##### 









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended
September 30, 2004

Commission file number 1-3605

Kaiser Aluminum & Chemical
Corporation

(Exact name of registrant as specified in its
charter)


|                                                |  |                                     
|----------------------------------------------- |  | ------------------------------------
|Delaware                                        |  | 94-0928288                          
|(State of incorporation)                        |  | (I.R.S. Employer Identification No.)
|                                               
|5847 San Felipe, Suite 2500,
    Houston, Texas |  | 77057-3268(Zip Code)                
|(Address of principal executive
    offices)    |  |                                     

(713) 267-3777

(Registrants telephone number, including
area code)


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

Indicate by check mark whether the registrant is
an accelerated filer (as defined by Rule 12b-2 of the
Exchange
Act).     Yes o          No þ

At October 31, 2004, the registrant had
46,171,365 shares of Common Stock outstanding.



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TABLE OF CONTENTS



|                                |                                                                                               |  |  |  |  |  |  | 
|------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION
|                                | Item 1. Financial Statements                                                                 
|                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                | Item 4. Controls and Procedures                                                              
|PART II -- OTHER INFORMATION   
|                                | Item 1. Legal Proceedings                                                                    
|                                | Item 6. Exhibits                                                                             
|SIGNATURE                      
|EXHIBIT INDEX                  

KAISER ALUMINUM & CHEMICAL
CORPORATION AND SUBSIDIARY COMPANIES

(Debtor-in-Possession)





PART I  FINANCIAL
INFORMATION






|        |                     
|------- | --------------------
|Item 1. | Financial Statements

CONSOLIDATED BALANCE SHEETS

|                                                             |                                                                                                      |                                                                         |                           |              |          |         |         |          |          |         | 
|------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------- | ------------ | -------- | ------- | ------- | -------- | -------- | ------- | 
|                                                             |                                                                                                      | September 30,                                                           |                           | December 31,
|                                                             |                                                                                                      | 2004                                                                    |                           | 2003        
|                                                             |                                                                                                      |                                                                         |                           |             
|                                                             |                                                                                                      |                                                                        
|                                                             |                                                                                                      | (Unaudited)                                                            
|                                                             |                                                                                                      | (In millions of dollars)                                               
|ASSETS                                                      
|Current assets:                                              |                                                                                                      |                                                                         |                           |              |          |         |         |         
|                                                             | Cash and cash equivalents                                                                            |                                                                         | $                         | 31.9         |          |         | $       | 35.6     |         
|                                                             | Receivables:                                                                                         |                                                                         |                           |              |          |         |         |          |         
|                                                             |                                                                                                      | Trade, less allowance for doubtful receivables of
    $6.5 and $6.4     |                           |              | 105.7    |         |         |          | 65.4     |        
|                                                             |                                                                                                      | Other                                                                   |                           |              | 10.8     |         |         |          | 25.0     |        
|                                                             | Inventories                                                                                          |                                                                         |                           | 131.4        |          |         |         | 102.6    |         
|                                                             | Prepaid expenses and other current assets                                                            |                                                                         |                           | 36.6         |          |         |         | 23.9     |         
|                                                             | Discontinued operations current assets                                                              |                                                                         |                           | 96.0         |          |         |         | 178.7    |         
|                                                             |                                                                                                      |                                                                         |                           |              |          |         |         |         
|                                                             |                                                                                                      |                                                                         | Total current assets      |              |          | 412.4   |         |          |          | 431.2   | 
|Investments in and advances to unconsolidated
    affiliates |                                                                                                      |                                                                         | 55.5                      |              |          |         | 50.9    |         
|Property, plant, and equipment  net                         |                                                                                                      |                                                                         | 217.7                     |              |          |         | 230.1   |         
|Restricted proceeds from sale of commodity
    interests     |                                                                                                      |                                                                         | 302.6                     |              |          |         |        |         
|Other assets                                                 |                                                                                                      |                                                                         | 488.1                     |              |          |         | 520.5   |         
|Discontinued operations long-term assets                    |                                                                                                      |                                                                         | 49.7                      |              |          |         | 396.0   |         
|                                                             |                                                                                                      |                                                                         |                           |              |          |         |         |         
|                                                             |                                                                                                      |                                                                         | Total                     |              | $        | 1,526.0 |         |          | $        | 1,628.7 | 
|                                                             |                                                                                                      |                                                                         |                           |              |          |         |         |         
|                                                            
|LIABILITIES & STOCKHOLDERS
    EQUITY (DEFICIT)            
|Liabilities not subject to compromise                       |                                                                                                      |                                                                         |                           |              |          |         |         |         
|                                                             | Current liabilities:                                                                                 |                                                                         |                           |              |          |         |         |          |         
|                                                             |                                                                                                      | Accounts payable                                                        |                           | $            | 48.4     |         |         | $        | 40.1     |        
|                                                             |                                                                                                      | Accrued interest                                                        |                           |              | .9       |         |         |          | .8       |        
|                                                             |                                                                                                      | Accrued salaries, wages, and related expenses                           |                           |              | 32.9     |         |         |          | 31.6     |        
|                                                             |                                                                                                      | Accrued postretirement medical benefit
    obligation  current portion |                           |              | 1.1      |         |         |          | 32.5     |        
|                                                             |                                                                                                      | Other accrued liabilities                                               |                           |              | 70.6     |         |         |          | 32.6     |        
|                                                             |                                                                                                      | Payable to affiliates                                                   |                           |              | 45.8     |         |         |          | 43.6     |        
|                                                             |                                                                                                      | Long-term debt  current portion                                        |                           |              | 1.2      |         |         |          | 1.3      |        
|                                                             |                                                                                                      | Discontinued operations current liabilities                            |                           |              | 109.1    |         |         |          | 137.0    |        
|                                                             |                                                                                                      |                                                                         |                           |              |          |         |         |         
|                                                             |                                                                                                      |                                                                         | Total current liabilities |              |          | 310.0   |         |          |          | 319.5   | 
|                                                             | Long-term liabilities                                                                                |                                                                         |                           | 44.5         |          |         |         | 59.4     |         
|                                                             | Long-term debt                                                                                       |                                                                         |                           | 2.2          |          |         |         | 2.2      |         
|                                                             | Discontinued operations long-term
    liabilities, including minority interests of $13.9 and $121.1 |                                                                         |                           | 54.2         |          |         |         | 195.6    |         
|                                                             |                                                                                                      |                                                                         |                           |              |          |         |         |         
|                                                             |                                                                                                      |                                                                         | 410.9                     |              |          |         | 576.7   |         
|Liabilities subject to compromise                            |                                                                                                      |                                                                         | 2,856.0                   |              |          |         | 2,783.2 |         
|Commitments and contingencies                                |                                                                                                      |                                                                         |                           |              |          |         |         |         
|Stockholders equity (deficit):                              |                                                                                                      |                                                                         |                           |              |          |         |         |         
|                                                             | Preference stock                                                                                     |                                                                         |                           | .7           |          |         |         | .7       |         
|                                                             | Common stock                                                                                         |                                                                         |                           | 15.4         |          |         |         | 15.4     |         
|                                                             | Additional capital                                                                                   |                                                                         |                           | 2,453.6      |          |         |         | 2,454.0  |         
|                                                             | Accumulated deficit                                                                                  |                                                                         |                           | (2,010.8     | )        |         |         | (1,901.7 | )       
|                                                             | Accumulated other comprehensive income (loss)                                                        |                                                                         |                           | (8.1         | )        |         |         | (107.9   | )       
|                                                             | Less: Note receivable from parent                                                                    |                                                                         |                           | (2,191.7     | )        |         |         | (2,191.7 | )       
|                                                             |                                                                                                      |                                                                         |                           |              |          |         |         |         
|                                                             |                                                                                                      | Total stockholders equity (deficit)                                    |                           |              | (1,740.9 | )       |         |          | (1,731.2 | )      
|                                                             |                                                                                                      |                                                                         |                           |              |          |         |         |         
|                                                             |                                                                                                      |                                                                         | Total                     |              | $        | 1,526.0 |         |          | $        | 1,628.7 | 
|                                                             |                                                                                                      |                                                                         |                           |              |          |         |         |         

The accompanying notes to interim consolidated
financial statements are an integral part of these statements.

