<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, 1997
                                      OR
           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                       Commission File Number:  0-18858

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

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

                          3633 E. Inland Empire Blvd.
                                   Suite 850
                              Ontario, CA  91764
                         -----------------------------

             (Address of principal executive offices and zip code)

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

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

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

                                                     Name of Each Exchange
           Title of Each Class                        on which Registered
      -----------------------------                 -----------------------
      COMMON STOCK ($.03 PAR VALUE)                 Nasdaq Stock Market(SM)

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 $51,203,719 based
upon the average of the bid and ask prices of registrant's Common Stock on the
Nasdaq Stock Market(SM) at March 20, 1998, or $10.875 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 20, 1998, 10,612,815 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 1998
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........................................................   29

Item 3.    LEGAL PROCEEDINGS.................................................   32

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY
            HOLDERS..........................................................   35

                                    PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND
            RELATED STOCKHOLDER MATTERS......................................   36

Item 6.    SELECTED FINANCIAL DATA...........................................   37

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS..............................   38

Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................   49

Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
            ON ACCOUNTING AND FINANCIAL DISCLOSURE...........................   49

                                   PART III

Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE
            REGISTRANT.......................................................   50

Item 11.   EXECUTIVE COMPENSATION............................................   50

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
            AND MANAGEMENT...................................................   50

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................   50

                                    PART IV

Item 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
            REPORTS ON FORM 8-K..............................................   51
</TABLE>

                                       i
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                                    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 FEDERAL, STATE, AND LOCAL
LAWS AND REGULATIONS ON THE COMPANY'S DEVELOPMENT ACTIVITIES; THE IMPACT OF
WEATHER ON THE COMPANY'S 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 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 11.51% 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 73% 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.

                                       1
<PAGE>

  In addition, the Company's financial position is enhanced by approximately
$113 million of federal net operating loss tax carryforwards ("NOLs"), as of
December 31, 1997, 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 $2.4 million of California net
operating loss carryforwards as of December 31, 1997. The federal NOL's expire
between the year 2000 through 2010 while the California NOL's expire between
year 2000 through 2002.

  The Company's 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 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 seeking additional growth opportunities,
primarily through strategic joint ventures or acquisitions. 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.

  To support the development of its current long-term projects and assets, the
Company is also 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. The Company anticipates that short-term property rentals and other
interim revenues will continue to decline as development of the remaining Mill
Site Property proceeds.

SUMMARY OF SIGNIFICANT DEVELOPMENTS IN 1997

  During 1997, a number of material 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. In
Management's opinion, three material events were particularly significant: (a)
the San Diego Court's ruling relative to the Landfill Project's environmental
impact report ("EIR"); (b) the filing of revised Form 13D's related to the
Company's two largest shareholders: the New Kaiser Voluntary Employee Benefit
Association ("VEBA") and the Pension Benefit Guarantee Corporation ("PBGC"); and
(c) the creation of a special committee by the Board of Directors to evaluate
strategic alternatives and transactions with respect to the Company and its
assets.

  In regard to the Landfill Project, MRC received the necessary land use and
environmental approvals from the Riverside County Board of Supervisors on
September 9, 1997. Subsequently, two separate legal actions were pursued by
opponents to the Eagle Mountain Landfill Project which argued that the
environmental impact report ("EIR") approved by Riverside County was defective.
The first action challenged the County's and MRC's assertion that the new EIR
satisfied the requirements of the July, 1994 decisions of San Diego County
Superior Court Judge Judith McConnell. The second action was the commencement of
a new lawsuit in Riverside County. The environmental challenges in the new
lawsuit were dismissed on December 16, 1997. However, with respect to the first
action, the San Diego County Superior Court issued, on December 31, 1997, a
tentative ruling that preliminarily concluded that the new EIR was deficient in
several areas. On February 17, 1998, the Court issued its final ruling. In its
final ruling, the Court reversed itself with regard to several items in its
tentative ruling which were initially

                                       2
<PAGE>

determined adverse to the Landfill Project. However, the Court still concluded
that the new EIR was deficient in two 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 "Municipal Solid Waste Management
Landfill Project."

  As a result of the Court's final ruling, the Company and MRC are currently
evaluating their available options with respect to the Landfill Project. These
options include, but are not limited to: (i) appealing the Court's decision;
(ii) taking the actions believed necessary to correct the deficiencies in the
EIR in compliance with the Court's decision; (iii) indefinitely postponing the
Landfill Project in some manner; or (iv) a combination of these or other
alternatives. 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. The Company
anticipates a final decision on what course of action will be taken by MRC and
the Company by mid-1998.

  In regard to the revised Form 13D's filed by VEBA and the investment advisor
of the PBGC, they disclosed that a Cooperation Agreement was entered into
between the PBGC's and VEBA's respective investment advisors. A copy of the
Cooperation Agreement was filed with the Form 13D's. The VEBA and PBGC own 33%
and 20% of the Company's stock respectively. The Cooperation Agreement provides,
among other things, that the parties are considering pursuing one or more
strategies involving the Company and its assets. Such alternatives include
distributing the PMI stock, securitizing and/or distributing the payments from
the Cucamonga Lease, pursuing the full development and operation of the Eagle
Mountain Landfill Project, selling or merging the Company, or jointly selling
the Company stock owned by PBGC and VEBA.

  In addition, the Company's Board of Directors appointed 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 has retained outside legal counsel and the
investment banking firm of Merrill Lynch to assist it in its work.

  These events, as well as other events, such as the successful opening of TCS
on property formerly owned by the Company, are discussed in more detail in this
Report.

WATER RESOURCES

  Background.  Municipalities in Southern California traditionally have long
depended on the availability of water from Northern California and the Colorado
River for significant portions of their water supply. Heavy usage of and
competing demands for these traditional sources, however, have decreased the
reliability of these imported sources and forced municipalities to seek
alternative water supplies. In addition, it is increasingly expensive to obtain
and deliver these imported water supplies. As a result, locally available
Southern California water resources continue to be increasingly important and
valuable.

  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

                                       3
<PAGE>

Basin subsurface aquifer; and (iv) unadjudicated rights to a subsurface aquifer
accessed by a well at the base of Lytle Creek (Well No. 22).

  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.
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 1997 and 1996, the Cucamonga Lease generated $5.1
million and $4.5 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. The
agreed upon quantities of water paid for under the Cucamonga Lease cannot be
adjusted or modified except in certain limited circumstances.

  However, there are limited circumstances in which the amount of water can be
adjusted. As an example, in 1996, the agreed upon quantity of water from one
source of water, the Colton/Rialto wells, was temporarily reduced in accordance
with the terms of the Cucamonga Lease. Under the terms of the Cucamonga Lease,
Cucamonga pays the Company based upon a presumed annual production of 3,000 acre
feet from the Colton/Rialto wells through 1997 and beginning in 1998 and
thereafter 3,100 acre feet, provided that the water level in certain index wells
is above a certain level. This amount is a component of the 34,000 acre feet of
annual water described above. In the second quarter of 1996, the Company was
informed that the average water level in the index wells dropped below the
specified level thereby resulting in a reduction in production and the agreed
upon quantity under the Cucamonga Lease to a maximum of 920 acre feet. With this
reduction in production from the Colton/Rialto wells, the gross revenues to the
Company pursuant to the Cucamonga Lease declined in 1996 by approximately

                                       4
<PAGE>

$269,000. However, in the fourth quarter of 1996, the wells again began pumping
at their historical levels. Thus, revenues generated from the Rialto/Colton
wells during 1997 were again based upon an annual production of 3,000 acre feet.

  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. Agricultural pool
transfers were only 2,557 acre feet for the 1995/96 water year apparently due to
increased and more accurate reporting of water usage by the agricultural
interests during the year. For the most recent water year, the 1996/97 water
year, the agricultural transfer was 3,832 acre feet. For the 1997/98 water year,
it is anticipated that the agricultural pool transfer will be in the range of
3,500 to 4,000 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. Recent 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. Cucamonga asserted that the rate increases for the years 1995, 1996 and
1997 were substantially less than those asserted by the Company. 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 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 and 1997. Cucamonga asserted there was no
rate increase in 1996 and only a 1.5% increase in 1997, while the Company
believes that there would have been greater increases in the Cucamonga Lease
rate in 1996 and 1997 if the Cucamonga Lease is interpreted in accordance with
Company's understanding of the Cucamonga Lease. 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 in accordance
with the terms of the Cucamonga Lease. 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. After a five-day trial, the
Court concluded that the rate on which the Cucamonga Lease had been based was
discontinued effective July 1, 1995.

                                       5
<PAGE>

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 referred to arbitration. There is no specified
time period in which the new substitute rate must be established.

  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. The Company bills Cucamonga for the full amount it asserts it is
entitled to receive under the Cucamonga Lease, but has elected to create a
reserve for the amount in dispute. Therefore, water revenues are reported in the
amounts actually received from Cucamonga. Consequently, the recently announced
court decision does not affect the Company's 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 Fontana Union have
been closed because of contamination apparently originating from the Mid-Valley
Landfill owned by 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.  However, the Company
will closely monitor the situation to make sure that it is prepared to undertake
the activities necessary to protect itself from any revenue loss due to the
contamination of these two wells.

  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 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 11.51% 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. In March 1996, PMI became a publicly traded
company. PMI is traded on the Nasdaq National Market under the symbol "SPWY".

                                       6
<PAGE>

  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.

  On March 27, 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, excluding Homestead-Miami Speedway, promoted a total of 17 major racing
events at MIS, Nazareth, TCS and NCMS in 1997 and expects to promote a total of
19 major racing events at these speedways in 1998. Of the seventeen 1997 events,
11 were stock car races, 9 of which were sanctioned by National Association of
Stock Car Racing ("NASCAR"), 4 (including an Indy Lights Series event) were Indy
car races sanctioned by Championship Auto Racing Teams, Inc. ("CART"), and 2
were Craftsman Truck Series races sanctioned by NASCAR. NASCAR events promoted
by PMI in 1997 included 4 NASCAR races associated with the Winston Cup Series, 4
races associated with the NASCAR Busch Grand National Series, and 2 races
associated with the NASCAR Craftsman Truck Series.

  PMI's 1998 scheduled racing events at all of its facilities, excluding GPLB,
are as follows:

<TABLE>
<CAPTION>
         DATE                            RACE                               CIRCUIT                        FACILITY
<S>                      <C>                                   <C>                                 <C>
February 21              GM Goodwrench Service Plus 200        NASCAR Busch Grand National         North Carolina Speedway
February 22              GM Goodwrench Service Plus 400        NASCAR Winston Cup                  North Carolina Speedway
March 15                                                       PPG-Dayton Indy Lights              Homestead-Miami Speedway
March 15                 Marlboro Grand Prix of Miami          CART/Fed EX Championship            Homestead-Miami Speedway
                         Presented by Toyota
April 4                                                        NASCAR Slim Jim All-Pro             Homestead-Miami Speedway
April 4                  Florida Dodge Dealers 400             NASCAR Craftsman Truck              Homestead-Miami Speedway
April 25                                                       Kool, Toyota Atlantic Championship  Nazareth Speedway
April 26                                                       PPG-Dayton Indy Lights              Nazareth Speedway
April 26                 Bosch Spark Plug Grand Pix Presented  CART/FedEx Championship             Nazareth Speedway
                         By Toyota
May 2                    Auto Club 200                         NASCAR Winston West                 California Speedway
May 2                    IROC Round II                         IROC                                California Speedway
May 3                    California 500 Presented by NAPA      NASCAR Winston Cup                  California Speedway
May 16                                                         USRRC/F2000                         Homestead-Miami Speedway
May 17                                                         USRRC NTB Trans Am                  Homestead-Miami Speedway
May 17                                                         USRRC Can-Am GT                     Homestead-Miami Speedway
May 17                   First Union 200                       NASCAR Busch Grand National         Nazareth Speedway
May 17                                                         NASCAR Featherlite Modified Tour    Nazareth Speedway
June 13                  ARCA 200                              ARCA                                Michigan Speedway
June 13                  IROC Round II                         IROC                                Michigan Speedway
June 14                  Miller Lite 400                       NASCAR Winston Cup                  Michigan Speedway
July 12                                                        NASCAR Slim Jim All-Pro             Nazareth Speedway
July 12                  NAPA AutoCare 200                     NASCAR Craftsman Truck              Nazareth Speedway
July 18                  No Fear Challenge                     NASCAR Craftsman Truck              California Speedway
</TABLE>

                                       7
<PAGE>

<TABLE>
<S>                      <C>                                   <C>                                 <C>
July 18                                                        NASCAR Winston West                 California Speedway
July 19                  Kenwood Home & Car Audio 300          NASCAR Busch Grand National         California Speedway
July 25                  Detroit News 100                      PPG-Dayton Indy Lights              Michigan Speedway
July 26                  US 500 Presented by Toyota            CART/FedEx Championship             Michigan Speedway
August 15                Pepsi 200 Presented by DeVilbiss      NASCAR Busch Grand National         Michigan Speedway
August 16                Pepsi 400 Presented by DeVilbiss      NASCAR Winston Cup                  Michigan Speedway
October 31                                                     PPG-Dayton Indy Lights              California Speedway
October 31               ACDelco 200                           NASCAR Busch Grand National         North Carolina Speedway
November 1               Marboro 500 Presented by Toyota       CART/FedEx Championship             California Speedway
November 1               ACDelco 400                           NASCAR Winston Cup                  North Carolina Speedway
November 14                                                    NASCAR Goody's Dash                 Homestead-Miami Speedway
November 15                                                    NASCAR Slim Jim All-Pro             Homestead-Miami Speedway
November 15              Jiffy Lube Miami 300                  NASCAR Busch Grand National         Homestead-Miami Speedway
</TABLE>

  A complete discussion of PMI, its business and financial results, is found in
the Form 10-K Report for the year ended December 31, 1997 prepared and filed by
PMI.

