .03        $      .03      $      .17
 Diluted..................................      $      .01        $      .03        $      .03      $      .17
</TABLE>

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<PAGE>

                    KAISER VENTURES INC. AND SUBSIDIARIES 
 
          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, 1998
   ----------------------------
Allowance for losses in collection
of current accounts receivable.....         $      299,000          $       31,000         $       27,000         $      303,000
                                           ===============         ===============        ===============        =============== 
   Year Ended December 31, 1997                                                                                                  
   ----------------------------                                                                                                  
Allowance for losses in collection                                                                                               
of current accounts receivable.....         $      286,000          $       54,000         $       41,000         $      299,000
                                           ===============         ===============        ===============        =============== 
    Year Ended December 31, 1996
    ----------------------------
Allowance for losses in collection
of current accounts receivable.....         $      414,000          $          ---         $      128,000         $      286,000
                                           ===============         ===============        ===============        =============== 
</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 report revenues on
the basis of amounts Cucamonga is currently paying. The amounts for 1996 and
1997 above have been restated to remove the disputed amounts which had
previously been included in accounts receivable and the account receivable
reserve. The total amount of lease payments in dispute for the years ended
December 31, 1998, 1997, and 1996 are approximately $658,000, $488,000, and
$668,000, respectively.


(B)  Amount charged off during the year.

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