1



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##### 



KAISER ALUMINUM & CHEMICAL
CORPORATION AND SUBSIDIARY COMPANIES


(Debtor-in-Possession)


STATEMENTS OF CONSOLIDATED INCOME
(LOSS)

|                                                         |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |        |       | 
|-------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------ | ----------------- | ----- | ---- | ----- | ----- | ----- | - | ------ | ----- | ----- | - | ------ | ------ | ----- | 
|                                                         |                                                                                                                                               |                          |        |                  
|                                                         |                                                                                                                                               | Quarter Ended            |        | Nine Months Ended
|                                                         |                                                                                                                                               | September 30,            |        | September 30,    
|                                                         |                                                                                                                                               |                          |        |                  
|                                                         |                                                                                                                                               | 2004                     |        | 2003              |       | 2004 |       | 2003 
|                                                         |                                                                                                                                               |                          |        |                   |       |      |       |      
|                                                         |                                                                                                                                               |                         
|                                                         |                                                                                                                                               | (Unaudited)             
|                                                         |                                                                                                                                               | (In millions of dollars)
|Net sales                                                |                                                                                                                                               | $                        | 281.8  |                   |       | $    | 203.1 |       |       | $ | 792.7  |       |       | $ | 613.2  |       
|                                                         |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |       
|Costs and expenses:                                      |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |       
|                                                         | Cost of products sold                                                                                                                         |                          |        | 245.3             |       |      |       | 189.7 |       |   |        | 700.7 |       |   |        | 570.6  |      
|                                                         | Depreciation and amortization                                                                                                                 |                          |        | 5.9               |       |      |       | 6.3   |       |   |        | 16.9  |       |   |        | 20.3   |      
|                                                         | Selling, administrative, research and
    development, and general                                                                            |                          |        | 26.8              |       |      |       | 25.0  |       |   |        | 68.2  |       |   |        | 73.1   |      
|                                                         | Other operating charges (benefits), net                                                                                                       |                          |        | 154.7             |       |      |       | 15.0  |       |   |        | 154.7 |       |   |        | 4.7    |      
|                                                         |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |       
|                                                         |                                                                                                                                               | Total costs and expenses |        |                   | 432.7 |      |       |       | 236.0 |   |        |       | 940.5 |   |        |        | 668.7 | 
|                                                         |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |       
|Operating loss                                           |                                                                                                                                               |                          | (150.9 | )                 |       |      | (32.9 | )     |       |   | (147.8 | )     |       |   | (55.5  | )     
|Other income (expense):                                  |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |       
|                                                         | Interest expense (excluding unrecorded
    contractual interest expense of $23.7 for both quarters and
    $71.2 for both nine-month periods) |                          |        | (2.3              | )     |      |       | (2.5  | )     |   |        | (6.4  | )     |   |        | (7.1   | )    
|                                                         | Reorganization items                                                                                                                          |                          |        | (10.0             | )     |      |       | (5.4  | )     |   |        | (28.9 | )     |   |        | (20.2  | )    
|                                                         | Other  net                                                                                                                                   |                          |        | 1.3               |       |      |       | (6.7  | )     |   |        | 5.2   |       |   |        | (8.7   | )    
|                                                         |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |       
|Loss before income taxes and discontinued
    operations |                                                                                                                                               |                          | (161.9 | )                 |       |      | (47.5 | )     |       |   | (177.9 | )     |       |   | (91.5  | )     
|Provision for income taxes                               |                                                                                                                                               |                          | (4.7   | )                 |       |      | (1.4  | )     |       |   | (13.5  | )     |       |   | (5.8   | )     
|                                                         |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |       
|Loss from continuing operations                          |                                                                                                                                               |                          | (166.6 | )                 |       |      | (48.9 | )     |       |   | (191.4 | )     |       |   | (97.3  | )     
|                                                         |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |       
|Discontinued operations:                                 |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |       
|                                                         | Loss from discontinued operations, net of income
    taxes, including minority interests                                                      |                          |        | (4.4              | )     |      |       | (39.7 | )     |   |        | (42.7 | )     |   |        | (117.7 | )    
|                                                         | Gain from sale of commodity interests                                                                                                         |                          |        | 101.6             |       |      |       |      |       |   |        | 125.0 |       |   |        |       |      
|                                                         |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |       
|Income (loss) from discontinued operations               |                                                                                                                                               |                          | 97.2   |                   |       |      | (39.7 | )     |       |   | 82.3   |       |       |   | (117.7 | )     
|                                                         |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |       
|Net loss                                                 |                                                                                                                                               | $                        | (69.4  | )                 |       | $    | (88.6 | )     |       | $ | (109.1 | )     |       | $ | (215.0 | )     
|                                                         |                                                                                                                                               |                          |        |                   |       |      |       |       |       |   |        |       |       |   |        |       

The accompanying notes to interim consolidated
financial statements are an integral part of these statements.

2



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##### 



KAISER ALUMINUM & CHEMICAL
CORPORATION AND SUBSIDIARY COMPANIES


(Debtor-in-Possession)


STATEMENTS OF CONSOLIDATED STOCKHOLDERS
EQUITY (DEFICIT)

AND COMPREHENSIVE INCOME (LOSS)


For the Nine Months Ended September 30,
2004


(Unaudited)


(In millions of dollars)


|                            |                                                                                                                                                                                                |            |    |        |  |            |      |             |  |               |         |            |   |       |          |        |   |   |        |      |  |   |          |   |  |   |          |        |  
|--------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- | -- | ------ |  | ---------- | ---- | ----------- |  | ------------- | ------- | ---------- | - | ----- | -------- | ------ | - | - | ------ | ---- |  | - | -------- | - |  | - | -------- | ------ | -
|                            |                                                                                                                                                                                                |            |    |        |  |            |      |             |  | Accumulated   |         |            |   |      
|                            |                                                                                                                                                                                                |            |    |        |  |            |      |             |  | Other         |         | Note       |   |      
|                            |                                                                                                                                                                                                |            |    |        |  |            |      |             |  | Comprehensive |         | Receivable |   |      
|                            |                                                                                                                                                                                                | Preference |    | Common |  | Additional |      | Accumulated |  | Income        |         | From       |   |      
|                            |                                                                                                                                                                                                | Stock      |    | Stock  |  | Capital    |      | Deficit     |  | (Loss)        |         | Parent     |   | Total
|                            |                                                                                                                                                                                                |            |    |        |  |            |      |             |  |               |         |            |   |      
|BALANCE, December 31, 2003  |                                                                                                                                                                                                | $          | .7 |        |  | $          | 15.4 |             |  | $             | 2,454.0 |            |   | $     | (1,901.7 | )      |   | $ | (107.9 | )    |  | $ | (2,191.7 | ) |  | $ | (1,731.2 | )     
|                            | Net loss                                                                                                                                                                                       |            |    |       |  |            |      |            |  |               |         |           |   |       |          | (109.1 | ) |   |        |     |  |   |          |  |  |   |          | (109.1 | )
|                            | Minimum pension liability adjustment during the
    quarter ended September 30, 2004                                                                                                           |            |    |       |  |            |      |            |  |               |         |           |   |       |          |       |   |   |        | 96.7 |  |   |          |  |  |   |          | 96.7   |  
|                            | Unrealized net increase in value of derivative
    instruments arising during the period (including net increase in
    value of $1.2 for the quarter ended September 30, 2004)                |            |    |       |  |            |      |            |  |               |         |           |   |       |          |       |   |   |        | 2.0  |  |   |          |  |  |   |          | 2.0    |  
|                            | Reclassification adjustment for net realized
    losses on derivative instruments included in net loss (including
    net realized losses of $.3 for the quarter ended
    September 30, 2004) |            |    |       |  |            |      |            |  |               |         |           |   |       |          |       |   |   |        | 1.1  |  |   |          |  |  |   |          | 1.1    |  
|                            |                                                                                                                                                                                                |            |    |        |  |            |      |             |  |               |         |            |   |       |          |        |   |   |        |      |  |   |          |   |  |   |          |       
|                            | Comprehensive income (loss)                                                                                                                                                                    |            |    |       |  |            |      |            |  |               |         |           |   |       |          |       |   |   |        |     |  |   |          |  |  |   |          | (9.3   | )
|                            | Restricted stock cancellations                                                                                                                                                                 |            |    |       |  |            |      |            |  |               |         | (.4        | ) |       |          |       |   |   |        |     |  |   |          |  |  |   |          | (.4    | )
|                            |                                                                                                                                                                                                |            |    |        |  |            |      |             |  |               |         |            |   |       |          |        |   |   |        |      |  |   |          |   |  |   |          |       
|BALANCE, September 30, 2004 |                                                                                                                                                                                                | $          | .7 |        |  | $          | 15.4 |             |  | $             | 2,453.6 |            |   | $     | (2,010.8 | )      |   | $ | (8.1   | )    |  | $ | (2,191.7 | ) |  | $ | (1,740.9 | )     
|                            |                                                                                                                                                                                                |            |    |        |  |            |      |             |  |               |         |            |   |       |          |        |   |   |        |      |  |   |          |   |  |   |          |       