  Total 1997 revenues for PMI, on a consolidated basis, were $109.8 million with
a net income of $16.4 million. After a fourteen percent (14%) increase in
average shares outstanding, 1997 earnings per share increased thirty two percent
(32%) from $.90 per share in 1996 to $1.19 per 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 1997 was $1,840,000
plus a management fee of $162,000, which ended in the first quarter of 1997.

  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
National Market System.

<TABLE>
<CAPTION>
1997                                  LOW                    HIGH
                                 -------------           -------------
          <S>                    <C>                     <C>
          Fourth Quarter                $24.38                  $33.88
          Third Quarter                 $32.50                  $34.58
          Second Quarter                $27.25                  $32.38
          First Quarter                 $25.00                  $30.75
</TABLE>

  On March 20, 1998, the range of the low and high reported bid price of PMI's
common stock were $31.38 and $33.00, respectively.

  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

                                       8
<PAGE>

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.

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 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 Sevine 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 1.  Business - Investment in PMI").  In
addition, as discussed in more detail below, 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.

                                       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>

  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 California Steel Industries ("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 with its plans to
redevelop the balance of the Mill Site Property.  After:  (i) completion of the
transactions with PMI; (ii) taking into account the land to be used for the
WVMRF; and (iii) the sale of one of the NAPA lots to an affiliate of Budway
Enterprises, Inc., the Company now owns approximately 629 acres (gross).
However, 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.

  The remaining Napa Lot, which constitutes approximately a 15 acre portion of
the Central Mill Site Property, and the WVMRF site, as discussed below, have
already received the entitlements and permits necessary for their 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
and the approximately 135 acres of property commonly referred to as the "East
Slag Pile" property.

  The Specific Plan application identified a wide variety of potential uses for
the property.  Possible uses include a rail-served distribution and commercial
park, an inter-modal rail truck distribution center, warehousing, 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.

  If development of the Kaiser Commerce Center occurs as provided in the
proposed Specific Plan, it will have a major impact on the local economy.  In an
economic study prepared by The Natelson Company, Inc. and released in the first
quarter of 1998, it is projected that over 9,500 permanent new jobs and
approximately $575 million per year in additional economic activity in San
Bernardino County will be generated by the project's full development, with
5,200 of those jobs created on site.  There are no assurances, however, that the
Kaiser Commerce Center will ultimately be approved for development as currently
proposed or as to the timing and scope of ultimate development.

  Separately and in addition to the permitting and entitlement process with the
County, the Company is working with the California Department of Transportation
and San Bernardino County to design and obtain approval for an improved
interchange at Etiwanda Avenue and the I-10 Freeway.  Such freeway improvements
near the Mill Site Property would also involve the realignment of at least one
existing street and the construction of other street improvements.

                                       11
<PAGE>

  As a result of additional technical studies and review, the entire entitlement
and permitting process is currently anticipated to be completed by the third
quarter of this year and involve an expenditure of approximately $1.5 million.
In addition, 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 approximately 405 (net) aces that comprise the Kaiser
Commerce Center contained limited areas with affected soils that require
remediation.

  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. 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 sought and
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.

  Development of Central Mill Site-Napa Lots and WVMRF site.  The portions of
the Central Mill Site Property still owned by the Company are one of the Napa
Lots (approximately 15 acres) and portions of the property on which the WVMRF is
to be expanded.  These parcels 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 ultimately developed into two industrial zoned, rail-
served lots. On September 30, 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. At closing, the Company received $1,500,000 in cash, less closing
adjustments. The balance of the purchase price of approximately $1,443,000 is
represented by a promissory note from the buyer. The note requires a payment of
approximately $554,000 in principal in nine equal monthly installments plus
interest at ten percent (10%) per annum with the remaining principal balance of
approximately $909,000 payable $25,000 per quarter plus interest at the same ten
percent (10%) rate. The note is secured by a lien on the property sold and by
the guarantee of Budway and one of its individual owners. The Company has
subordinated its note receivable to approximately $6.0 million in construction
and permanent financing for a warehouse and distribution center being built on
the property. Although the Company considers the sale to have been fully
consummated during 1997, generally accepted accounting principles 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 does have some impacted
soil stock piled on a portion of the lot. Once this soil is removed and
environmental clearance is received, the lot will be available for sale.

                                       12
<PAGE>

     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 of the
Central Mill Site 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 Mill Site tar pits 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 Properties
(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.  The principal amount of the note accrues interest at 1.5% over the
prime rate.  Principal payments of $60,000 plus accrued interest are to be made
quarterly with a balloon payment due on the fourth anniversary of the note, July
28, 1998.  The Company currently anticipates drawing on its existing credit
facility to repay the obligation on its due date.  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 two limited areas require further investigation and may
require limited remediation.  On the West End Property there are several older
metal warehouse buildings which are rented out to a variety of short term
tenants and which will need to be demolished as the redevelopment of the West
End Property proceeds.  In the second half of 1997, the Company began the
activities necessary to demolish one of the major remaining buildings,
Fabrication No. 3 Building, and related structures.  Such activities included
terminating leases with certain tenants in and surrounding the Fabrication No. 3
Building and conducting various environmental surveys.  The actual demolition of
Fabrication No. 3 Building and related structures commenced in the first quarter
of 1998.

  The Company also provides railroad switching services for many of the tenants
on this property.  The Company believes that the West End Property could be
redeveloped in a variety of ways, including a modern industrial, rail-served
distribution and commercial park, once the appropriate permitting and
entitlements are obtained and assuming that economic conditions justify the
redevelopment.  The development of the West End Property will involve
substantial expenditures for grading and infrastructure improvement.

  The Valley Boulevard Property has no known environmental remediation
requirements and can be easily redeveloped.  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.

                                       13
<PAGE>

  South Mill Site.  The South Mill Site consists of approximately 290 acres and
is debt free.  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 Company's hazardous
treatment plant was closed in mid-1994 in connection with the expiration of the
Company's contract to treat the waste of an adjacent property owner.  These uses
have historically provided the Company with interim revenues and positive cash
flow while waiting to begin redevelopment of the property.

  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 additional investigation will be
required. 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 5-10 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. As noted above, 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.
Depending upon the type of environmental remediation required, this property
could have potential commercial and recreational uses.

  In addition to the area of the East Slag Pile requiring remediation, the
Company applied to the California Environmental Protection Agency  Department of
Toxic Substance Control ("DTSC") to use up to approximately 6.5 acres of the
South Mill Site as a corrective action management unit ("CAMU") in which certain
types of impacted materials from other locations from the Mill Site Property
would be stored and 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 on the South
Mill Site that serves property historically owned by the Company or KSC.  The
Company currently provides sanitary sewer services to CSI, an adjoining
landowner, from its sewage treatment plant located on the northeastern end of
the South Mill site property for a total revenue in 1997 of $223,000.  CSI is
also obligated to pay a substantial portion of the operating costs of the sewer
treatment plant.

  In addition, pursuant to a Sewer Services Agreement, the Company has agreed to
provide sanitary sewer treatment services for the wastewater generated by the
property owned by The California Speedway Corporation. In consideration for such
services, The California Speedway Corporation pays to the Company an annual fee
of $88,800 in quarterly installments, which commenced in April 1997, adjusted
annually by increases in the consumer price index. The agreement also grants an
option to The California Speedway Corporation to purchase the Company's
wastewater treatment facility in certain circumstances such as if the Company
terminates the Sewer Services Agreement or the Company discontinues providing
sewer treatment services. In order to provide this sewer service, the Company

                                       14
<PAGE>

has expanded the capacity of and refurbished the treatment plant at a cost of
approximately $2.3 million. Approximately $988,000 of the $2.3 million of the
costs to upgrade the sewer treatment plant were paid by The California Speedway
Corporation.

  The sewer treatment facility also currently serves the West Valley MRF and is
anticipated to serve the former Mill Site as it is developed if alternatives are
not otherwise available on a cost effective basis.

  Completion of the improvements to the sewer treatment facility, totaling
approximately $213,000 will be undertaken in 1998.

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, the phased
remediation was originally scheduled to be completed by July 1998.  However, in
late 1997, the Company was granted a seven (7) year extension to complete its
required obligations under the Consent Order.  The Consent Order, as amended,
provides for a 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 1997, 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 the site of the WVMRF, investigation of the
sewer treatment facility and adjacent areas, investigation of buildings planned
for demolition for such items as asbestos containing materials and lead based
paint, and preparation of a draft supplemental groundwater study.  The Company
also undertook preliminary investigations of available and alternative
technologies for remediation of the tar pits located on the Central Mill Site
and the landfill in the East Slag Pile.

  In addition, the Company expended considerable effort in seeking approval for
a CAMU with the DTSC.  The CAMU was approved by the DTSC in February 1998.  The
CAMU will be 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 will be used for the on-site disposal of affected soils and materials from
the balance of the Mill Site Property.  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.  In 1997, a draft supplemental ground water study was
furnished to the DTSC for its review and comment.  It is currently anticipated
that the DTSC and the Company will agree in 1998 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
the on property owned by TCS, i.e., the Central Mill Site.  Initial results from
these two test wells were positive for the Company in that they did not indicate
any groundwater contamination that would require remediation.

  In addition, the Company previously settled certain obligations of groundwater
contamination with the California Regional Water Quality Control Board.  The
settlement required a $1.5 million cash

                                       15
<PAGE>

payment by the Company, which was made in February 1994, and the contribution of
1,000 acre feet of water annually for 25 years to a water quality project. These
water rights are unrelated to those leased to Cucamonga. In 1995, the Company
contributed 18,000 acre feet of its water in storage thus, satisfying the first
18 years of its obligation.

  The Company's cost for investigation, remediation, site cleanup, and all other
environmental related activities for 1997 totaled approximately $1.5 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 are a number of smaller environmentally-related Mill Site projects
such as disposing inactive PCB transformers and  removing or containing of some
asbestos containing materials, based on currently know information, the major
outstanding environmental issues to be addressed that will likely involve
material expenditures 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) remediation of the sewer treatment plant, as appropriate;
(iv) additional groundwater monitoring including groundwater related items; (v)
completion of the above described CAMU; and (vi) investigation and possible
remediation of two limited areas 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 $20 million and $31 million (i.e.,
the original high range of the estimate of approximately $32 million less 1997
expenditures), 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 capping alternative can be used for the East Slag Pile
waste management unit on the East Slag Pile and the tar pits parcel and that the
CAMU can accept all the impacted soil currently scheduled for deposit into the
CAMU.  As of December 31, 1997, the total short-term and long-term environmental
remediation liability reflected on the Company's balance sheet was approximately
$30.7 million, the high end of the 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 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 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 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.  In February 1996, the City of Ontario,
California served a complaint on the Company alleging

                                       16
<PAGE>

that the Company is liable for environmental contamination of one of its
municipal wells. See "Part I, Item 3. Legal Proceedings."

EAGLE MOUNTAIN TOWNSITE

  The Eagle Mountain Townsite, which is owned debt free by Kaiser 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.  In order to redevelop the Eagle
Mountain Townsite, the Company has filed a Specific Plan with the County of
Riverside.  The Townsite Specific Plan is included in the processing of the
Landfill Project.

  If the land exchange with the United States Bureau of Land Management (the
"BLM") is completed (see page 27 "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.  In 1989, the California legislature enacted
legislation, AB 939, which currently requires all municipalities to recycle or
divert 25% of their solid waste streams from landfills by the year 1995 and 50%
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.  An alternative to these requirements is the 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 1989 to construct and operate a rail-served regional solid waste
transfer station and MRF to be located on approximately 30 acres of the Central
Mill Site (the "WVMRF").  From 1989 through 1996 Burrtec and the Company secured
the necessary permits and entitlements to build and operate a MRF and
unsuccessfully sought to be integrated into San Bernardino County's Municipal
waste system.

                                       17
<PAGE>

  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 WVMRF.  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 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
equipped, at a total cost of approximately $10.3 million, in the last half of
1997.  It became operational on a limited basis in late October 1997 and became
fully operational as of January 1998.  The WVMRF currently receives and
processes approximately 800 to 1,000 tons per day of non-hazardous commercial
and municipal solid waste.  Phase 1 of the WVMRF is permitted to receive and
process up to 2,000 tons per day (six days a week) of solid waste.  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.

  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 tax-exempt financing transaction represented by the
Bonds, which effectively closed on June 25, 1997, are limited obligations of the
Authority payable solely from and 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").  Neither the faith and credit nor the taxing power of the State
of California or any political subdivision thereof is pledged to the payment of
the principal or interest on the Bonds.  The Bonds are backed by a letter of
credit issued by Union Bank.  Pursuant to a Guaranty Agreement with

                                       18
<PAGE>

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. Fitch
Investors Service rated the Bonds upon issuance as "AA-/F-1+."

  The interest rate for the Bonds varies weekly and has averaged approximately
3.5% per annum since inception.  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.
Beginning in 1998, the West Valley MRF, LLC is required to redeem $100,000 in
principal amount of the Bonds with the annual redemption increasing to a maximum
of $940,000 in the year 2011.

  West Valley MRF, LLC and Union Bank have 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 recently
asserted that the WVMRF's current operations are in violation of the MRF's
conditional use permit because much of the waste processed at the WVMRF is
deposited into Orange County, California landfills. One of the purported
conditions in the WVMRF's conditional use permit states that the residue from
the MRF is to be deposited into San Bernardino County landfills until November
23, 1998. West Valley MRF, LLC believes that this purported condition is invalid
and not enforceable for a variety of reasons. However, if upheld, the violation
of such condition could lead to the revocation of the conditional use permit
under which the WVMRF operates. San Bernardino County has initiated discussions
with the West Valley MRF, LLC to determine if there can be a mutually acceptable
arrangement pursuant to which the WVMRF can be integrated into the County's
landfill system without adversely impacting the economics of the WVMRF.
Litigation could result if these negotiations do not reach a mutually acceptable
conclusion.

  Competition.  Although other entities have proposed to develop MRFs that would
serve the same broad geographic area as that of the Mill Site MRF, 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 in the WVMRF.

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

                                       19
<PAGE>

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 develop 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 73% 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 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. BFI also agreed to leave in place certain financial assurances
associated with the permits that had been granted to MRC through August 1, 1996.
Those financial assurances were never used.

                                       20
<PAGE>

  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 December 31, 1997, a total of $10.8 million
has been raised by MRC, with Kaiser contributing approximately $8.1 million of
that amount. Due to the uncertainty associated with the Landfill Project, the
Company is evaluating its continuing investment in MRC. In this regard, the
Company has agreed to advance funds to MRC for a limited period in 1998 pending
the Company's determination, in light of the San Diego County Superior Court's
recent ruling, of what course of action to pursue with regard to the Landfill
Project. It is anticipated that the initial 1998 advance will total up to
approximately $900,000 and that the Company may invest additional funds in MRC
during 1998 depending upon what course of action the Company may ultimately
decide to pursue.

  MRC continues to pursue other 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.

  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

                                       21
<PAGE>

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.  This rent was $200,000 per month during 1994 and was originally
scheduled to increase to $300,000 a month in December 1995.  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.

  Monthly        Average            % Fee              Net              # Days
  Royalty     =   Daily      X   Payable to   X      Tipping     X        in
  Payment        Tonnage           Kaiser          Fee Per Ton        Operation

<TABLE>
<CAPTION>
             Average
         Daily Tonnage/1/                         Tipping Fee Percentage Payable to Kaiser
----------------------------------     --------------------------------------------------------
<S>                                    <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

                                       22
<PAGE>

perceived landfill capacity shortages in areas, pending closure deadlines and
partly as a result of 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 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.

  Through the first half of 1994, MRC was making substantial progress in
obtaining the necessary permits to commence construction of the Landfill
Project.  As of June 1, 1994, 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 has 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.

                                       23
<PAGE>

  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 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, 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-Return to Writ.  After the September, 1997 approval of the
EIR, the litigation with respect to the EIR resumed.  The state litigation
surrounding the Landfill Project has two subparts: the "return to the writ"
previously issued by the San Diego Superior Court and a newly filed lawsuit
which is discussed in more detail below.  As noted above, in 1994, the San Diego
Superior Court ruled that the EIR for the Landfill Project approved by Riverside
County in November 1992 was defective in eight areas.  This resulted in the
issuance of a writ (a form of legal document) ordering Riverside County to
comply with the court's decisions and the California Environmental Quality Act
("CEQA"), which is the statutory basis for the preparation and evaluation of an
EIR.  The County and MRC have sought to comply with the court's decisions and
the writ by preparing a new EIR and completing the entire evaluation and
political process again.  This culminated in the final approval of the EIR and
related land use approvals by Riverside County on September 9, 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 Eagle Crest Energy Company ("ECEC").  On October 20,
1997, the San Diego Superior Court entered an order discharging the original
objections of ECEC.  The remaining original project opponents maintain that MRC
and the Company failed to correct in the new EIR any of the deficiencies found
to exist in the 1992 approved EIR.  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
decisions.

                                       24
<PAGE>

  On February 17, 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.  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 Joshua Tree National 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.

  State Litigation-New Lawsuit.  Under CEQA, participants in the administrative
and political process have the ability to commence litigation with regard to an
EIR within thirty days after the approval of the EIR.  Several project opponents
did file a new lawsuit in Riverside County on October 10, 1997.  The plaintiffs
in this new litigation are generally the same plaintiffs as in the lawsuit
commenced in 1992 with a few exceptions.  Notably, ECEC and the City of
Coachella were not plaintiffs in the new lawsuit.  There was only one new
plaintiff, the Center for Community Action and Environmental Justice, a local
environmental group originally organized to address environmental issues
associated with the String Fellows acid pits located in Riverside County.

  The claims made in the petition were fairly typical of a CEQA lawsuit.  The
only non-CEQA claim is a claim that the Development Agreement with Riverside
County violates California Proposition 218, an amendment to California's
Constitution.  Proposition 218 generally requires a vote of taxpayers if a new
tax is levied by a governmental or quasi-governmental entity.

  On December 19, 1997, the environmental claims in the new Riverside County
lawsuit were dismissed because the plaintiffs failed to timely commence the
litigation.

  Evaluation of Alternatives.  As a result of Judge McConnell's final ruling,
the Company and MRC are evaluating their available alternatives with respect to
the Landfill Project.  These alternatives include, but are not limited, to:  (i)
appealing the Court's decision in whole or in part; (ii) taking the actions
believed necessary to correct the deficiencies the Court found to exist in the
EIR; (iii) postpone or terminate the Landfill Project; or (iv) a combination of
these or other alternatives.  The Company's and MRC's ultimate course of action
will depend upon a number of factors such as the length of time to accomplish
any alternative, the likelihood of success, the amount of and availability of
funds necessary to accomplish a particular alternative, and the anticipated
marketability of the Landfill once permitted.  Depending upon the course of
action ultimately selected by the Company and MRC, there could be a material
adverse impact to the financial statements of the Company, including a write
down of the Company's investment in MRC to the lower of cost or fair market
value.  A final decision on what course of action will be taken by MRC and the
Company should be made by mid-1998.

  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

                                       25
<PAGE>

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>

  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

                                       26
<PAGE>

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.

  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 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.

                                       27
<PAGE>

  The BLM is the lead Federal agency for the EIS.  The National Parks Service
("NPS") has been a cooperating agency for the EIS.  As noted above, 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.  Approval commenced a forty-five (45) day protest period during which
opponents to the proposed land exchange may raise objections.  Objections were
received and we understand that responses are currently being prepared by the
BLM.  The Company currently anticipates a final decision by the BLM on the land
exchange and the rights-of-way during the second quarter of 1998.

  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.

  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 18 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 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. and the Santa Fe Railway Company, Inc.;
and (ii) Mesquite Regional Landfill to be developed in Imperial County by a
partnership including Western Waste Industries 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 several 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 EIR's required. The Rail
Cycle project is also contingent upon the approval of a business tax by the
voters, which has failed once.

  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.

                                       28
<PAGE>

  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.  Within the last year, 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.  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 20, 1998, Kaiser had 25 full-time and 2 part-time employees.  In
addition, as of March 20, 1998, MRC, the Company's subsidiary, had 6 full-time
employees.


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 also maintains offices on the
Mill Site Property, at the Eagle Mountain site and in Denver, Colorado.  MRC
leases an office in Palm Desert, California for a term that expires in 1998, 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

                                       29
<PAGE>

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 9,550 acres and holds 1,800 acres in fee simple.  In addition,
the Company and BLM are working toward a land exchange.  See "Part I, Item 1.
Business" 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.  As a part of its Record of Decision the
BLM issued a new railroad right-of-way to the Company.  However, with the
decision of the BLM to reconsider its Record of Decision, the new railroad
right-of-way is currently considered still pending.  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 with the exception of the West End
and Valley Boulevard parcels, which total approximately 282 acres (gross).  The
West End and Valley Boulevard parcels are subject to an outstanding loan with an
approximate principal balance of $5,102,000.  Located on the Mill Site Property
is extensive infrastructure, including, water and sewage treatment facilities,
and several old single-story office, storage and industrial buildings.  However,
all the buildings previously on the Central Mill Site Property have been
demolished as part of the development of TCS.  Various buildings and other
improvements are also being demolished on the West End.  The Company has
historically had a number of short-term lease arrangements with unaffiliated
entities for portions of this property.

  There is one active deep water well on the property, with capacity
significantly in excess of the current water needs for the property.  Another
deep water well formerly owned by the Company is located on the property
acquired by The California Speedway Corporation, although it was taken out of
service due to the development of TCS.  The Company's remaining water 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

                                       30
<PAGE>

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. In addition, the Company currently has rights to approximately 5,500
acre-feet of water in storage, effective as of December 1997. 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 satisfies
the Company's obligation under the settlement agreement for the first 18 years.

  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 "Item 1.  Business - Mill Site
Environmental Matters," the Company undertook significant remediation activities
in 1997.  As a result of the Company's experience in remediating the limited
portion of the motorsports complex and other areas requiring remediation, the
Company is evaluating other alternatives for the remediation of the remaining
impacted areas of its property.  See "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 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 "Item 1.  Business - Water Resources." See "Item 3 - Legal
Proceedings."

                                       31
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

  The Company, in the normal course of its business, is involved in various
claims and legal proceedings.  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 three separate 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. 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 Company and
MRC are now evaluating their alternatives with respect to the Landfill Project.
For a more extensive discussion of this litigation, please see "Municipal Solid
Waste Management - Landfill Project - State Litigation-Return to Writ."

  In addition to the "return to writ" litigation before Judge McConnell, a
separate lawsuit challenging the validity of the new EIR was filed in Riverside
County.  The environmental challenges in this lawsuit were dismissed in December
1997.

  Warburton Litigation.  The Company, KSC and KSC Recovery were named or became
cross-defendants in certain litigation in the U.S. Federal District Court for
the District of Northern California (Case No. C-93-1114 CW) commenced by IMACC
Corporation ("IMACC") against Dorothy Warburton ("Warburton") and others seeking
a determination of liability, contribution and indemnification for the costs of
environmental remediation for two sites that had been used at one time by IMACC
in conjunction with its barrel reconditioning business.  Warburton is the owner
of the sites in question.  At one time, KSC, through a wholly owned subsidiary,
owned the business now operated by IMACC.  Certain other Warburton family
defendants are claiming that they should be indemnified by KSC's subsidiary or
by the Company for actions they took while officers of the KSC subsidiary.  A
settlement was reached in the litigation with respect to the environmental
claims, which required payment of less than $100,000 by the Company and by KSC
Recovery.  The Company's cash contribution to the settlement will be immaterial.
While there was a tentative settlement of the environmental matters (which has
now been finalized), a trial was held in November 1996, relating to the
indemnity claims and related matters.  The Court had previously ruled that
either the Company or KSC was the alter ego of KSC's subsidiary, Myers Drum
Company.  The Court also subsequently ruled that in these particular
circumstances, the request for indemnification did not rise to the level of
being a claim in bankruptcy at the time of the bankruptcy and thus could not be
discharged. With the announcement of the Court's decision, there remains a
dispute among the parties over the award of attorneys' fees. Two of the estates
claim that the Company and IMACC jointly owe them approximately $1.7 million in
attorneys fees and IMACC believes it is in turn entitled to attorneys' fees.
Even if the Company should be found liable for the attorneys' fees, which it
vigorously contests, IMACC is obligated to indemnify the Company for all such
amounts. Since the Company believes it has full indemnification coverage from
IMACC, no provision for any potential loss has been made in the accompanying
financial statements.

                                       32
<PAGE>

  Theft Related Litigation.  The Company and certain of its subsidiaries are
defendants in three separate lawsuits related to alleged thefts of items from
tenants or users of sites formerly leased on the West End Property. The alleged
basis of each lawsuit is that the Company failed to provide proper security
resulting in a breach of contract and negligence by the Company by allowing
theft to occur. The Company believes it has numerous defenses to each of these
litigation matters.  Defense of each matter has been tendered and accepted by
the Company's insurance carrier although the Company is paying defense costs in
excess of those paid by the carrier.  If the Company should be found negligent
in any of these cases, insurance coverage may be available for any damages
awarded.  If the Company is found to have breached a contract, insurance
coverage may not be available.  The Company is vigorously defending each
lawsuit.

  Johnson Machinery, Inc. is the plaintiff in one of the three lawsuits in which
it is alleged that the Company is liable for the theft of equipment or other
items from land leased by the Company.  Johnson Machinery claims that there was
a theft of equipment with a value of approximately $1.2 million from a warehouse
on the West End Property. (Johnson Machinery, Inc. v. Lusk/Kaiser West End Joint
Venture et al. - San Bernardino County Superior Court: Case No. RCV 23757).

  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).

  In February 1998, the Company was served with a complaint alleging that the
Company, certain subsidiaries of the Company and others are liable for
approximately $1.8 million paid by Nippon Fire & Marine Insurance Co., Ltd. to
Toshiba America Information System, Inc. as a result of the theft of a load of
lap top computers from a semi-truck owned by PST Vans a former tenant on the
West End Property.  (Nippon Fire & Marine Insurance Co., Ltd., a corporation,
and Toshiba America Information System, Inc. v. PST Vans, Inc., a corporation;
PST Van Line, Inc. a corporation; Burns International, Inc., a corporation;
Burns International Security Services, Inc., a corporation; Borg-Warner Security
Corporation, a corporation; Kaiser Steel and Land Development, Inc., a
corporation; Kaiser Ventures Inc., a corporation; Kaiser Resources Inc., a
corporation; Lusk-Kaiser West End Joint Venture, a business entity (Case No.
CV97-9558 CBM (VAPx)).