For the Nine Months Ended September 30,
2003

|                            |                                                                                                                                                                                              |            |    |        |  |            |      |             |  |               |         |            |   |       |          |        |   |   |        |      |   |   |          |   |  |   |          |        |  
|--------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- | -- | ------ |  | ---------- | ---- | ----------- |  | ------------- | ------- | ---------- | - | ----- | -------- | ------ | - | - | ------ | ---- | - | - | -------- | - |  | - | -------- | ------ | -
|                            |                                                                                                                                                                                              |            |    |        |  |            |      |             |  | Accumulated   |         |            |   |      
|                            |                                                                                                                                                                                              |            |    |        |  |            |      |             |  | Other         |         | Note       |   |      
|                            |                                                                                                                                                                                              |            |    |        |  |            |      |             |  | Comprehensive |         | Receivable |   |      
|                            |                                                                                                                                                                                              | Preference |    | Common |  | Additional |      | Accumulated |  | Income        |         | From       |   |      
|                            |                                                                                                                                                                                              | Stock      |    | Stock  |  | Capital    |      | Deficit     |  | (Loss)        |         | Parent     |   | Total
|                            |                                                                                                                                                                                              |            |    |        |  |            |      |             |  |               |         |            |   |      
|BALANCE, December 31, 2002  |                                                                                                                                                                                              | $          | .7 |        |  | $          | 15.4 |             |  | $             | 2,454.8 |            |   | $     | (1,113.6 | )      |   | $ | (243.9 | )    |   | $ | (2,191.7 | ) |  | $ | (1,078.3 | )     
|                            | Net loss                                                                                                                                                                                     |            |    |        |  |            |      |            |  |               |         |           |   |       |          | (215.0 | ) |   |        |     |   |   |          |  |  |   |          | (215.0 | )
|                            | Unrealized net decrease in value of derivative
    instruments arising during the period (including net decrease in
    value of $1.9 for the quarter ended September 30, 2003)              |            |    |        |  |            |      |            |  |               |         |           |   |       |          |       |   |   |        | (1.3 | ) |   |          |  |  |   |          | (1.3   | )
|                            | Reclassification adjustment for net realized
    gains on derivative instruments included in net loss (including
    net realized gains of $.2 for the quarter ended
    September 30, 2003) |            |    |        |  |            |      |            |  |               |         |           |   |       |          |       |   |   |        | (.7  | ) |   |          |  |  |   |          | (.7    | )
|                            |                                                                                                                                                                                              |            |    |        |  |            |      |             |  |               |         |            |   |       |          |        |   |   |        |      |   |   |          |   |  |   |          |       
|                            | Comprehensive income (loss)                                                                                                                                                                  |            |    |        |  |            |      |             |  |               |         |           |   |       |          |       |   |   |        |     |   |   |          |  |  |   |          | (217.0 | )
|                            | Restricted stock cancellations                                                                                                                                                               |            |    |        |  |            |      |             |  |               |         | (.9        | ) |       |          |       |   |   |        |     |   |   |          |  |  |   |          | (.9    | )
|                            | Restricted stock accretion                                                                                                                                                                   |            |    |        |  |            |      |            |  |               |         | .3         |   |       |          |       |   |   |        |     |   |   |          |  |  |   |          | .3     |  
|                            |                                                                                                                                                                                              |            |    |        |  |            |      |             |  |               |         |            |   |       |          |        |   |   |        |      |   |   |          |   |  |   |          |       
|BALANCE, September 30, 2003 |                                                                                                                                                                                              | $          | .7 |        |  | $          | 15.4 |             |  | $             | 2,454.2 |            |   | $     | (1,328.6 | )      |   | $ | (245.9 | )    |   | $ | (2,191.7 | ) |  | $ | (1,295.9 | )     
|                            |                                                                                                                                                                                              |            |    |        |  |            |      |             |  |               |         |            |   |       |          |        |   |   |        |      |   |   |          |   |  |   |          |       

The accompanying notes to interim consolidated
financial statements are an integral part of these statements.

3



---



##### 



KAISER ALUMINUM & CHEMICAL
CORPORATION AND SUBSIDIARY COMPANIES


(Debtor-in-Possession)


STATEMENTS OF CONSOLIDATED CASH
FLOWS

|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |        |       |       |  
|----------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------ | ----- | ------ | ----- | ------ | ----- | ----- | -
|                                                                                    |                                                                                                                                                                              |                                                                                                     
|                                                                                    |                                                                                                                                                                              | Nine Months Ended                                                                                   
|                                                                                    |                                                                                                                                                                              | September 30,                                                                                       
|                                                                                    |                                                                                                                                                                              |                                                                                                     
|                                                                                    |                                                                                                                                                                              | 2004                                                                                                 |                                           | 2003  
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |       
|                                                                                    |                                                                                                                                                                              |                                                                                                     
|                                                                                    |                                                                                                                                                                              | (Unaudited)                                                                                         
|                                                                                    |                                                                                                                                                                              | (In millions of                                                                                     
|                                                                                    |                                                                                                                                                                              | dollars)                                                                                            
|Cash flows from operating activities:                                               |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|                                                                                    | Net loss                                                                                                                                                                     |                                                                                                      | $                                         | (109.1 | )     |        | $     | (215.0 | )    
|                                                                                    | Less net income (loss) from discontinued
    operations                                                                                                                      |                                                                                                      |                                           | 82.3   |       |        |       | (117.7 | )    
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|                                                                                    | Net loss from continuing operations                                                                                                                                          |                                                                                                      |                                           | (191.4 | )     |        |       | (97.3  | )    
|                                                                                    | Adjustments to reconcile net loss from continuing
    operations to net cash (used) provided by continuing
    operations:                                                   |                                                                                                      |                                           |        |       |        |       |        |      
|                                                                                    |                                                                                                                                                                              | Depreciation and amortization (including deferred
    financing costs of $3.6 and $3.8 respectively) |                                           |        | 20.5  |        |       |        | 24.1  |      
|                                                                                    |                                                                                                                                                                              | Non-cash charges in other operating charges                                                          |                                           |        | 155.5 |        |       |        | 1.1   |      
|                                                                                    |                                                                                                                                                                              | Gain on sale of Tacoma facility                                                                      |                                           |        |      |        |       |        | (14.5 | )    
|                                                                                    |                                                                                                                                                                              | Equity in earnings of unconsolidated affiliates,
    net of distributions                            |                                           |        | (4.6  | )      |       |        | (7.2  | )    
|                                                                                    |                                                                                                                                                                              | Increase in trade and other receivables                                                              |                                           |        | (25.9 | )      |       |        | (8.1  | )    
|                                                                                    |                                                                                                                                                                              | (Increase) decrease in inventories                                                                   |                                           |        | (28.0 | )      |       |        | 4.8   |      
|                                                                                    |                                                                                                                                                                              | Increase in prepaid expenses and other current
    assets                                            |                                           |        | (.6   | )      |       |        | (1.9  | )    
|                                                                                    |                                                                                                                                                                              | Increase in accounts payable and accrued interest                                                    |                                           |        | 9.1   |        |       |        | 13.9  |      
|                                                                                    |                                                                                                                                                                              | Decrease in other accrued liabilities                                                                |                                           |        | (.5   | )      |       |        | (.4   | )    
|                                                                                    |                                                                                                                                                                              | Increase in payable to affiliates                                                                    |                                           |        | 2.1   |        |       |        | 14.0  |      
|                                                                                    |                                                                                                                                                                              | Increase (decrease) in accrued and deferred
    income taxes                                         |                                           |        | 6.6   |        |       |        | (28.2 | )    
|                                                                                    |                                                                                                                                                                              | Net cash impact of changes in long-term assets
    and liabilities                                   |                                           |        | 5.3   |        |       |        | 66.6  |      
|                                                                                    |                                                                                                                                                                              | Net cash provided (used) by discontinued
    operations                                              |                                           |        | 40.5  |        |       |        | (45.6 | )    
|                                                                                    |                                                                                                                                                                              | Other                                                                                                |                                           |        | 4.0   |        |       |        | (2.6  | )    
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|                                                                                    |                                                                                                                                                                              |                                                                                                      | Net cash used by operating activities     |        |       | (7.4   | )     |        |       | (81.3 | )
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|Cash flows from investing activities:                                               |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|                                                                                    | Net proceeds (payments) associated with
    dispositions: primarily Tacoma facility and interests in office
    building complex in 2003                                     |                                                                                                      |                                           | (5.7   | )     |        |       | 82.0   |      
|                                                                                    | Capital expenditures                                                                                                                                                         |                                                                                                      |                                           | (4.5   | )     |        |       | (6.2   | )    
|                                                                                    | Net cash provided (used) by discontinued
    operations: primarily proceeds from the sale of commodity
    interests in 2004 and Alpart-related capital expenditures in 2003 |                                                                                                      |                                           | 328.5  |       |        |       | (19.9  | )    
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|                                                                                    |                                                                                                                                                                              |                                                                                                      | Net cash provided by investing activities |        |       | 318.3  |       |        |       | 55.9  |  
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|Cash flows from financing activities:                                               |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|Financing costs, primarily DIP
    Facility  related                               |                                                                                                                                                                              |                                                                                                      | (1.7                                      | )      |       |        | (4.0  | )     
|Net cash used by discontinued operations:
    primarily increase in restricted cash |                                                                                                                                                                              |                                                                                                      | (312.9                                    | )      |       |        |      |       
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|                                                                                    |                                                                                                                                                                              |                                                                                                      | Net cash used by financing activities     |        |       | (314.6 | )     |        |       | (4.0  | )
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|Net decrease in cash and cash equivalents during
    the period                     |                                                                                                                                                                              |                                                                                                      | (3.7                                      | )      |       |        | (29.4 | )     
|Cash and cash equivalents at beginning of period                                    |                                                                                                                                                                              |                                                                                                      | 35.6                                      |        |       |        | 77.6  |       
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|Cash and cash equivalents at end of period                                          |                                                                                                                                                                              | $                                                                                                    | 31.9                                      |        |       | $      | 48.2  |       
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|Supplemental disclosure of cash flow information:                                   |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|                                                                                    | Interest paid, net of capitalized interest of $.1
    and $1.0, respectively                                                                                                 |                                                                                                      | $                                         | 3.3    |       |        | $     | 2.5    |      
|                                                                                    | Less interest paid by discontinued operations,
    net of capitalized interest of $.8 in 2003                                                                                |                                                                                                      |                                           | (.9    | )     |        |       | (.5    | )    
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|                                                                                    |                                                                                                                                                                              | $                                                                                                    | 2.4                                       |        |       | $      | 2.0   |       
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|                                                                                    | Income taxes paid                                                                                                                                                            |                                                                                                      | $                                         | 8.5    |       |        | $     | 44.7   |      
|                                                                                    | Less income taxes paid by discontinued operations                                                                                                                            |                                                                                                      |                                           | (4.5   | )     |        |       | (16.5  | )    
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       
|                                                                                    |                                                                                                                                                                              | $                                                                                                    | 4.0                                       |        |       | $      | 28.2  |       
|                                                                                    |                                                                                                                                                                              |                                                                                                      |                                           |        |       |        |       |       