  Apollo Wood Litigation:  On November 11, 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.)

  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
                                       33
<PAGE>

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 five-day trial on the matter in March 1998, 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. For more detailed information, please see "Water Resources -
Lease to Cucamonga County Water District."

  Asbestos Suits.  The Company along with KSC are currently named in
approximately ten 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, this 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 Regional Water
Quality Control Board. The City has not yet filed an amended complaint. The
Company and the City of Ontario are engaging in informal discovery and
discussions. The Company currently believes it has numerous defenses in the
litigation.

                                       34
<PAGE>

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.

                                       35
<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 National Market
System 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 National Market System.


<TABLE>
<CAPTION>
                                                                       Low               High
                                                                       ---               ----
                 <S>                                                <C>              <C>
                 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

                 1996:
                 Fourth quarter..............................       $     8.25       $    10.00
                 Third quarter...............................       $     8.75       $     9.50
                 Second quarter..............................       $     9.38       $    12.75
                 First quarter...............................       $    11.00       $    13.13
</TABLE>

  As of March 20, 1998, there were 2,310 holders of record of the Company's
Common Stock.

  As of March 20, 1998, 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 and does not
intend to declare dividends on its Common Stock in the foreseeable future.  Any
future decisions by the Company to pay cash dividends will depend upon its
growth, profitability, financial condition and other factors the Board of
Directors may deem relevant.  The Company presently intends to retain its
earnings to finance the development and expansion of its business and for use in
connection with future acquisitions.

                                       36
<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:                   1997          1996          1995          1994           1993
                                                   ----          ----          ----          ----           ----
<S>                                            <C>           <C>           <C>           <C>            <C>
Total revenues...............................   $10,006,000   $15,331,000   $11,053,000   $12,471,000    $10,591,000

Costs and expenses...........................     7,815,000     7,066,000     7,938,000     8,593,000      8,144,000
                                                -----------   -----------   -----------   -----------    -----------

Income from operations.......................     2,191,000     8,265,000     3,115,000     3,878,000      2,447,000

Net interest expense (income)................       672,000       819,000       665,000      (155,000)      (466,000)
                                                -----------   -----------   -----------   -----------    -----------

Income before income tax provision
 and extraordinary loss......................     1,519,000     7,446,000     2,450,000     4,033,000      2,913,000

Taxes currently payable......................        43,000        92,000           ---       125,000         50,000
Deferred tax expense.........................        74,000       840,000       721,000           ---            ---
Deferred tax expense credited to equity......       554,000     3,945,000       335,000     1,621,000      1,171,000
                                                -----------   -----------   -----------   -----------    -----------

Income before extraordinary loss.............       848,000     2,569,000     1,394,000     2,287,000      1,692,000

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

Net income...................................   $   848,000   $ 2,569,000   $ 1,394,000   $    54,000    $ 1,692,000
                                                ===========   ===========   ===========   ===========    ===========
Earnings per share
 Before extraordinary loss
  Basic......................................   $       .08   $       .24   $       .13   $       .21    $       .16
  Diluted....................................   $       .08   $       .24   $       .13   $       .21    $       .16
 Net Income
  Basic......................................   $       .08   $       .24   $       .13   $       .01    $       .16
  Diluted....................................   $       .08   $       .24   $       .13   $       .01    $       .16

Basic Weighted average
number of shares outstanding.................    10,536,457    10,485,943    10,456,353    10,435,878     10,365,163

Diluted Weighted average
number of shares outstanding.................    10,740,357    10,729,645    10,653,950    10,671,154     10,604,122
</TABLE>

<TABLE>
<CAPTION>
SELECTED BALANCE SHEET DATA
AS OF DECEMBER 31:                                 1997           1996           1995          1994           1993
                                                   ----           ----           ----          ----           ----
<S>                                            <C>            <C>            <C>           <C>            <C>
Cash, cash equivalents and
 short-term investments......................  $  4,330,000   $  8,482,000   $ 10,937,000  $  6,829,000   $ 15,922,000
Working capital..............................    (4,685,000)    (1,240,000)     2,821,000    (3,567,000)    11,420,000
Total assets.................................   139,265,000    134,067,000    126,803,000   114,350,000    109,014,000
Long-term debt...............................     8,982,000      8,102,000      5,342,000     5,700,000            ---
Long-term environmental......................    24,673,000
 remediation reserves........................                   26,466,000     32,176,000    28,439,000     34,537,000
Stockholders' equity.........................    86,204,000     81,448,000     68,697,000    66,802,000     66,664,000
</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, 1997, were approximately $113
    million and $2.4 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 70.

                                       37
<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 11.51% interest in Penske Motorsports, Inc. ("PMI"), a publicly-
traded professional motorsports company that has developed the California
Speedway ("TCS") on land acquired from the Company; (iii) approximately a 73%
interest in Mine Reclamation Corporation ("MRC"), the developer of the Eagle
Mountain Landfill Project (the "Landfill Project"); (iv) 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 1997

  During 1997, a number of material 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. In
Management's opinion, three of the material events were particularly
significant: (a) the San Diego Court's ruling relative to the Landfill Project's
environmental impact report ("EIR"); (b) the filing of revised Form 13D's
related to the Company's two largest shareholders: the New Kaiser Voluntary
Employee Benefit Association ("VEBA") and the Pension Benefit Guarantee
Corporation ("PBGC"); and (c) the creation of a special committee by the Board
of Directors to evaluate strategic alternatives and transactions with respect to
the Company and its assets.

  In regard to the Landfill Project, MRC received the necessary land use and
environmental approvals from the Riverside County Board of Supervisors on
September 9, 1997.  Subsequently, two separate legal actions were pursued by
opponents to the Eagle Mountain Landfill Project which argued that the
environmental impact report ("EIR") approved by Riverside County was defective.
The first action challenged the County's and MRC's assertion that the new EIR
satisfied the requirements of the July, 1994 decisions of San Diego Superior
Court Judge Judith McConnell.  The second action was the commencement of a new
lawsuit in Riverside County.  The environmental challenges in the new lawsuit
were dismissed with prejudice on December 16, 1997.  However, with respect to
the first action, Judge McConnell of the San Diego Superior Court issued, on
December 31, 1997, a tentative ruling that preliminarily concluded that the new
EIR was still deficient in several areas.  On February 17, 1998, the Court
issued its final ruling.  In its final ruling the Court reversed itself with
regard to several items in its tentative ruling that were initially determined
adverse to the Landfill Project, but the Court still concluded that the new EIR
was deficient in two areas.  The Court's two remaining areas of concern involve
the project's impacts on the threatened desert tortoise and Joshua Tree National
Park.  For more detailed information on this matter, please see "Municipal Solid
Waste Management Landfill Project."

  As a result of the Court's final ruling, the Company and MRC are currently
evaluating their available options with respect to the Landfill Project.  These
options include, but are not limited to:  (i) appealing the Court's decision;
(ii) taking the actions believed necessary to correct the deficiencies in the
EIR in

                                       38
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

compliance with the Court's decision; (iii) indefinitely postponing the Landfill
Project in some manner; or (iv) a combination of these or other alternatives.
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. A final decision on what course of
action will be taken by MRC and the Company should be made by mid-1998.

  In regard to the revised Form 13D's filed by VEBA and the investment advisor
of the PBGC, they disclosed that a Cooperation Agreement was entered into
between the PBGC's and VEBA's respective investment advisors.  A copy of the
Cooperation Agreement was filed with the Form 13D's.  The Cooperation Agreement
provides, among other things, that the parties are considering pursuing one or
more strategies involving the Company and its assets.  Such alternatives include
distributing the PMI stock, securitizing and/or distributing the payments from
the Cucamonga Lease, pursuing the full development and operation of the Eagle
Mountain Landfill Project, selling or merging the Company, or jointly selling
the Company stock owned by PBGC and VEBA.

  In addition, the Company's Board of Directors appointed 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 has retained outside legal counsel and the
investment banking firm of Merrill Lynch to assist it in its work.

  These events, as well as other event, are discussed in more detail in Part I
of this Report.

PRIMARY REVENUE SOURCES

ONGOING OPERATIONS

  The Company's revenues from ongoing operations are generally derived from the
development of the Company's long-term projects.  Revenues from water resources
represent payments under the lease of the Company's interest in Fontana Union to
Cucamonga County Water District ("Cucamonga").  Property redevelopment revenues
primarily reflect revenues from long-term redevelopment activities at the Mill
Site property, 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.

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.

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

                                       39
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

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 positive (income) in the second and third
quarters and negative (loss) in the first and fourth quarters.

RESULTS OF OPERATIONS

ANALYSIS OF RESULTS FOR THE YEARS ENDED DECEMBER 31, 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 land sale
shows an increase of 17 %, or $1,195,000, to $8,359,000 from $7,164,000.
Revenues from ongoing 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

                                       40
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

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 reserve the full amount in dispute and report revenues on the basis
of amounts actually received from Cucamonga. The total amount of lease payments
in dispute as of December 31, 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 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
tenants ($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 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.

  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).

                                       41
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

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 ($73,000), depreciation expense relating to the newly
completed railroad and sewer plant improvements at the Mill Site ($59,000), and
legal costs associated with both the CCWD water lease rate dispute and Mill Site
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.

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

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

                                       42
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES


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

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

INTERIM ACTIVITIES
   Lease, service and other...........................          1,796,000           2,719,000                (34%)
   Asset sales........................................                ---           2,200,000               (100%)
                                                              -----------         -----------               -----

   TOTAL INTERIM ACTIVITIES...........................          1,796,000           4,919,000                (63%)
                                                              -----------         -----------               -----

   TOTAL RESOURCE REVENUES............................        $15,331,000         $11,053,000                 39%
                                                              ===========         ===========               =====

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

   Total resource revenues............................                100%                100%
                                                              ===========         ===========
</TABLE>

  Resource Revenues.  Total resource revenues for 1996 were $15,331,000,
compared to $11,053,000 for 1995.  Revenues from ongoing operations increased
121% during the year to $13,535,000 from $6,134,000 in 1995, while revenues from
interim activities declined 63% to $1,796,000 from $4,919,000 in 1995.  Revenues
from ongoing operations as a percentage of total revenues increased to 88% in
1996 from 55% in 1995; however, excluding both the Mill Site land sale in 1996
and the gain on sale of water rights to CSI in 1995, ongoing operations
represented 80% and 69% of total revenues in 1996 and 1995, respectively.

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

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

  Income from equity method investments increased to $1,539,000 for 1996
compared to $162,000 for 1995 as a result of an increase in the amount of
project service fees paid by PMI ($488,000) plus the Company's 12.29% (10.56%
through November 30, 1996) share of PMI's net income, net of expenses,

                                       43
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

from April 1, 1996 ($889,000). The Company is recording its investment in PMI on
the equity method and began recording its share of PMI's net income concurrent
with conversion of the Company's preferred stock into common stock at the end of
the first quarter of 1996.

  Mill Site land sale revenues 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 or
approximately 12.29%.

  Interim Activities.  Revenues from interim activities for 1996 were $1,796,000
compared to $4,919,000 for 1995.  As noted above, the 63% decrease in revenues
from interim activities in 1996 is primarily attributable to the non-recurring
$2.2 million gain on the sale of water rights to CSI recorded in 1995; lower
slag and scrap revenues ($156,000); sewer service revenues under the amended
Services Agreement with CSI ($185,000) and lower miscellaneous revenues
($347,000).

  Resource Operating Costs.  Resource operating costs are those costs directly
related to the resource revenue sources.  Total resource operating costs for
1996 declined to $3,229,000 from $3,737,000 in 1995.  Operations and maintenance
costs for 1996 were $1,092,000 compared to $1,496,000 for 1995.  The 27%
decrease in 1996 operations and maintenance costs was primarily due to lower
expenses associated with the reduced levels of services being provided to CSI
and lower property taxes associated with the portion of the Mill Site Property
that was contributed to PMI for the development of the TCS.  Administrative
support expenses for 1996 decreased 3% to $2,137,000 from $2,241,000 for 1995.
The decrease was primarily due to lower outside professional costs and lower
depreciation expense.

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

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

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

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

                         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 $4,152,000 to $4,330,000 at
December 31, 1997 from $8,482,000 at December 31, 1996.

                                       44
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

Included in cash and cash equivalents is $1,984,000 and $1,766,000 held solely
for the benefit of MRC at December 31, 1997 and 1996, respectively. The decrease
in cash and cash equivalents is due primarily to the $7,174,000 in capital
expenditures and $1,496,000 in environmental remediation, incurred in 1997 being
offset by: (a) $1,500,000 in cash from the sale of the 15.7 acres of the Mill
Site Property to McLeod Properties Fontana LLC (Budway Enterprises); (b)
$1,000,000 of net new borrowings under the Union Bank credit facility; (c)
$1,260,000 of equity funds contributed by the minority owners of MRC; and (d)
the collection of $865,000 of outstanding accounts receivable.

  Working Capital.  During 1997, current assets decreased $4,539,000 to
$7,279,000 while current liabilities decreased $1,094,000 to $11,964,000.  The
decrease in current assets resulted primarily from the $4,152,000 decrease in
cash and cash equivalents, plus a $797,000 decline in accounts receivable due
primarily to the receipt of reimbursable expenses from PMI, partially offset by
an increase in the current portion of the note receivable ($410,000) from the
Mill Site land sale to McLeod properties.  The decrease in current liabilities
resulted primarily from a decrease in capital spending at the Mill Site during
the 4/th/ quarter of 1997.  Included in current liabilities for 1997 is $885,000
in accounts payable and accrued liabilities relating to MRC.  As a result,
working capital decreased during 1997 by $3,445,000 to a negative $4,685,000 at
December 31, 1997.

  Real Estate.  Real Estate decreased $2,952,000 during 1997 due to:  (a) the
closing of the Company's restructured joint venture with Burrtec Waste
Industries for the West Valley MRF and the resulting contribution of 23 acres of
land for WVMRF ($2,199,000); and (b) the sale of 15.7 acres of land to McLeod
Properties, Fontana, LLC ($2,225,000).  These reductions were partially offset
by capital expenditures ($1,472,000)  related to continue redevelopment of the
Mill Site properties.

  Investments.  There was a $6,503,000 increase in the Company's investments in
PMI and WVMRF during 1997.  The Company's increased investment in PMI
($5,018,000) is a result of PMI's stock issuance related to its acquisition of a
majority of the common stock of North Carolina Motor Speedway Inc. ("NCMS") in
May 1997 ($3,128,000) and the Company's recording of its equity share of PMI's
1997 earnings ($1,840,000). In regard to the $3,128,000 increase in Kaiser's
investment in PMI relating to its stock issuance for NCMS, the Company also
recorded corresponding increases in deferred income taxes and stockholders
equity of approximately $191,000 and $2,937,000, respectively.  The increase in
the investment in WVMRF ($1,485,000) is due to Kaiser's contribution of the land
for the joint venture ($2,199,000) being partially offset by expense
reimbursements from the joint venture ($714,000).

  Other Assets.  The increase in other assets ($5,918,000) is primarily related
to: a) capitalized landfill permitting and development costs incurred by MRC
($3,962,000); b) recording of the long term portion of the note receivable
associated with the Mill Site (Napa Lot) land sale ($860,000); c) railroad and
sewer plant improvements at the Mill Site ($1,213,000); and an increase in
deferred loan fees ($242,000).  These increases were partially offset by an
increase in accumulated depreciation as of December 31, 1997 ($359,000).

  Environmental Remediation.  As is discussed extensively in Part I, "Property
Redevelopment, Mill Site Environmental", the Company estimates, based upon
current information, that its future remediation and other environmental costs
for the balance of its land and related matters, including groundwater and other
possible third party claims, will be between approximately $20 million and $31
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

                                       45
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES


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 $23.1 million in remediation and other environmental
costs expended through December 31, 1997. 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, 1997, the total short-term and long-term environmental
liabilities including remediation reflected on the Company's balance sheet were
approximately $30.7 million, the high end of the probable range of future
remediation and other environmental costs, which declined from the $32.2 million
as of December 31, 1996.  The decrease is a result of the $1.5 million in
remediation and other environmental costs incurred in 1997 on the Mill Site
property.

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

  Long-term Debt. Of December 31, 1997, the Company had $8,982,000 in long-term
debt comprised of $4,982,000 of debt issued as part of the purchase of
properties from the Lusk Joint Ventures in July 1994 and $4,000,000 borrowed
under the $30,000,000 revolving-to-term credit facility with Union Bank.  The
Lusk debt has been classified as long-term debt due to the Company's intent and
ability to refinance the obligation on a long-term basis utilizing the Union
Bank revolving-to-term credit facility.

  Long-term Liabilities.  The $872,000 decrease in other long-term liabilities
is primarily due to the reduction of the environmental remediation liability as
a result of: a) $1,496,000 in environmental remediation undertaken during 1997
and b) a reclassification of $297,000 from long term into current environmental
remediation.  These reductions were partially offset by the recording of the
deferred gain on the sale of real estate ($656,000) and the increases in
deferred tax liability discussed above ($265,000).

  Minority Interest and Other Liabilities.  As of December 31, 1997, the Company
has recorded $2,878,000 of minority interest relating to MRC in which the
Company had approximately a 73% equity interest.

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

  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.

                                       46
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES


  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
and the 11.51% equity ownership in PMI, are essentially complete and the Company
is recognizing significant revenues and income from these investments.  The
Company expects revenues from these projects and investments to increase
moderately over time as certain key economic factors impacting these projects
and investments increase.  In 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 (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 parties are
unable to negotiate a substitute Lease Rate, the matter is referred to
arbitration for resolution.

  In regard to the Company's 11.51% 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 Caroline 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.

  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 73% owned subsidiary.  If it is successful in completing the
development of these

                                       47
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES


two projects as planned, the Company expects to generate significant future
revenues and net income from them. However, as is noted elsewhere in this
Report, there are also numerous risks associated with the redevelopment of the
remaining Mill Site Property and completing the re-permitting of the Eagle
Mountain Landfill 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 throughout
1998, include the approval of possible changes that would alter and improve the
existing access to portions of the Mill Site Property.  In support of these
efforts, the Company expects to spend, in 1998, up to approximately $6.1 million
for required environmental remediation and approximately $1.5 million for real
estate entitlement and improvement expenditures.  The $6.1 million to be spent
in 1998 for required environmental remediation is a component of the $20-31
million estimate to complete all remaining required remediation for the Mill
Site Property.  In addition, substantial capital expenditures beyond the $1.5
million projected for 1998 will be required to complete the necessary on-site
and off-site improvements for the redevelopment of remaining Mill Site property.

  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, 1997, a total of $10.8 million
has been raised by MRC, with Kaiser contributing approximately $8.1 million of
that amount. Due to the uncertainty associated with the Landfill Project, the
Company is evaluating its continuing investment in MRC. In this regard, the
Company has agreed to advance funds to MRC for a limited period in 1998 pending
the Company's determination, in light of the San Diego County Superior Court's
recent ruling, of what course of action to pursue with regard to the Landfill
Project. It is anticipated that the initial 1998 advance will total up to
approximately $900,000 and that the Company may invest additional funds in MRC
during 1998 depending upon what course of action the Company may ultimately
decide to pursue.

  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 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, 1997, are
estimated to be approximately $113 million for federal purposes and $2.4 million
for California purposes.  The federal NOLs expire in varying amounts over a
period from year 2000 to 2010 while the California NOLs expire from 2000 through
2002.

                                       48
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES


  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.

                                       49
<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 1998
Annual Meeting of Stockholders (the "1998 Proxy Statement"), a definitive copy
of which will be filed within 120 days of December 31, 1997.


ITEM 11.  EXECUTIVE COMPENSATION

  Information required by this item is incorporated by reference from the
Executive Compensation Section of the 1998 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 1998
Proxy Statement.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  Information required by this item is incorporated by reference from the 1998
Proxy Statement.

                                       50
<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>
     (1)            Financial Statements                                         Page
                    --------------------                                         ----
     <S>            <C>                                                          <C>
                    Report of Independent Auditors ...............................  64

                    Consolidated Balance Sheets ..................................  65

                    Consolidated Statements of Income ............................  67

                    Consolidated Statements of Cash Flows ........................  68

                    Consolidated Statements of Changes in Stockholders' Equity ...  69

                    Notes to Consolidated Financial Statements ...................  70

     (2)            Financial Statement Schedules
                    -----------------------------

                    II        Valuation and Qualifying Accounts and Reserves .....  92
</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:

                                       51
<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>

                                       52
<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>

                                       53
<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.

   10.4*        Amended and Restated Employment Agreement between Kaiser Ventures Inc. and
                Richard E. Stoddard, dated effective January 15, 1998.

   10.5*        Employment Agreement between Kaiser Ventures Inc. and Gerald A. Fawcett, dated
                effective January 15, 1998.
</TABLE>

                                       54
<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.

   10.10*       Employment Agreement between Kaiser Ventures Inc. and James F. Verhey, dated
                effective June 17, 1996 incorporated by reference from the Company's Form 10-Q
                Report for the quarter ended June 30, 1996.

   10.10*       First Amendment to Employment Agreement dated effective January 15, 1998 between
                Kaiser Ventures Inc and James F. Verhey.

   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 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 to Consent Order dated August 22, 1998 issued by the State Department
                of Health Services to Kaiser Steel Corporation is issued as of November 13, 1997
                by the California Environmental Protection Agency.

   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.

   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).
</TABLE>

                                       55
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (CONTINUED)

<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                                        DOCUMENT DESCRIPTION
-----------      --------------------------------------------------------------------------------

<S>              <C>
   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).

   10.21         Mining Lease between Kaiser Steel Resources, Inc. and Levand Steel and Supply
                 Corporation/K.D. Mining and Consulting Co. effective January 2, 1993,
                 incorporated by reference from Exhibit 10.20 of the Company's Form S-2
                 (Registration No. 33-56234).
</TABLE>

                                       56
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (CONTINUED)

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                                       DOCUMENT DESCRIPTION
----------      ---------------------------------------------------------------------------------
<S>             <C>
   10.22        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.

   10.22.1      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.

   10.23        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.

   10.23.1      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.

   10.24        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.

   10.25        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.

   10.26        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.

   10.27        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>

                                       57
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (CONTINUED)

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                                       DOCUMENT DESCRIPTION
----------      ---------------------------------------------------------------------------------
<S>             <C>
   10.28        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.

   10.29        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.

   10.29.1      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.

   10.29.2      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.

   10.29.3      First Amendment to Guaranty by Kaiser Ventures Inc. in favor of Union Bank dated
                June 30, 1997 incorporated by reference from Exhibit 10.29.3 of the Company's
                10-K Report for the year ended December 31, 1996.

   10.29.4      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.

   10.29.5      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.

   10.29.6      Second Amendment to Revolving Credit and Term Loan Agreement dated August 14,
                1997 by Fontana Water Resources, Inc. and Union Bank of California.

   10.31        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.

   10.32        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.
</TABLE>

                                       58
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (CONTINUED)

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                                       DOCUMENT DESCRIPTION
----------      ---------------------------------------------------------------------------------
<S>             <C>
   10.32.1      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.

   10.32.2      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.

   10.33        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.

   10.33.1      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.

   10.34        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.

   10.34.1      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.

   10.35        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.

   10.36        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.
</TABLE>

                                       59
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

                          EXHIBIT INDEX - (CONTINUED)

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                                       DOCUMENT DESCRIPTION
--------        -----------------------------------------------------------------------------------
<S>             <C>
   10.36.1      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.

   10.37        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.

   10.37.1      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>

                                       60
<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, 1998


                              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)

                                       61
<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, 1998
    -------------------------
    Richard E. Stoddard                     Officer and Chairman of the
                                            Board

2.  Principal Financial and
    Accounting Officer

    /s/ James F. Verhey                     Executive Vice President              March 31, 1998
    --------------------------
    James F. Verhey                         Finance and Chief Finance
                                            Officer
</TABLE>

                                       62
<PAGE>

<TABLE>
<CAPTION>
                 SIGNATURE                            TITLE                     DATE
                 ---------                            -----                     ----
<S>                                                <C>                      <C>
4.  Directors

    /s/ Ronald E. Bitonti                             Director              March 31, 1998
    --------------------------------------------
    Ronald E. Bitonti

    /s/ Todd G. Cole                                  Director              March 31, 1998
    --------------------------------------------
    Todd G. Cole

    /s/ Gerald A. Fawcett                          Vice Chairman            March 31, 1998
    --------------------------------------------
    Gerald A. Fawcett

    /s/ Reynold C. MacDonald                          Director              March 31, 1998
    --------------------------------------------
    Reynold C. MacDonald

    /s/ William J. Morgan                             Director              March 31, 1998
    --------------------------------------------
    William J. Morgan

    /s/ Charles E. Packard                            Director              March 31, 1998
    --------------------------------------------
    Charles E. Packard

    /s/ Thomas S. Rabone                              Director              March 31, 1998
    --------------------------------------------
    Thomas S. Rabone

    /s/ Lyle B. Stevenson                             Director              March 31, 1998
    --------------------------------------------
    Lyle B. Stevenson

    /s/ Marshall F. Wallach                           Director              March 31, 1998
    --------------------------------------------
    Marshall F. Wallach
</TABLE>

                                       63
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS
                        ------------------------------



Board of Directors
Kaiser Ventures Inc. and Subsidiaries


     We have audited the accompanying consolidated balance sheets of Kaiser
Ventures Inc. and Subsidiaries (the "Company") as of December 31, 1997 and 1996,
and the related consolidated statements of income, cash flows, and stockholders'
equity for each of the three years in the period ended December 31, 1997.  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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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 20, 1998

                                       64
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                               AS OF DECEMBER 31

<TABLE>
<CAPTION>
                                                                      1997                        1996
                                                                  -------------               ------------
<S>                                                               <C>                         <C>
ASSETS

Current Assets
   Cash and cash equivalents...............................        $  4,330,000               $  8,482,000
   Accounts receivable and other, net of allowance for
       doubtful accounts of $1,535,000 and $1,034,000,
       respectively........................................           2,539,000                  3,336,000
   Note receivable.........................................             410,000                        ---
                                                                   ------------               ------------

                                                                      7,279,000                 11,818,000
                                                                   ------------               ------------

Investment in common stock of Penske Motorsports, Inc......          43,881,000                 38,863,000
                                                                   ------------               ------------

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

Investment in West Valley MRF..............................           2,509,000                  1,024,000
                                                                   ------------               ------------

Real Estate
   Land and improvements...................................          15,621,000                 15,554,000
   Real estate in development..............................          40,094,000                 43,113,000
                                                                   ------------               ------------