The accompanying notes to interim consolidated
financial statements are an integral part of these statements.

4



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES

(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS

(In millions of dollars)


(Unaudited)


1.     Reorganization
Proceedings

Kaiser Aluminum & Chemical Corporation (the
Company), its parent company, Kaiser Aluminum
Corporation (Kaiser or KAC), and 24 of
the Companys subsidiaries have filed separate voluntary
petitions in the United States Bankruptcy Court for the District
of Delaware (the Court) for reorganization under
Chapter 11 of the United States Bankruptcy Code (the
Code); the Company, Kaiser and 15 of the
Companys subsidiaries (the Original Debtors)
filed in the first quarter of 2002 and nine additional Company
subsidiaries (the Additional Debtors) filed in the
first quarter of 2003. The Original Debtors and Additional
Debtors are collectively referred to herein as the
Debtors and the Chapter 11 proceedings of these
entities are collectively referred to herein as the
Cases. For purposes of this Report, the term
Filing Date means, with respect to any particular
Debtor, the date on which such Debtor filed its Case. None of
the Companys non-U.S. joint ventures are included in the
Cases. The Cases are being jointly administered. The Debtors are
managing their businesses in the ordinary course as
debtors-in-possession subject to the control and administration
of the Court.

Original Debtors.During the first quarter of 2002, the Original Debtors filed
separate voluntary petitions for reorganization. The wholly
owned subsidiaries of the Company included in such filings were:
Kaiser Bellwood Corporation (Bellwood), Kaiser
Aluminium International, Inc. (KAII), Kaiser
Aluminum Technical Services, Inc. (KATSI), Kaiser
Alumina Australia Corporation (KAAC) (and its wholly
owned subsidiary, Kaiser Finance Corporation (KFC))
and ten other entities with limited balances or activities.

The necessity for filing the Cases by the
Original Debtors was attributable to the liquidity and cash flow
problems of the Company and its subsidiaries arising in late
2001 and early 2002. The Company was facing significant
near-term debt maturities at a time of unusually weak aluminum
industry business conditions, depressed aluminum prices and a
broad economic slowdown that was further exacerbated by the
events of September 11, 2001. In addition, the Company had
become increasingly burdened by asbestos litigation and growing
legacy obligations for retiree medical and pension costs. The
confluence of these factors created the prospect of continuing
operating losses and negative cash flows, resulting in lower
credit ratings and an inability to access the capital markets.

The outstanding principal of, and accrued
interest on, all debt of the Original Debtors became immediately
due and payable upon commencement of the Cases. However, the
vast majority of the claims in existence at the Filing Date
(including claims for principal and accrued interest and
substantially all legal proceedings) are stayed
(deferred) during the pendency of the Cases. In connection
with the filing of the Original Debtors Cases, the Court,
upon motion by the Original Debtors, authorized the Original
Debtors to pay or otherwise honor certain unsecured pre-Filing
Date claims, including employee wages and benefits and customer
claims in the ordinary course of business, subject to certain
limitations. In July 2002, the Court also issued a final order
authorizing the Company to fund the cash requirements of its
foreign joint ventures in the ordinary course of business and to
continue using the Companys existing cash management
systems. The Original Debtors also have the right to assume or
reject executory contracts existing prior to the Filing Date,
subject to Court approval and certain other limitations. In this
context, assumption means that the Original Debtors
agree to perform their obligations and cure certain existing
defaults under an executory contract and rejection
means that the Original Debtors are relieved from their
obligations to perform further under an executory contract and
are subject only to a claim for damages for the breach thereof.
Any claim for damages resulting from the rejection of a
pre-Filing Date executory contract is treated as a general
unsecured claim in the Cases.

Generally, pre-Filing Date claims, including
certain contingent or unliquidated claims, against the Original
Debtors will fall into two categories: secured and unsecured.
Under the Code, a creditors claim is

5



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


treated as secured only to the extent of the
value of the collateral securing such claim, with the balance of
such claim being treated as unsecured. Unsecured and partially
secured claims do not accrue interest after the Filing Date. A
fully secured claim, however, does accrue interest after the
Filing Date until the amount due and owing to the secured
creditor, including interest accrued after the Filing Date, is
equal to the value of the collateral securing such claim. The
Court set January 31, 2003 as the last date by which holders of
pre-Filing Date claims against the Original Debtors (other than
asbestos-related personal injury claims and certain hearing loss
and other claims) could file their claims. Any holder of a claim
that was required to file such claim by January 31, 2003
and did not do so may be barred from asserting such claim
against any of the Original Debtors and, accordingly, may not be
able to participate in any distribution in any of the Cases on
account of such claim. The Company has not yet completed its
analysis of all of the proofs of claim to determine their
validity. However, during the course of the Cases, certain
matters in respect of the claims have been resolved. Material
provisions in respect of claim settlements are included in the
accompanying financial statements and are fully disclosed
elsewhere herein. The January 31, 2003 bar date does not
apply to asbestos-related personal injury claims, for which the
Original Debtors reserve the right to establish a separate bar
date at a later time. A separate bar date for certain hearing
loss and coal tar pitch volatiles claims was reset to
February 29, 2004.

Additional Debtors.On January 14, 2003, the Additional Debtors filed separate
voluntary petitions for reorganization. The wholly owned
subsidiaries included in such filings were: Kaiser Bauxite
Company (KBC), Kaiser Jamaica Corporation
(KJC), Alpart Jamaica Inc. (AJI), Kaiser
Aluminum & Chemical of Canada Limited (KACOCL)
and five other entities with limited balances or activities.
Ancillary proceedings in respect of KACOCL and two Additional
Debtors were also commenced in Canada simultaneously with the
January 14, 2003 filings.

The Cases filed by the Additional Debtors were
commenced, among other reasons, to protect the assets held by
these Debtors against possible statutory liens that might have
arisen and been enforced by the Pension Benefit Guaranty
Corporation (PBGC) primarily as a result of the
Companys failure to meet a $17.0 accelerated funding
requirement to its salaried employee retirement plan in January
2003 (see Note 9 of Notes to Consolidated Financial Statements
in the Companys Annual Report on Form 10-K for the
year ended December 31, 2003 for additional information
regarding the accelerated funding requirement). The filing of
the Cases by the Additional Debtors had no impact on the
Companys day-to-day operations.

In connection with the Additional Debtors
filings, the Court authorized the Additional Debtors to continue
to pay or otherwise honor certain pre-Filing Date claims,
including employee wages and benefits, and customer and vendor
claims in the ordinary course of business. The Court also
approved the Additional Debtors continued participation in
the Companys existing cash management systems and routine
intercompany transactions involving, among other transactions,
the transfer of materials and supplies among subsidiaries and
affiliates.