                                                                     55,715,000                 58,667,000
                                                                   ------------               ------------

Other Assets
   Note Receivable.........................................             860,000                        ---
   Landfill permitting and development.....................           9,607,000                  5,645,000
   Buildings and equipment (net)...........................           3,064,000                  2,210,000
   Other assets............................................             242,000                        ---
                                                                   ------------               ------------

                                                                     13,773,000                  7,855,000
                                                                   ------------               ------------

Total Assets...............................................        $139,265,000               $134,335,000
                                                                   ============               ============
</TABLE>

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

                                       65
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES


                          CONSOLIDATED BALANCE SHEETS
                               AS OF DECEMBER 31

<TABLE>
<CAPTION>
                                                                      1997                      1996
                                                                   ------------              ------------
<S>                                                                <C>                       <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
   Accounts payable.......................................         $  1,479,000              $  2,936,000
   Accrued liabilities....................................            4,311,000                 4,125,000
   Current portion of long-term debt......................              120,000                   240,000
   Environmental remediation..............................            6,054,000                 5,757,000
                                                                   ------------              ------------

                                                                     11,964,000                13,058,000
                                                                   ------------              ------------

Long-term Liabilities
   Deferred gain on sale of real estate...................              656,000                       ---
   Accrued liabilities....................................            1,685,000                 1,685,000
   Deferred tax liabilities...............................            2,223,000                 1,958,000
   Long-term debt.........................................            8,982,000                 8,102,000
   Environmental remediation..............................           24,673,000                26,466,000
                                                                   ------------              ------------

                                                                     38,219,000                38,211,000
                                                                   ------------              ------------

Total Liabilities.........................................           50,183,000                51,269,000
                                                                   ------------              ------------

Minority Interest.........................................            2,878,000                 1,618,000
                                                                   ------------              ------------

Commitments and Contingencies

Stockholders' Equity
   Common stock, par value $.03 per share, authorized
       13,333,333 shares; issued and outstanding
       10,591,240 and 10,488,114 respectively.............              318,000                   315,000
   Capital in excess of par value.........................           74,342,000                70,437,000
   Retained earnings since November 15, 1988..............           11,544,000                10,696,000
                                                                   ------------              ------------

Total Stockholders' Equity................................           86,204,000                81,448,000
                                                                   ------------              ------------

Total Liabilities and Stockholders' Equity................         $139,265,000              $134,335,000
                                                                   ============              ============
</TABLE>

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

                                       66
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES


                       CONSOLIDATED STATEMENTS OF INCOME
                        FOR THE YEARS ENDED DECEMBER 31

<TABLE>
<CAPTION>
                                                                         1997         1996         1995
                                                                      -----------  -----------  -----------
<S>                                                                   <C>          <C>          <C>
RESOURCE REVENUES
  Ongoing Operations
       Water resource...............................................  $ 5,143,000  $ 4,505,000  $ 4,974,000
       Property redevelopment.......................................    1,213,000    1,120,000      998,000
       Income from equity method investments........................    2,003,000    1,539,000      162,000
       Mill Site land sale..........................................          ---    6,371,000          ---
                                                                      -----------  -----------  -----------

          Total ongoing operations..................................    8,359,000   13,535,000    6,134,000
                                                                      -----------  -----------  -----------

  Interim Activities
       Lease, service and other.....................................    1,647,000    1,796,000    2,719,000
       Asset sales..................................................          ---          ---    2,200,000
                                                                      -----------  -----------  -----------

          Total interim activities..................................    1,647,000    1,796,000    4,919,000
                                                                      -----------  -----------  -----------

          Total resource revenues...................................   10,006,000   15,331,000   11,053,000
                                                                      -----------  -----------  -----------

RESOURCE OPERATING COSTS
  Operations and maintenance........................................    1,311,000    1,092,000    1,496,000
  Administrative support expenses...................................    2,343,000    2,137,000    2,241,000
                                                                      -----------  -----------  -----------

       Total resource operating costs...............................    3,654,000    3,229,000    3,737,000
                                                                      -----------  -----------  -----------

INCOME FROM RESOURCES...............................................    6,352,000   12,102,000    7,316,000

  Corporate general and administrative expenses.....................    4,161,000    3,837,000    4,201,000
                                                                      -----------  -----------  -----------

Income from Operations..............................................    2,191,000    8,265,000    3,115,000

  Net interest expense..............................................      672,000      819,000      665,000
                                                                      -----------  -----------  -----------

INCOME BEFORE INCOME TAX PROVISION..................................    1,519,000    7,446,000    2,450,000

  Income tax provision
       Currently payable............................................       43,000       92,000          ---
       Deferred tax expense.........................................       74,000      840,000      721,000
       Deferred tax expense credited to equity......................      554,000    3,945,000      335,000
                                                                      -----------  -----------  -----------

NET INCOME..........................................................  $   848,000  $ 2,569,000  $ 1,394,000
                                                                      ===========  ===========  ===========

BASIC EARNINGS PER SHARE............................................         $.08         $.24         $.13
                                                                      ===========  ===========  ===========

DILUTED EARNINGS PER SHARE..........................................         $.08         $.24         $.13
                                                                      ===========  ===========  ===========

BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.................   10,536,457   10,485,943   10,456,353

DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING...............   10,740,357   10,729,645   10,653,950
</TABLE>

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

                                       67
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                        FOR THE YEAR ENDED DECEMBER 31

<TABLE>
<CAPTION>
                                                                     1997                1996                1995
                                                              ------------------  ------------------  ------------------
<S>                                                           <C>                 <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income...............................................        $   848,000         $ 2,569,000         $ 1,394,000
   Provision for income tax which is credited to equity.....            554,000           3,945,000             335,000
   Equity income in Penske Motorsports, Inc.................         (1,840,000)           (889,000)                ---
   Deferred tax expense.....................................             74,000             840,000             721,000
   Depreciation and amortization............................            389,000             952,000             436,000
   Extraordinary loss.......................................                ---                 ---          (3,938,000)
   Gain on sale of Speedway Business Park...................                ---          (6,371,000)                ---
   Gain from the CSI Settlement.............................                ---                 ---          (2,200,000)
   Allowance for doubtful accounts..........................             13,000              36,000             258,000
   Changes in assets:
       Receivable and other.................................            865,000              77,000            (755,000)
   Changes in liabilities:
       Current liabilities..................................            684,000          (2,810,000)            798,000
       Long-term accrued liabilities........................                ---             306,000                 ---
                                                                    -----------         -----------         -----------

   Net cash flows from operating activities.................          1,587,000          (1,345,000)         (2,951,000)
                                                                    -----------         -----------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES
   Minority interest and other liabilities..................          1,260,000             670,000           1,538,000
   Proceeds from the sale of Mill Site Real Estate..........          1,500,000           5,000,000                 ---
   Collection of note receivable............................            174,000                 ---                 ---
   Proceeds from the CSI Settlement.........................                ---           3,661,000                 ---
   Capital expenditures.....................................         (7,174,000)         (9,273,000)         (1,605,000)
 Environmental remediation expenditures.....................         (1,496,000)         (6,595,000)         (5,950,000)
   Environmental insurance proceeds (net)...................                ---           2,582,000          13,823,000
 Investment in Penske Motorsports, Inc......................                ---             232,000            (309,000)
 Other investments..........................................           (759,000)           (268,000)           (184,000)
   Short-term investments and marketable securities.........                ---                 ---           3,624,000
   Investment in Fontana Union Water Co.....................                ---                 ---             (62,000)
                                                                    -----------         -----------         -----------

 Net cash flows from investing activities...................         (6,495,000)         (3,991,000)         10,875,000
                                                                    -----------         -----------         -----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Issuance of common stock.................................            196,000             121,000             166,000
   Borrowings under revolver-to-term credit facility........          2,000,000           3,000,000                 ---
   Principal payments on revolver-to-term credit facility
    and note payable........................................         (1,240,000)           (240,000)           (358,000)

   Payment of loan fees                                                (200,000)                ---                 ---
                                                                    -----------         -----------         -----------

   Net cash flows from financing activities                             756,000           2,881,000            (192,000)
                                                                    -----------         -----------         -----------

NET CHANGES IN CASH AND CASH EQUIVALENTS                             (4,152,000)         (2,455,000)          7,732,000

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                        8,482,000          10,937,000           3,205,000
                                                                    -----------         -----------         -----------

CASH AND CASH EQUIVALENTS AT END OF YEAR                            $ 4,330,000         $ 8,482,000         $10,937,000
                                                                    ===========         ===========         ===========
</TABLE>

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

                                       68
<PAGE>

                     KAISER VENTURES INC. AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                          CAPITAL IN
                                               COMMON STOCK                EXCESS OF        RETAINED
                                  ------------------------------------
                                         SHARES            AMOUNT          PAR VALUE        EARNINGS           TOTAL
                                  ----------------------------------------------------------------------------------------
<S>                               <C>                      <C>            <C>               <C>                <C>
Balance at December 31, 1994......        10,437,362          $313,000      $59,756,000      $ 6,733,000       $66,802,000

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

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

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

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

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

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

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

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

Balance at December 31, 1996              10,488,114           315,000       70,437,000       10,696,000        81,448,000
                                          ----------          --------      -----------      -----------       -----------

   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
                                          ==========          ========      ===========      ===========       ===========
</TABLE>

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

                                       69
<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, 1997, 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 11.51% 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 73% 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.

                                       70
<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.


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 12 to 18 months.  Consequently, activity of KSC
Recovery is not included in Kaiser's financial statements; however, KSC Recovery
is a member of the Kaiser consolidated group for tax purposes and is therefore,
included in the consolidated tax return.

CASH AND CASH EQUIVALENTS

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

                                       71
<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, LCC

  The Company accounts for its investment in West Valley MRF, LCC 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 $794,000
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
(income), and was $ 34,000, $666,000, and $77,000 for 1997, 1996 and 1995,
respectively.  Acceleration of amortization of loan fees in 1996 was due to the
renegotiation of the revolving-to-term credit facility.

BUILDINGS AND EQUIPMENT

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

REVENUE RECOGNITION

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

INCOME TAXES

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

                                       72
<PAGE>

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.  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 1995 and 1996 in order to conform with the
1997 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.

                                       73
<PAGE>

Note 3.   ACCOUNTS RECEIVABLE & OTHER


  Accounts receivable as of December 31 consisted of the following:

<TABLE>
<CAPTION>
                                                                           1997                     1996
                                                                       -----------               -----------
     <S>                                                               <C>                       <C>
     Cucamonga County Water District..........................         $ 2,877,000               $ 2,099,000
     Penske Motorsports, Inc..................................             157,000                   843,000
     Burrtec Waste Industries.................................                 ---                   461,000
     Other....................................................           1,040,000                   967,000
                                                                       -----------               -----------
                                                                         4,074,000                 4,370,000
     Allowance for doubtful accounts
        CCWD rate dispute (See Note 4)........................          (1,236,000)                 (748,000)
        Other.................................................            (299,000)                 (286,000)
                                                                       -----------               -----------
             Total............................................         $ 2,539,000               $ 3,336,000
                                                                       ===========               ===========
</TABLE>

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 centered upon whether or not the lease rate in the
Cucamonga Lease should be interpreted as the Company asserts to include all the
changed rates and items implemented by Metropolitan Water District of Southern
California ("MWD") since July 1, 1995. Alternatively, the Company asserted that
the lease rate was discontinued as of July 1, 1995 requiring the parties to
negotiate in good faith a substitute lease rate. 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 lease rate, the Company has elected to reserve
the full amount in dispute and report revenues on the basis of amounts received.
The total amount of lease payments in dispute as of December 31, 1997, is
approximately $1,236,000 and is included in the allowance for doubtful accounts.
See Note 21. "Subsequent Events" with regard to the court ruling on the lease
rate dispute with Cucamonga.

Note 5.   INVESTMENT IN PENSKE MOTORSPORTS, INC.

  The Company, as of December 31, 1997, owns 1,627,923 shares, or approximately
11.51% of the common stock of PMI.  As discussed in more detail below, the
Company's ownership interest in PMI was acquired as a result of:  (i) its
contribution in November, 1995, to PMI of approximately 480 acres, as adjusted,
of the Central Mill Site Property on which the California Speedway ("TCS") has
been built; and (ii) the subsequent sale of the Speedway Business Park, totaling
approximately 54 acres to PMI in December, 1996.  Kaiser recorded no gain or
loss as a result of the November 1995 transaction discussed above since the
value of the PMI stock that Kaiser received was equal to the book value of the
land Kaiser contributed to PMI.  PMI is traded on the NASDAQ National Market
under the symbol "SPWY".

  In March, 1996, Penske Motorsports, Inc. ("PMI") effected a recapitalization
resulting in PMI ownership of the outstanding shares of Michigan International
Speedway, Inc., Pennsylvania International Raceway, Inc., The California
Speedway Corporation, Motorsports International Corp., Competition Tire West,
Inc. and Competition Tire South, Inc.  Subsequent to the recapitalization, PMI
completed an initial public offering ("IPO") by issuing 3,737,500 shares of
common stock at a price to the public of $24 per share.  The proceeds to PMI,
after underwriting discounts and commissions and

                                       74
<PAGE>

other offering expenses, were approximately $83.1 million. As a result of the
IPO, which materially increased the Company's share of PMI's stockholder's
equity, the Company has recorded an increase in its equity investment in PMI of
$6,513,000 and corresponding increases in deferred income taxes and capital in
excess of par value of $397,000 and $6,116,000, respectively. As an additional
result of the IPO, when the Company converted its PMI preferred stock into PMI
common stock, the Company changed its accounting for this investment from the
cost to the equity method of accounting and began recording it's share of
undistributed equity in the earnings of PMI effective April 1, 1996.