In March 2003, the Court set May 15, 2003 as
the last date by which holders of pre-Filing Date claims against
the Additional Debtors (other than asbestos-related personal
injury claims and certain hearing loss, coal tar pitch volatiles
and other claims) could file their claims. Any holder of a claim
that was required to file such claim by May 15, 2003 and
did not do so may be barred from asserting such claim against
any of the Additional Debtors and, accordingly, may not be able
to participate in any distribution in any of the Cases on
account of such claim. The Company has not yet completed its
analysis of all of the proofs of claim to determine their
validity. However, during the course of the Cases, certain
matters in respect of the claims have been resolved. Material
provisions in respect of claim settlements are included in the
accompanying financial statements and are fully disclosed
elsewhere herein.

6



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


All Debtors.Two
creditors committees, one representing the unsecured
creditors (the UCC) and the other representing the
asbestos claimants (the ACC), have been appointed as
official committees in the Cases and, in accordance with the
provisions of the Code, have the right to be heard on all
matters that come before the Court. In August 2003, the Court
approved the appointment of a committee of salaried retirees
(the 1114 Committee and, together with the UCC and
the ACC, the Committees) with whom the Debtors have
negotiated necessary changes, including the modification or
termination, of certain retiree benefits (such as medical and
insurance) under Section 1114 of the Code. The Committees,
together with the legal representatives for (a) potential
future asbestos claimants (the Asbestos Futures
Representative) and (b) potential future silica and
coal tar pitch volatile claimants (the Silica/ CTPV
Futures Representative and, collectively with the
Asbestos Futures Representative, the Futures
Representatives) that have been appointed in the Cases,
have played and will continue to play important roles in the
Cases and in the negotiation of the terms of any plan or plans
of reorganization. The Debtors are required to bear certain
costs and expenses for the Committees and the Futures
Representatives, including those of their counsel and other
advisors.

As provided by the Code, the Debtors had the
exclusive right to propose a plan of reorganization for
120 days following the initial Filing Date. The Court has
subsequently approved several extensions of the exclusivity
period for all Debtors. Most recently, the Court approved an
extension of exclusivity as to all Debtors to February 28,
2005, but the approved order provides that exclusivity can be
terminated earlier with respect to AJI, KJC, KBC and KAAC, the
four entities that own or owned certain of the Company
commodity-related interests in Jamaica, which have been
sold/monetized, and in Australia, which, are currently expected
to be sold in early 2005, in accordance with the terms of an
intercompany settlement agreement (the Intercompany
Agreement) that is pending before the Court. Additional
extensions may be sought. However, no assurance can be given
that any such future extension requests will be granted by the
Court. If the Debtors fail to file a plan of reorganization
during the exclusivity period, or if such plan is not accepted
by the requisite numbers of creditors and equity holders
entitled to vote on the plan, other parties in interest in the
Cases may be permitted to propose their own plan(s) of
reorganization for the Debtors.

The Debtors anticipate that substantially all
liabilities of the Debtors as of their Filing Date will be
settled under more than one plan of reorganization to be
proposed and voted on in accordance with the provisions of the
Code. As more fully described below, a joint plan was filed by
AJI and KJC in November 2004. Although the Debtors intend to
file and seek confirmation of additional plans, there can be no
assurance as to when the Debtors will file such additional plans
or as to whether any such plan or plans will be confirmed by the
Court and consummated.

In working toward one or more plans of
reorganization, the Debtors have been, and continue to be,
engaged in discussions with each of their key constituencies,
including the Committees, the Futures Representatives, the
PBGC, and the appropriate union representatives. The ultimate
treatment of individual groups of creditors in any such plans of
reorganization cannot be determined definitively at this time.
The ultimate treatment of and recoveries to individual creditors
is dependent on, among other things, the total amount of claims
against the Debtors as ultimately determined by the Court, the
priority of the applicable claims, the outcome of ongoing
discussions with the key constituencies, the amount of value
available for distribution in respect of claims and the
completion of the plan confirmation process consistent with
applicable bankruptcy law.

The Debtors objective is to achieve the
highest possible recoveries for all stakeholders, consistent
with the Debtors abilities to pay, and to continue the
operations of their core businesses. However, there can be no
assurance that the Debtors will be able to attain these
objectives or achieve a successful reorganization. While
valuation of the Debtors assets and estimation of
pre-Filing Date claims at this stage of the Cases are subject

7



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


to inherent uncertainties, the Debtors currently
believe that, in the aggregate, it is likely that their
liabilities will be found to significantly exceed the fair value
of their assets. Therefore, the Debtors currently believe that,
with limited exceptions, it is likely that substantially all
pre-Filing Date claims will be settled at less than 100% of
their face value and the equity interests of the Companys
stockholders will be cancelled without consideration. Further,
the Debtors believe that it is likely that: (a) the claims
of pre-petition creditors that are given certain priorities by
statute or have the benefit of guarantees or other contractual
or structural seniority will likely receive substantially
greater recoveries than pre-petition creditors that have no such
priorities or seniority; and (b) all pending and future
asbestos-related personal injury claims are likely to be
resolved through the formation, pursuant to a plan of
reorganization, of a statutory trust to which all claims would
be directed by a channeling injunction that would permanently
remove all asbestos liability from the Debtors. A similar trust
arrangement is anticipated in respect of pending and future
silica and coal tar pitch volatiles personal injury claims. A
separate trust arrangement is anticipated for hearing loss
claims. The trusts would be funded pursuant to statutory
requirements and agreements with representatives of the affected
parties, using the Debtors insurance assets and certain
other consideration that has yet to be agreed. No assurances can
be provided that the foregoing will ultimately be included in
any plan(s) of reorganization the Debtors may file. Further,
while the Debtors believe it is possible to successfully
reorganize their operations and emerge from Chapter 11 in
the first half of 2005, their ability to do so is subject to
inherent market-related risks as well as successful negotiation
and Court approval for the treatment of creditors consistent
with applicable bankruptcy law.

The Debtors Cases are being administered on
a consolidated basis. In fact, however, there are separate Cases
for each Debtor or twenty-six Cases in total. The Company
believes that the impacts of the Cases and any plans of
reorganization proposed for individual Debtors will depend on
each Debtors specific circumstances and the differing
interests that creditors have in respect of such entities.

A substantial majority of the claims in the Cases
are against the Company. These include claims in respect of
substantially all of the Debtors debt obligations,
obligations in respect of pension and retiree medical benefits,
asbestos-related and personal injury claims, and known
environmental obligations. As such, all of these claimholders
will have claims against the Company that, except as further
described below, will have to be satisfied by the Companys
assets, which generally include the fabricated products plants
(other than the London, Ontario, Canada and Richmond, Virginia
extrusion facilities, which are owned by separate subsidiaries
that are also Debtors), the interests in Anglesey Aluminium
Limited (Anglesey), which are not currently expected
to be sold, and the Companys interest in and related to
the alumina refinery located in Gramercy, Louisiana
(Gramercy) and Volta Aluminium Company Limited
(Valco), which have been sold for nominal net
proceeds (see Note 4). the Companys assets also
include certain intercompany receivables from certain of its
Debtor subsidiaries for funding provided to its joint venture
affiliates.

In general, except as described below, there are
a relatively modest number or amount of third party trade and
other claims against the Companys other Debtor
subsidiaries. Sixteen of the Debtors (including KAC) have no
material ongoing activities or operations and have no material
assets or liabilities other than intercompany items. The Company
believes that it is likely that most, if not all, of these
entities will ultimately be merged out of existence or dissolved
in some manner. The remaining Debtor subsidiaries (which include
AJI, KJC, KAAC, KAII, KACOCL, KBC, Bellwood, KATSI and KFC) own
certain extrusion facilities or act largely as intermediaries
between the Company and certain of its other subsidiaries and
joint venture affiliates or interact with third parties on
behalf of the Company and its joint venture affiliates. As such,
the vast majority of the pre-petition claims against such
entities are related to intercompany activities. However,
certain of those entities holding claims against the Company
also have claims against certain Company subsidiaries that own
or owned the Companys interests in joint venture
affiliates and which represent a

8



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


significant portion of the Companys
consolidated asset value. For example, noteholders have claims
against each of AJI and KJC which together hold in escrow
substantially all of the net proceeds from the sale of the
Companys interests in Alumina Partners of Jamaica
(Alpart) (see Note 4) and KAAC, which owns the
Companys interests in Queensland Alumina Limited
(QAL), as a result of AJI, KJC and KAAC having been
subsidiary guarantors of the Companys Senior Notes (as
defined below) and Sub Notes (as defined below). Additionally,
the PBGC, pursuant to statute, has joint and several claims
against the Company and all entities which are 80% or more owned
by the Company referred to as Controlled Group
Members). Controlled Group Members include each of AJI,
KJC and KAAC, as well as all of the other Debtors. The only
other significant claims against AJI, KJC and KAAC are
intercompany claims related to funding provided to these
entities by the Company. As such, it is likely that the vast
majority of the value realized in respect of the Companys
interests in Alpart and QAL is likely to be for the benefit of
the noteholders and the PBGC.