  In 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.

  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 positive (income) in the second and third
quarters and negative (loss) in the first and fourth quarters.

  PMI is a leading promoter and marketer of professional motorsports in the
United States as well as an owner and operator of speedway facilities.  PMI
currently owns:  (i) Michigan International Speedway, Inc. which owns and
operates the Michigan Speedway, 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.

  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 transaction 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 3, 1997 is approximately $41 million.  The unaudited condensed balance
sheets of PMI as of December 31, follow:

                                       75
<PAGE>

<TABLE>
<CAPTION>
                                                                            1997                      1996
                                                                        ------------               ------------
     <S>                                                                <C>                        <C>
     Current Assets............................................         $  9,238,000               $ 33,559,000
     Property and Equipment....................................          224,666,000                140,402,000
     Other Assets..............................................           57,510,000                 10,036,000
                                                                        ------------               ------------
        Total Assets...........................................         $291,414,000               $183,997,000
                                                                        ============               ============

     Current Liabilities.......................................         $ 39,713,000               $ 25,801,000
     Long-Term Debt............................................           47,278,000                  3,825,000
     Other Liabilities.........................................              738,000                        ---
     Deferred taxes............................................           13,036,000                  8,969,000
     Stockholders' Equity......................................          190,649,000                145,402,000
                                                                        ------------               ------------
        Total Liabilities and Stockholders' Equity.............         $291,414,000               $183,997,000
                                                                        ============               ============
</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 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.

  Gross revenues for the WVMRF from inception through December 31, 1997 amounted
to $2.4 million.  The Company's share of undistributed equity in the earnings of
WVMRF was, however, immaterial.  A condensed unaudited balance sheet of West
Valley MRF, LLC as of December 31, 1997 follows:

                                       76
<PAGE>

<TABLE>
<CAPTION>
                                                                         1997
                                                                         ----
          <S>                                                        <C>
          Current Assets........................................     $ 1,153,000
          Property and Equipment................................      11,015,000
          Other Assets..........................................         900,000
                                                                     -----------
             Total Assets.......................................     $13,068,000
                                                                     ===========

          Current Liabilities...................................     $ 1,547,000
          Other Liabilities.....................................         199,000
          CPCFA Bonds Payable...................................       8,562,000
          Stockholders' Equity..................................       2,760,000
                                                                     -----------
             Total Liabilities and Stockholders' Equity.........     $13,068,000
                                                                     ===========
</TABLE>

Note 7.   MINE RECLAMATION CORPORATION

  As previously disclosed, the Company, in January, 1995, acquired a 70%
interest in Mine Reclamation Corporation ("MRC"), the developer of the Eagle
Mountain Landfill Project.  Concurrent with this acquisition, MRC and the
Company amended the MRC Lease to terminate the minimum monthly rent payments by
MRC to the Company.  Consequently, the Company 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, 1997, a total of $10.8 million has been raised by
MRC, with Kaiser contributing approximately $8.1 million of that amount.  As a
result of these equity fundings, the Company's ownership interest in MRC as of
December 31, 1997 is approximately 73%.

  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 has agreed to advance funds to MRC for a limited period in 1998 pending
the Company's determination, in light of Judge McConnell's recent ruling, of
what course of action to pursue with regard to the Landfill Project.  It is
anticipated that the initial 1998 advance will total up to approximately
$900,000 and that the Company may invest additional funds in MRC during 1998
depending upon what course of action the Company may ultimately decide to
pursue.

  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.  A final decision on what course of
action will be taken by MRC and the Company should be made by mid-1998.


Note 8.  NOTE RECEIVABLE

  As of December 1997, the Company has a note receivable from McLeod Properties,
Fontana LLC in the amount of $1,270,000, of which $410,000 has been included in
current assets and the balance, of $860,000, classified as long term.  The note
bears interest at 10% per annum with monthly payments of

                                       77
<PAGE>

approximately $59,000 plus accrued interest through June 1998; thereafter
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>
                                                                        1997                   1996
                                                                        ----                   ----
   <S>                                                               <C>                    <C>
  Buildings and structures.....................................      $ 2,076,000            $ 2,074,000
  Machinery and equipment......................................        2,834,000              1,621,000
                                                                     -----------            -----------
                                                                       4,910,000              3,695,000
  Accumulated depreciation.....................................       (1,846,000)            (1,485,000)
                                                                     -----------            -----------
     Total.....................................................      $ 3,064,000            $ 2,210,000
                                                                     ===========            ===========
</TABLE>

Note 10.    ACCRUED LIABILITIES - CURRENT

  The current portion of accrued liabilities as of December 31 consisted of the
following:

<TABLE>
<CAPTION>
                                                                         1997                  1996
                                                                         ----                  ----
  <S>                                                                 <C>                   <C>
  Environmental insurance settlement costs.....................       $1,313,000            $1,313,000
  Compensation and related employee costs......................        1,008,000               956,000
  Other........................................................        1,990,000             1,856,000
                                                                      ----------            ----------
     Total.....................................................       $4,311,000            $4,125,000
                                                                      ==========            ==========
</TABLE>

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 $20 million and $31
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 $23.1 million in
remediation and other environmental costs expended through December 31, 1997.
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.

                                       78
<PAGE>

  As of December 31, 1997, the total short-term and long-term environmental
remediation liabilities reflected on the Company's balance sheet was
approximately $30.7 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>
                                                      1997                   1996
                                                      ----                   ----
          <S>                                       <C>                    <C>
          Beginning Estimated Liability             $32,223,000            $39,411,000

           Remediation Costs Incurred                (1,496,000)            (7,188,000)
                                                    -----------            -----------

          Ending Estimated Liability                 30,727,000             32,223,000

           Less:  Current Portion                    (6,054,000)            (5,757,000)
                                                    -----------            -----------

          Long-term Portion                         $24,673,000            $26,466,000
                                                    ===========            ===========
</TABLE>

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


Note 12.  LONG-TERM DEBT

  As of December 31, 1997, long-term debt consisted of a $5,102,000 note (which
includes the current portion of $120,000) secured by a first trust deed issued
to Bank of America as part of the Company's purchase of property from the Lusk
Joint Ventures and $4,000,000 in borrowings under the Union Bank credit
facility.  The Bank of America note is payable in quarterly payments of $60,000
plus interest at the their prime rate plus 1.5% (10% at December 31, 1997) with
all remaining principal and accrued and unpaid interest due and payable on July
28, 1998.  The Lusk debt has been classified as long-term debt due to the
Company's intent and ability to refinance the obligation on a long-term basis
utilizing the Union Bank revolving-to-term facility.

  The Company, through FWR, had a 7-year, $30,000,000 revolving-to-term credit
facility with Union Bank at floating interest rates and collateralized by the
Company's shares of Fontana Union and the lease of those shares to Cucamonga.
At December 31, 1997, there was $4,000,000 outstanding under the credit
facility.  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, 1997.  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; $765,000 in two unused outstanding standby letters of credit; and
$4,000,000 in outstanding loans was $20,385,000 as of December 31, 1997.

  Total interest expense incurred in 1997, 1996, and 1995 was $980,000, $743,000
and $728,000, respectively.


Note 13.  STOCKHOLDERS' EQUITY

EQUITY TRANSACTIONS

  During 1997, 1996 and 1995 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

                                       79
<PAGE>

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, 1997, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                                     1997             1996             1995
                                                ---------------  ---------------  --------------
  <S>                                           <C>              <C>              <C>
  Deferred tax expense credited to equity            $  554,000      $ 3,945,000        $335,000
  Investment increase in Penske
    Motorsports, Inc..........................        2,937,000        6,116,000             ---
                                                     ----------      -----------        --------

                                                     $3,491,000      $10,061,000        $335,000
                                                     ==========      ===========        ========
</TABLE>

COMMON STOCK OUTSTANDING

  At December 31, 1997 and 1996, Kaiser Ventures Inc. common stock has a par
value of $0.03 and 13,333,333 authorized shares, of which 10,591,240 and
10,488,114 were outstanding, respectively.

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

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 1997,
1996 and 1995.

  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, 1997.  Grants are
generally established at fair market value of the Company's common stock on the
date of the grant and the exercise thereof may extend for up to 10 years with
various vesting schedules.

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

  A summary of the status of the stock option grants under the Company's Stock
Plans' as of December 31, 1997, 1996 and 1995 and activities during the years
ending on those dates is presented below:

                                       80
<PAGE>

<TABLE>
<CAPTION>
                                               1997                                1996                              1995
                                ---------------------------------  --------------------------------  ------------------------------
                                                 WEIGHTED-AVERAGE                  WEIGHTED-AVERAGE                WEIGHTED-AVERAGE
                                     OPTIONS     EXERCISE PRICE        OPTIONS     EXERCISE PRICE       OPTIONS    EXERCISE PRICE
                                ---------------- ----------------  --------------- ----------------  ------------- ----------------
<S>                             <C>              <C>               <C>             <C>               <C>           <C>
Outstanding at beginning of
   Year.......................         1,431,161           $11.35         809,661            $11.63        652,836         $13.00
Granted                                   44,000             8.05         639,000             10.87        182,000           5.93
Exercised                                 (4,000)            5.83         (17,500)             6.89        (17,801)          4.26
Forfeited                                    ---              ---             ---               ---         (7,374)         10.09
                                      ----------                       ----------                         --------

Outstanding at end of year             1,471,161           $11.28       1,431,161            $11.35        809,661         $11.63
                                      ==========                       ==========                         ========

Options exercisable at year
                                      ==========           $11.08         497,791            $11.29        425,916         $10.97
   end........................           676,987                       ==========                         ========
                                      ==========

Weighted-average fair value
   of options granted during
   the year...................             $1.55                       $     2.87                            $1.22
</TABLE>

  The following table summarizes information about fixed stock options
outstanding as of December 31, 1997:

<TABLE>
<CAPTION>
                                               OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
                                      -----------------------------------         ----------------------------------------
                    WEIGHTED-AVERAGE
RANGE OF EXERCISE    REMAINING LIFE                      WEIGHTED-AVERAGE                               WEIGHTED-AVERAGE
     PRICES              (YEARS)           OPTIONS        EXERCISE PRICE               OPTIONS           EXERCISE PRICE
-----------------   ----------------  -----------------  ----------------         -----------------   --------------------
<S>                 <C>               <C>                <C>                      <C>                 <C>
$3.00 to  7.50                   6.7            198,511              $ 5.71                  183,261                $ 5.71
$7.51 to 17.58                   6.9          1,272,650              $12.15                  493,726                $13.07
</TABLE>

  The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
plans.  Accordingly, no compensation expense has been recognized for the
Company's stock-based compensation plans other than for compensation and
performance-based stock awards.  Had compensation cost for the Company's stock
option plan been determined based upon the fair value at the grant date for the
awards under the plan consistent with the methodology prescribed under Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("FAS 123") the effect on the Company's net income and earnings
per share would have been adjusted to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                   1997             1996               1995
                                   ----             ----               ----
     <S>                         <C>             <C>                 <C>
     Net Earnings
      As reported                $848,000        $2,569,000          $1,394,000
      Pro forma                  $263,000        $2,160,000          $1,249,000

     Earnings per share (Basic
     and Diluted)
       As reported               $   0.08        $     0.24          $     0.13
       Pro forma                 $   0.02        $     0.20          $     0.12
</TABLE>

                                       81
<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 1997, 1996 and 1995 is not necessarily representative of the
effect in future years.  The following table describes the assumptions utilized
by the Black-Scholes option-pricing model and the resulting fair value of the
options granted:

<TABLE>
<CAPTION>
                                            1997              1996               1995
                                            ----              ----               ----
          <S>                              <C>               <C>                 <C>
          Volatility                       .255              .254                 .346
          Risk-free interest rate          6.38%             5.74%                6.98%
          Expected life in years           2.10              2.67                 2.25
          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, 1997, 90,833 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>
                                                                      1997                     1996                   1995
                                                                      ----                     ----                   ----
<S>                                                          <C>                       <C>                     <C>
Numerator:

   Net Income...............................................        $   848,000              $ 2,569,000           $ 1,394,000

   Numerator for basic earnings per share
      -income available to common stockholders..............        $   848,000              $ 2,569,000           $ 1,394,000

   Numerator for diluted earnings per share
      -income available to common stockholders..............        $   848,000              $ 2,569,000           $ 1,394,000


Denominator:

   Denominator for basic earnings per share
      -weighted-average shares..............................         10,536,457               10,485,943            10,456,353

   Effect of dilutive options...............................            203,900                  243,702               197,597
                                                                    -----------              -----------           -----------

   Denominator for diluted earnings per share
      -adjusted weighted-average shares and
   assumed conversions......................................         10,740,357               10,729,645            10,653,950
                                                                    ===========              ===========           ===========

 Basic earnings per share...................................        $       .08              $       .24           $       .13
                                                                    ===========              ===========           ===========

 Diluted earnings per share.................................        $       .08              $       .24           $       .13
                                                                    ===========              ===========           ===========
</TABLE>

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

                                       82
<PAGE>

  The following table discloses the number of vested and outstanding options
during 1997, 1996 and 1995 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.