As discussed above, the Company has stated that
it expects that pre-Filing Date claims that have the benefit of
contractual or structural seniority will receive substantially
greater recoveries than pre-Filing Date claims that have no such
seniority. Accordingly, it has been the Companys
expectation that the holders of the Companys 9 7/8%
Senior Notes and 10 7/8% Senior Notes (collectively, the
Senior Notes) will receive substantially greater
recoveries than the holders of claims in respect of the
Companys 12 3/4% Senior Subordinated Notes (the
Sub Notes). However, a group of holders of the Sub
Notes (the Sub Note Group) has formed an unofficial
committee to represent all holders of Sub Notes and retained its
own legal counsel. The Sub Note Group is asserting that the Sub
Note holders claims against the Subsidiary Guarantors
(such as AJI, KJC and KAAC) may not, as a technical matter, be
contractually subordinate to the claims of holders of the Senior
Notes. The effect of such position, if ultimately sustained,
would be that the holders of Sub Notes would be on a par with
the holders of the Senior Notes in respect of proceeds from
sales of the Companys interests in and related to Alpart
and QAL. This position, if accepted by the Court, would
materially increase the recoveries to the holders of the Sub
Notes and materially decrease the recoveries to the holders of
the Senior Notes. The Company believes that the intent of the
indentures in respect of the Senior Notes and the Sub Notes was
to subordinate the claims of the Sub Note holders in respect of
the Subsidiary Guarantors. The Company cannot predict, however,
the ultimate resolution of the matters raised by the Sub Note
Group, when any such resolution will occur, or what impact any
such resolution may have on the Company, the Cases or
distributions to affected noteholders.

In order to resolve the question of what
consideration from any sale or other disposition of AJI, KJC
and/or KAAC, or their respective assets, should be for the
benefit of the Company and its claimholders (in respect of the
Companys intercompany claims against such entities), the
Intercompany Agreement was reached between the UCC and the
Company and filed with the Court in October 2004. The
Intercompany Agreement is also intended to resolve substantially
all other pre-and post-petition intercompany claims between the
Debtors. Evidentiary hearings in respect of the Intercompany
Agreement are expected to begin in early 2005. The Intercompany
Agreement, which is subject to approval by the Court, provides,
among other things, for payments of cash by AJI, KJC and KAAC
from the sale of their respective interests in and related to
Alpart and QAL to the Company of at least $90.0 in respect of
its intercompany claims against AJI, KJC and KAAC. Under the
Intercompany Agreement, such payments would be increased or
decreased for any net cash flows funded by or collected by the
Company related to: (a) the Companys interests in and
related to Alpart from January 1, 2004 through July 1,
2004 (estimated to be between $20.0-$25.0 collected by the
Company); (b) the Companys interests in and related
to QAL from July 1, 2004 through KAACs emergence from
Chapter 11 (estimated to be in the $5.0 range collected by
the Company through September 30, 2004); and
(c) certain third party costs and certain limited overhead
of the Companys

9



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


activities related to AJI, KJC, KBC, KAAC and
KFC. As provided under the Intercompany Agreement, the Company
was reimbursed for approximately $14.5 of payments made in the
third quarter of 2004 to retire Alpart-related debt. The
Intercompany Agreement calls for the remaining payments, other
than $28.0 already made available to the Company but not paid to
the Company at October 31, 2004 pending finalization of the
latest amendment to the DIP Facility, to be made in specific
increments to the Company at the emergence of AJI, KJC and KAAC
from Chapter 11. The Company expects that all remaining
proceeds from the sale of Alpart and QAL are likely to be held
in escrow for the benefit of creditors until the applicable
subsidiaries emerge from the Cases. The ACC, the Futures
Representatives and others have filed objections to the
Intercompany Agreement and no assurances can be provided as to
whether the Intercompany Agreement will be approved by the Court.

On November 1, 2004, AJI and KJC filed a
joint plan of liquidation and related disclosure statement (the
AJI/KJC Plan) with the Court. Under the proposed
AJI/KJC Plan, the assets of those entities, consisting primarily
of the net proceeds received by them in connection with the sale
of their interests in Alpart, will be transferred to a
liquidation trust, whereupon AJI and KJC will be dissolved. The
liquidating trustee will then make distributions of cash to the
creditors of AJI and KJC in accordance with such plan. As
indicated in the AJI/KJC Plan, it is currently anticipated that
AJI and KJC will have approximately $278.4 of cash available for
distribution to creditors when the plan becomes effective. Of
the cash available for distribution, $20.0 is expected to be
retained, subject to certain terms and conditions, in a cash
collateral account securing the Post-Petition Credit Agreement
until such financing is terminated. The AJI/KJC Plan outlines
the specific treatment and expected recoveries of AJI and KJC
creditors.The AJI/KJC Plan indicates that, assuming the
holders of the Sub Notes accept the plan and after payment of
priority claims and trust expenses (initial reserves for which
are expected to be established in the range of $15.0 to $20.0),
AJI and KJC anticipate ultimately distributing cash as follows:

|             |  |  |                  | 
|------------ |  |  | ---------------- | 
|Senior Notes |  |  | $162.7 to $171.1 | 
|PBGC         |  |  | $82.7 to $84.3   | 
|Sub Notes    |  |  | $8.0             | 

The $8.0 payment to be made for the benefit of
holders of the Companys Sub Notes will be made if, and
only if, such holders approve the plan. In addition, the plan
provides that the Court will determine the amount, if any, to be
paid in respect of the Parish of St. James, State of Louisiana,
Solid Waste Disposal Revenue Bonds (the Revenue
Bonds). Any amounts paid in respect of the Sub Notes and
the Revenue Bonds will be paid from amounts that otherwise would
be distributed to holders of the Senior Notes. The disclosure
statement also indicates that it is currently anticipated that
the plan of liquidation for KAAC, which owns the Companys
interests in QAL, will provide for an additional $8.0 payment to
the holders of Sub Notes if, and only if, such holders of the
Sub Notes vote to accept that plan. As described in the AJI/KJC
Plan, the plan and disclosure statement will be subject to
approval by the Court, and the plan will be subject to a vote by
certain creditors. The Company anticipates that certain
creditors are likely to challenge the proposed AJI/ KJC Plan.
The effectiveness of the AJI/KJC Plan is expressly conditioned
on Court approval of the Intercompany Agreement. This disclosure
is not intended to be, nor should it be construed to be, a
solicitation for a vote on the AJI/KJC Plan. The AJI/KJC Plan
filed relates exclusively to AJI and KJC and will have no impact
on the normal, ongoing operation of the Companys
fabricated aluminum products business or other operations.

As discussed above, because each Debtor entity
has different creditors and claim amounts and each Debtor has
different assets, the Company currently anticipates that the
recoveries of individual creditors will differ depending on the
Debtor entity against which a given creditor has a claim.
Another factor affecting creditor recoveries will be whether or
not intercompany claims are resolved pursuant to the Intercompany

10



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Agreement, which was jointly filed by the Debtors
and the UCC, or some other proposal. Certain holders of claims
and other stakeholders, in the their Court filings objecting to
approval of the Intercompany Agreement, have raised a question
as to whether all of the individual Debtors should be
substantively consolidated, which is specifically prohibited by
the Intercompany Agreement. In this context, substantive
consolidation would mean that the separate corporate
existences of the individual Debtor entities would be ignored
and all Debtors would be treated as a single enterprise for
purposes of the treatment of creditors claims in a single
plan of reorganization. The Company does not believe that
substantive consolidation of all Debtors is appropriate.
However, no assurances can be given as to whether a formal
substantive consolidation motion will be made by one or more
stakeholders or how the Court might rule on any such motion if
such motion were made. The Company believes that, if a
substantive consolidation motion seeking to treat all Debtors as
a single entity were made and ultimately approved by the Court,
recoveries by creditors who hold claims at Debtor entities where
there are otherwise fewer competing claims (e.g., AJI, KJC and
KAAC) could be significantly and adversely affected as compared
to their likely recoveries if the individual Debtor entities
(e.g. AJI, KJC and KAAC) were permitted (as is intended under
the Intercompany Agreement) to file separate plans of
reorganization and distribute their value only to the creditors
of those entities. It is also possible that the filing and any
potential litigation of such a substantive consolidation motion
that might occur could delay the Companys emergence.

At emergence from Chapter 11, the Company
will have to pay or otherwise provide for a material amount of
claims. Such claims include accrued but unpaid professional
fees, priority pension, tax and environmental claims, secured
claims, and certain post-petition obligations (collectively,
Exit Costs). The Company currently estimates that
its Exit Costs will be in the range of $60.0 to $80.0. The
Companys estimate of Exit Costs is less than that
estimated in prior periods due in large part to the payment of
approximately $27.3 of environmental costs in October 2004 (see
Note 7). The Company currently expects to fund such Exit Costs
using the proceeds to be received under the Intercompany
Agreement together with existing cash resources and available
borrowing availability under an exit financing facility that
would replace the current Post-Petition Credit Agreement (see
Note 5). If payments made to the Company under the
Intercompany Agreement together with borrowing availability
under an exit financing facility are not sufficient to pay or
otherwise provide for all Exit Costs, the Company, Kaiser and
some or all of the Companys other Debtor subsidiaries will
not be able to emerge from Chapter 11 unless and until
sufficient funding can be obtained. Management believes it will
be able to successfully resolve any issues that may arise in
respect of the Intercompany Agreement and/or exit financing
facility or be able to negotiate a reasonable alternative.
However, no assurances can be given in this regard.

The Company expects that, when the Company and
Kaiser ultimately file a plan or plans of reorganization, it is
likely to reflect the Companys strategic vision for
emergence from Chapter 11: (a) a standalone going
concern with manageable leverage and financial flexibility,
improved cost structure and competitive strength; (b) a
company positioned to execute its long-standing vision of market
leadership and growth in fabricated products; (c) a company
that delivers a broad product offering and leadership in service
and quality for its customers and distributors; and (d) a
company with continued ownership of those commodity assets that
have the potential to generate significant cash at steady-state
metal prices and/or which provide a strategic hedge against the
fabricated products business needs for primary aluminum.
While the Company intends to continue to pursue a standalone
fabricated products company emergence strategy, from time to
time the Debtors may also evaluate other reorganization
strategies, consistent with the Debtors responsibility to
maximize the recoveries for its stakeholders.

The Company believes that it is not likely that
it will emerge from the Cases until sometime in the first half
of 2005. The Company continues to push for an aggressive pace
that would allow it and Kaiser to file a

11



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


disclosure statement and a plan or plans of
reorganization before the end of 2004. However, the
Companys ability to do so and to ultimately emerge from
the Cases is subject to a number of factors, including, among
others, confirmation of a plan of reorganization in accordance
with the applicable bankruptcy law and, accordingly, no
assurances can be given as to whether or when any plan or plans
of reorganization will ultimately be filed or confirmed.

Financial Statement
Presentation.The accompanying
consolidated financial statements have been prepared in
accordance with AICPA Statement of Position 90-7
(SOP 90-7), Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code, and on a going
concern basis, which contemplates the realization of assets and
the liquidation of liabilities in the ordinary course of
business. However, as a result of the Cases, such realization of
assets and liquidation of liabilities are subject to a
significant number of uncertainties.

Upon emergence from the Cases, the Company
expects to apply fresh start accounting to its
consolidated financial statements as required by SOP 90-7.
Fresh start accounting is required if: (1) a debtors
liabilities are determined to be in excess of its assets and
(2) there will be a greater than 50% change in the equity
ownership of the entity. As previously disclosed, the Company
expects both such circumstances to apply. As such, upon
emergence, the Company will restate its balance sheet to equal
the reorganization value as determined in its plan(s) of
reorganization and approved by the Court. Additionally, items
such as accumulated depreciation, accumulated deficit and
accumulated other comprehensive income (loss) will be reset
to zero. The Company will allocate the reorganization value to
its individual assets and liabilities based on their estimated
fair value at the emergence date. Typically such items as
current liabilities, accounts receivable, and cash will be
reflected at values similar to those reported prior to
emergence. Items such as inventory, property, plant and
equipment, long-term assets and long-term liabilities are more
likely to be significantly adjusted from amounts previously
reported. Because fresh start accounting will be adopted at
emergence, and because of the significance of the pending and
completed asset sales and liabilities subject to compromise
(that will be relieved upon emergence), meaningful comparisons
between the current historical financial statements and the
financial statements upon emergence may be difficult to make.

12



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Financial
Information.Condensed consolidating
financial statements of the Debtors and non-Debtors are set
forth below:

Condensed Consolidating Balance
Sheets

September 30, 2004


|                                                  |                                                    |         |          |             |  |                |       |              |  |   |        |      |   |   |          |       | 
|------------------------------------------------- | -------------------------------------------------- | ------- | -------- | ----------- |  | -------------- | ----- | ------------ |  | - | ------ | ---- | - | - | -------- | ----- | 
|                                                  |                                                    |         |          |             |  | Consolidation/ |       |             
|                                                  |                                                    |         |          |             |  | Elimination    |       |             
|                                                  |                                                    | Debtors |          | Non-Debtors |  | Entries        |       | Consolidated
|                                                  |                                                    |         |          |             |  |                |       |             
|Current assets                                    |                                                    | $       | 313.7    |             |  | $              | 2.7   |              |  | $ |       |      |   | $ | 316.4    |      
|Discontinued operations current assets           |                                                    |         | 58.7     |             |  |                | 37.3  |              |  |   |       |      |   |   | 96.0     |      
|Investments in subsidiaries and affiliates        |                                                    |         | 170.2    |             |  |                |      |              |  |   | (114.7 | )    |   |   | 55.5     |      
|Intercompany receivables (payables), net          |                                                    |         | (4.9     | )           |  |                | 4.9   |              |  |   |       |      |   |   |         |      
|Property and equipment, net                       |                                                    |         | 217.7    |             |  |                |      |              |  |   |       |      |   |   | 217.7    |      
|Restricted proceeds from sale of commodity assets |                                                    |         | 302.6    |             |  |                |      |              |  |   |       |      |   |   | 302.6    |      
|Other assets                                      |                                                    |         | 488.1    |             |  |                |      |              |  |   |       |      |   |   | 488.1    |      
|Discontinued operations long-term assets(1)      |                                                    |         | (92.2    | )           |  |                | 141.9 |              |  |   |       |      |   |   | 49.7     |      
|                                                  |                                                    |         |          |             |  |                |       |              |  |   |        |      |   |   |          |      
|                                                  |                                                    | $       | 1,453.9  |             |  | $              | 186.8 |              |  | $ | (114.7 | )    |   | $ | 1,526.0  |      
|                                                  |                                                    |         |          |             |  |                |       |              |  |   |        |      |   |   |          |      
|Liabilities not subject to compromise            |                                                    |         |          |             |  |                |       |              |  |   |        |      |   |   |          |      
|                                                  | Current liabilities                                |         | $        | 198.3       |  |                | $     | 4.6          |  |   | $      | (2.0 | ) |   | $        | 200.9 | 
|                                                  | Discontinued operations current liabilities       |         |          | 66.8        |  |                |       | 42.3         |  |   |        |     |   |   |          | 109.1 | 
|                                                  | Long-term liabilities                              |         |          | 45.3        |  |                |       | 1.4          |  |   |        |     |   |   |          | 46.7  | 
|                                                  | Discontinued operations long-term
    liabilities |         |          | 28.4        |  |                |       | 11.9         |  |   |        | 13.9 |   |   |          | 54.2  | 
|Liabilities subject to compromise                 |                                                    |         | 2,856.0  |             |  |                |      |              |  |   |       |      |   |   | 2,856.0  |      
|Stockholders equity (deficit)                    |                                                    |         | (1,740.9 | )           |  |                | 126.6 |              |  |   | (126.6 | )    |   |   | (1,740.9 | )    
|                                                  |                                                    |         |          |             |  |                |       |              |  |   |        |      |   |   |          |      
|                                                  |                                                    | $       | 1,453.9  |             |  | $              | 186.8 |              |  | $ | (114.7 | )    |   | $ | 1,526.0  |      
|                                                  |                                                    |         |          |             |  |                |       |              |  |   |        |      |   |   |          |      

13



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Condensed Consolidating Balance
Sheets