<TABLE>
<CAPTION>
                                                                1997                      1996                      1995
                                                        --------------------       -------------------       ------------------
<S>                                                     <C>                        <C>                       <C>
   Number of antidilutive options.....................               364,000                   272,000                  291,000

   Range of option prices
       for the antidilutive options...................        $11.25 - 17.85            $10.50 - 17.85            $8.78 - 17.85
</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 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 1997, 1996, and 1995 of $968,000, $674,000
and $607,000, respectively.

  Income taxes paid in 1997 and 1996 were $92,000 and $20,000, respectively.
There were no income taxes paid in 1995.

  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 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, 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.

                                       83
<PAGE>

  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 expense or property taxes during 1995.

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

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

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

NOTE 17.  INCOME TAXES

  The income tax provisions for the years ended December 31, 1997, 1996 and 1995
are composed of the following:

<TABLE>
<CAPTION>
                                                        1997                1996                1995
                                                   --------------      --------------      --------------
Current tax expense:
<S>..............................................  <C>                 <C>                 <C>
   Federal.......................................        $  5,000          $   56,000      $          ---
   State.........................................          38,000              36,000                 ---
                                                         --------          ----------          ----------
                                                           43,000              92,000                 ---
                                                         --------          ----------          ----------
Deferred tax expense credited to equity:
   Federal.......................................         554,000           3,945,000             335,000
   State.........................................             ---                 ---                 ---
                                                         --------          ----------          ----------
                                                          554,000           3,945,000             335,000
                                                         --------          ----------          ----------
Deferred tax expense:
   Federal.......................................             ---                 ---                 ---
   State.........................................          74,000             840,000             721,000
                                                         --------          ----------          ----------
                                                           74,000             840,000             721,000
                                                         --------          ----------          ----------

                                                         $671,000          $4,877,000          $1,056,000
                                                         ========          ==========          ==========
</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, 1997 and 1996:

                                       84
<PAGE>

<TABLE>
<CAPTION>
                                                                                   1997                    1996
                                                                                   ----                    ----
<S>                                                                         <C>                     <C>
   Land held for development....................................            $  1,711,000            $  2,231,000
   Investment in Fontana Union..................................               6,440,000               6,440,000
   Investment in Penske Motorsports Inc.........................              13,332,000              11,795,000
   Depreciation.................................................                  56,000                  36,000
                                                                            ------------            ------------
                                                                              21,539,000              20,502,000
                                                                            ------------            ------------

   Groundwater remediation......................................                (690,000)               (690,000)
   Insurance Proceeds...........................................              (1,659,000)             (2,165,000)
   Investment in MRC............................................              (1,837,000)             (1,837,000)
   Accounts receivable reserve..................................                (193,000)               (181,000)
   Other........................................................              (1,825,000)             (1,262,000)
   Loss carryforwards...........................................             (38,870,000)            (39,898,000)
                                                                            ------------            ------------
                                                                             (45,074,000)            (46,033,000)
                                                                            ------------            ------------
   Deferred tax asset valuation allowance.......................              25,758,000              27,489,000
                                                                            ------------            ------------
                                                                            $  2,223,000            $  1,958,000
                                                                            ============            ============
</TABLE>

  As indicated above, the net change in the valuation allowance was a reduction
of $1,731,000 in 1997.

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

<TABLE>
<CAPTION>
                                                                    1997          1996            1995
                                                                    ----          ----            ----
<S>                                                                 <C>           <C>             <C>
  Federal statutory rate......................................         34.0%         34.0%          34.0%
  Increase resulting from state tax, net of federal benefit...          6.1           5.1            6.1
  Other                                                                 3.6           2.4            3.0
  Additional recognition of pre-reorganization benefits.......         30.2          21.5            ---
  Increase in valuation allowance on state NOLs...............          ---           6.2            ---
  Non taxable equity earnings.................................        (29.8)         (4.0%)          ---
                                                                      -----          ----           ----
                                                                       44.1%         65.2%          43.1%
                                                                      =====          ====           ====
</TABLE>

  The consolidated Net Operating Loss ("NOL") carryforwards available for
federal income tax purposes as of December 31, 1997, are approximately
$113,000,000 and will expire over a period from year 2000 through 2010. The
amount of NOL carryforwards available for California state tax purposes as of
December 31, 1997, are approximately $2,394,000 and will expire over a period
from year 2000 through 2002. 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 $379,000 of investment tax credit
carryforwards available. The credits will expire in the years 1998 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:

                                       85
<PAGE>

<TABLE>
<CAPTION>
            YEAR ENDING           CUCAMONGA
            DECEMBER 31             LEASE               MTC LEASE              TOTAL
            -----------             -----               ---------              -----
            <S>                   <C>                   <C>                 <C>
                1998              $ 5,047,000           $ 714,000           $ 5,761,000
                1999              $ 5,047,000           $  60,000           $ 5,107,000
                2000              $ 5,047,000           $     ---           $ 5,047,000
                2001              $ 5,047,000           $     ---           $ 4,047,000
                2002              $ 5,047,000           $     ---           $ 4,047,000
</TABLE>

  The amounts for the Cucamonga Lease are based upon:  (a) the quantities of
water as of December 31, 1997, and as provided for under the Lease; (b) the
current disputed lease rate paid by Cucamonga, (which is less than the lease
rate the Company bills Cucamonga by approximately $540,000 on an annual basis)
and; (c) projections by MWD which forecast no rate increases in the disputed
rate over the next 5 years.

  The net book values of Fontana Union and Eagle Mountain at December 31, 1997
were $16,108,000 and $10,555,000, respectively.  Only a portion of Eagle
Mountain is being utilized for the MTC Lease.

SIGNIFICANT CUSTOMERS

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

<TABLE>
<CAPTION>
                         YEAR ENDED                 CUCAMONGA
                         DECEMBER 31                  LEASE                MTC LEASE
                         -----------                  -----                ---------
                         <S>                        <C>                    <C>
                               1997                  $5,143,000              $714,000
                               1996                  $4,505,000              $709,000
                               1995                  $4,974,000              $699,000
</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 $20 million and $31 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.

                                       86
<PAGE>

  While the Company has monitored certain groundwater wells in the past, the
DTSC requested and the Company will implement a supplemental groundwater
monitoring system.  The Company has settled obligations of groundwater
contamination with the California Regional Water Quality Control Board.  The
settlement required a $1,500,000 cash payment by the Company, which was made in
February 1994, and the contribution of 1,000 acre feet of water annually for 25
years to a water quality project.  These water rights are unrelated to those
leased to Cucamonga.  In 1995, the Company contributed 18,000 acre feet of its
water in storage thus satisfying the first 18 years of its obligation.   The
Company remains contingently liable for any impacts the groundwater plume may
have on water wells owned by third parties.  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 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.

  Total expense relative to these plans for the years ended December 31, 1997,
1996 and 1995, was $223,000, $199,000 and $170,000, respectively.

LETTERS OF CREDIT

  At December 31, 1997, 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

  Significant legal proceedings are summarized as follows:

  Eagle Mountain EIR Litigation.  This litigation involved three separate legal
challenges to the environmental impact report for the Eagle Mountain landfill
project certified by the Riverside County Board of Supervisors in October 1992.
These cases were heard in the San Diego Superior Court.  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 Company and MRC are now evaluating their alternatives
with respect to the landfill project. Depending upon the course of action
ultimately selected with respect to the landfill project, there could be a
material adverse impact to the financial statements of the Company, including a
possible writedown of the Company's investment in MRC to the lower of cost or
fair market value.

  Warburton Litigation.  The Company, KSC and KSC Recovery were named or became
cross-defendants in certain litigation in the U.S. Federal District Court for
the District of Northern California (Case No. C-93-1114 CW) commenced by IMACC
Corporation ("IMACC") against Dorothy Warburton ("Warburton") and others seeking
a determination of liability, contribution and indemnification for the costs of
environmental remediation for two sites that had been used at one time by IMACC
in conjunction with its barrel reconditioning business.  Warburton is the owner
of the sites in question.  At one time, KSC, through a wholly owned subsidiary,
owned the business now operated by IMACC.

                                       87
<PAGE>

Certain other Warburton family defendants are claiming that they should be
indemnified by KSC's subsidiary or by the Company for actions they took while
officers of the KSC subsidiary. A settlement was reached in the litigation with
respect to the environmental claims, which required payment of less than
$100,000 by the Company and by KSC Recovery. The Company's cash contribution to
the settlement was immaterial. While there was a tentative settlement of the
environmental matters (which has now been finalized), a trial was held in
November 1996, relating to the indemnity claims and related matters. The Court
had previously ruled that either the Company or KSC was the alter ego of KSC's
subsidiary, Myers Drum Company. The Court also subsequently ruled that in these
particular circumstances, the request for indemnification did not rise to the
level of being a claim in bankruptcy at the time of the bankruptcy and thus
could not be discharged. With the announcement of the Court's decision,
there is now a dispute over the award of attorney's fees. Two of the estates
claim that the Company and IMACC jointly owe them approximately $1.7 million in
attorneys fees and IMACC believes it is in turn entitled to attorneys' fees.
Even if the Company should be found liable for the attorneys' fees, which it
vigorously contests, IMACC is obligated to indemnify the Company for all such
amounts. Since the Company believes it has full indemnification coverage from
IMACC, no provision for any potential loss has been made in the accompanying
financial statements.

  Johnson Machinery, Inc.  It is alleged that the Company is liable for the
theft of equipment or other items from land leased by the Company.  Johnson
Machinery, the Plaintiff, claims that there was a theft of equipment with a
value of approximately $1.2 million from a warehouse on the West End Property
owned by the Company.  (Johnson Machinery, Inc. v. Lusk/Kaiser West End Joint
Venture et al. - San Bernardino County Superior Court:  Case No. RCV 23757). The
Company believes the lawsuit is without merit and is vigorously defending such
lawsuit.

  Apollo Wood Litigation:  On November 11, 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.)

  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

                                       88
<PAGE>

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 Regional Water
Quality Control Board.  The City has not yet filed an amended complaint.  The
Company will vigorously defend any continuation of this litigation.

BANKRUPTCY ADVERSARY LITIGATION/CLAIMS

  The Company's predecessor, KSC, was in reorganization under Chapter 11 of the
United States Bankruptcy Code from February 1987 until November 1988.  Pursuant
to the KSC Plan of Reorganization, the Company has established a subsidiary, KSC
Recovery, Inc. ("KSC Recovery") see Note 2, which was engaged in the process of
pursuing certain legal actions on behalf of the former creditors of KSC and
handling the remaining administrative duties of the KSC bankruptcy estate,
including claims resolution.

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

OTHER LITIGATION

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

  See also Note 21. Subsequent Events.

NOTE 21.  SUBSEQUENT EVENTS

  Nippon Fire & Marine Insurance Co.  In February 1998, the Company was served
with a complaint alleging that the Company, certain subsidiaries of the Company
and others are liable for approximately $1.8 million paid by Nippon Fire &
Marine Insurance Co., Ltd. to Toshiba America Information System,

                                       89
<PAGE>

Inc. as a result of the theft of a load of lap top computers from a semi-truck
owned by PST Vans a former tenant on the West End Property. (Nippon Fire &
Marine Insurance Co., Ltd., a corporation, and Toshiba America Information
System, Inc. v. PST Vans, Inc., a corporation; PST Van Line, Inc. a corporation;
Burns International, Inc., a corporation; Burns International Security Services,
Inc., a corporation; Borg-Warner Security Corporation, a corporation; Kaiser
Steel and Land Development, Inc., a corporation; Kaiser Ventures Inc., a
corporation; Kaiser Resources Inc., a corporation; Lusk-Kaiser West End Joint
Venture, a business entity). The Company currently believes it has numerous
defenses to this litigation and is vigorously defending the case.

  Cucamonga County Water District.   The Company is involved in a rate dispute
with Cucamonga. Such dispute involves amounts owed to the Company under the
terms of its lease of Fontana Union Water stock to Cucamonga. This dispute
arises out of a change made by the Metropolitan Water District in its water
rates and rate structure effective July 1, 1995. In April 1996 litigation was
commenced by the Company against Cucamonga to resolve the dispute.

  After a five-day trial in March 1998, the Court concluded 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 lease rate. If the parties are unable
to agree on a substitute lease rate, the matter is referred to arbitration for
resolution. There is no specified time period in which the new lease rate must
be established.

                                       90
<PAGE>

NOTE 22.  QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                             First Quarter     Second Quarter    Third Quarter    Fourth Quarter
                                             -------------     --------------    -------------    --------------
<S>                                          <C>               <C>               <C>              <C>
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 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

1995

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

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

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

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

Earnings per share
   Basic                                       $      .00           $      .00       $      .01        $      .12
   Diluted                                     $      .00           $      .00       $      .01        $      .12
</TABLE>

                                       91
<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, 1997
---------------------------------------

Allowance for losses in collection
of current accounts receivable.........           $1,034,000                $542,000                $ 41,000            $1,535,000
                                             ===============       =================        ================        ==============

YEAR ENDED DECEMBER 31, 1996
---------------------------------------

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

YEAR ENDED DECEMBER 31, 1995
---------------------------------------

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

(A) Although the Company is continuing to bill Cucamonga at what it believes is
the correct Metropolitan Water District of Southern California ("MWD") rate
under the lease with Cucamonga, the Company has elected to reserve the full
amount in dispute and report revenues on the basis of amounts received.  The
total amount of lease payments in dispute for the years ending December 31,
1997, 1996 and 1995 are approximately $488,000, $668,000 and $80,000,
respectively.

(B)  Amount charged off during the year.

                                       92