December 31, 2003


|                                             |                                                    |         |          |             |  |                |       |              |  |   |        |      |   |   |          |       | 
|-------------------------------------------- | -------------------------------------------------- | ------- | -------- | ----------- |  | -------------- | ----- | ------------ |  | - | ------ | ---- | - | - | -------- | ----- | 
|                                             |                                                    |         |          |             |  | Consolidation/ |       |             
|                                             |                                                    |         |          |             |  | Elimination    |       |             
|                                             |                                                    | Debtors |          | Non-Debtors |  | Entries        |       | Consolidated
|                                             |                                                    |         |          |             |  |                |       |             
|Current assets                               |                                                    | $       | 219.6    |             |  | $              | 2.9   |              |  | $ |       |      |   | $ | 252.5    |      
|Discontinued operations current assets      |                                                    |         | 78.5     |             |  |                | 100.2 |              |  |   |       |      |   |   | 178.7    |      
|Investments in subsidiaries and affiliates   |                                                    |         | 394.8    |             |  |                |      |              |  |   | (343.9 | )    |   |   | 50.9     |      
|Intercompany receivables (payables), net     |                                                    |         | (5.4     | )           |  |                | 5.4   |              |  |   |       |      |   |   |         |      
|Property and equipment, net                  |                                                    |         | 230.1    |             |  |                |      |              |  |   |       |      |   |   | 230.1    |      
|Other assets                                 |                                                    |         | 520.5    |             |  |                |      |              |  |   |       |      |   |   | 520.5    |      
|Discontinued operations long-term assets(1) |                                                    |         | (75.0    | )           |  |                | 471.0 |              |  |   |       |      |   |   | 396.0    |      
|                                             |                                                    |         |          |             |  |                |       |              |  |   |        |      |   |   |          |      
|                                             |                                                    | $       | 1,393.1  |             |  | $              | 579.5 |              |  | $ | (343.9 | )    |   | $ | 1,628.5  |      
|                                             |                                                    |         |          |             |  |                |       |              |  |   |        |      |   |   |          |      
|Liabilities not subject to compromise       |                                                    |         |          |             |  |                |       |              |  |   |        |      |   |   |          |      
|                                             | Current liabilities                                |         | $        | 179.9       |  |                | $     | 4.6          |  |   | $      | (2.0 | ) |   | $        | 182.5 | 
|                                             | Discontinued operations current liabilities       |         |          | 50.3        |  |                |       | 86.7         |  |   |        |     |   |   |          | 137.0 | 
|                                             | Long-term liabilities                              |         |          | 60.0        |  |                |       | 1.6          |  |   |        |     |   |   |          | 61.6  | 
|                                             | Discontinued operations long-term
    liabilities |         |          | 50.9        |  |                |       | 129.1        |  |   |        | 15.6 |   |   |          | 195.6 | 
|Liabilities subject to compromise            |                                                    |         | 2,783.2  |             |  |                |      |              |  |   |       |      |   |   | 2,783.2  |      
|Stockholders equity (deficit)               |                                                    |         | (1,731.2 | )           |  |                | 357.5 |              |  |   | (357.5 | )    |   |   | (1,731.2 | )    
|                                             |                                                    |         |          |             |  |                |       |              |  |   |        |      |   |   |          |      
|                                             |                                                    | $       | 1,393.1  |             |  | $              | 579.5 |              |  | $ | (343.9 | )    |   | $ | 1,628.7  |      
|                                             |                                                    |         |          |             |  |                |       |              |  |   |        |      |   |   |          |      



---



|    |                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Discontinued operations long-term assets
    for debtors include intercompany payables to non-Debtors of
    $99.3 and $82.9 as of September 30, 2004 and
    December 31, 2003, respectively.

14



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Condensed Consolidating Statements of Income
(Loss)

For the Quarter Ended September 30,
2004


|                                 |                                         |         |        |             |  |                |      |              |   |   |     |   |  |   |        |       | 
|-------------------------------- | --------------------------------------- | ------- | ------ | ----------- |  | -------------- | ---- | ------------ | - | - | --- | - |  | - | ------ | ----- | 
|                                 |                                         |         |        |             |  | Consolidation/ |      |             
|                                 |                                         |         |        |             |  | Elimination    |      |             
|                                 |                                         | Debtors |        | Non-Debtors |  | Entries        |      | Consolidated
|                                 |                                         |         |        |             |  |                |      |             
|Net sales                        |                                         | $       | 281.8  |             |  | $              |     |              |   | $ |    |   |  | $ | 281.8  |      
|                                 |                                         |         |        |             |  |                |      |              |   |   |     |   |  |   |        |      
|Costs and expenses              |                                         |         |        |             |  |                |      |              |   |   |     |   |  |   |        |      
|                                 | Operating costs and expenses            |         |        | 278.1       |  |                |      | (.1          | ) |   |     |  |  |   |        | 278.0 | 
|                                 | Other operating charges (benefits), net |         |        | 154.7       |  |                |      |             |   |   |     |  |  |   |        | 154.7 | 
|                                 |                                         |         |        |             |  |                |      |              |   |   |     |   |  |   |        |      
|                                 |                                         |         | 432.8  |             |  |                | (.1  | )            |   |   |    |   |  |   | 432.7  |      
|                                 |                                         |         |        |             |  |                |      |              |   |   |     |   |  |   |        |      
|Operating income (loss)          |                                         |         | (151.0 | )           |  |                | .1   |              |   |   |    |   |  |   | (150.9 | )    
|Interest expense                 |                                         |         | (2.3   | )           |  |                |     |              |   |   |    |   |  |   | (2.3   | )    
|All other income (expense), net  |                                         |         | (8.8   | )           |  |                |     |              |   |   | .1  |   |  |   | (8.7   | )    
|Income taxes                     |                                         |         | (4.7   | )           |  |                |     |              |   |   |    |   |  |   | (4.7   | )    
|Equity in income of subsidiaries |                                         |         | (1.0   | )           |  |                |     |              |   |   | 1.0 |   |  |   |       |      
|                                 |                                         |         |        |             |  |                |      |              |   |   |     |   |  |   |        |      
|Loss from continuing operations  |                                         |         | (167.8 | )           |  |                | .1   |              |   |   | 1.1 |   |  |   | (166.6 | )    
|Discontinued operations          |                                         |         | 98.4   |             |  |                | (1.2 | )            |   |   |    |   |  |   | 97.2   |      
|                                 |                                         |         |        |             |  |                |      |              |   |   |     |   |  |   |        |      
|Net income (loss)                |                                         | $       | (69.4  | )           |  | $              | (1.1 | )            |   | $ | 1.1 |   |  | $ | (69.4  | )    
|                                 |                                         |         |        |             |  |                |      |              |   |   |     |   |  |   |        |      

Condensed Consolidating Statements of Income
(Loss)

For the Quarter Ended September 30,
2003


|                                 |                                         |         |       |             |  |                |      |              |  |   |     |   |  |   |       |       | 
|-------------------------------- | --------------------------------------- | ------- | ----- | ----------- |  | -------------- | ---- | ------------ |  | - | --- | - |  | - | ----- | ----- | 
|                                 |                                         |         |       |             |  | Consolidation/ |      |             
|                                 |                                         |         |       |             |  | Elimination    |      |             
|                                 |                                         | Debtors |       | Non-Debtors |  | Entries        |      | Consolidated
|                                 |                                         |         |       |             |  |                |      |             
|Net sales                        |                                         | $       | 203.1 |             |  | $              |     |              |  | $ |    |   |  | $ | 203.1 |      
|                                 |                                         |         |       |             |  |                |      |              |  |   |     |   |  |   |       |      
|Costs and expenses              |                                         |         |       |             |  |                |      |              |  |   |     |   |  |   |       |      
|                                 | Operating costs and expenses            |         |       | 220.6       |  |                |      | .4           |  |   |     |   |  |   |       | 221.0 | 
|                                 | Other operating charges (benefits), net |         |       | 15.0        |  |                |      |             |  |   |     |  |  |   |       | 15.0  | 
|                                 |                                         |         |       |             |  |                |      |              |  |   |     |   |  |   |       |      
|                                 |                                         |         | 235.6 |             |  |                | .4   |              |  |   |    |   |  |   | 236.0 |      
|                                 |                                         |         |       |             |  |                |      |              |  |   |     |   |  |   |       |      
|Operating loss                   |                                         |         | (32.5 | )           |  |                | (.4  | )            |  |   |    |   |  |   | (32.9 | )    
|Interest expense                 |                                         |         | (2.5  | )           |  |                |     |              |  |   |    |   |  |   | (2.5  | )    
|All other income (expense), net  |                                         |         | (14.8 | )           |  |                |     |              |  |   | 2.7 |   |  |   | (12.1 | )    
|Income taxes                     |                                         |         | (1.4  | )           |  |                |     |              |  |   |    |   |  |   | (1.4  | )    
|Equity in income of subsidiaries |                                         |         | (4.3  | )           |  |                |     |              |  |   | 4.3 |   |  |   |      |      
|                                 |                                         |         |       |             |  |                |      |              |  |   |     |   |  |   |       |      
|Loss from continuing operations  |                                         |         | (55.5 | )           |  |                | (.4  | )            |  |   | 7.0 |   |  |   | (48.9 | )    
|Discontinued operations          |                                         |         | (33.1 | )           |  |                | (6.6 | )            |  |   |    |   |  |   | (39.7 | )    
|                                 |                                         |         |       |             |  |                |      |              |  |   |     |   |  |   |       |      
|Net loss                         |                                         | $       | (88.6 | )           |  | $              | (7.0 | )            |  | $ | 7.0 |   |  | $ | (88.6 | )    
|                                 |                                         |         |       |             |  |                |      |              |  |   |     |   |  |   |       |      

15



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Condensed Consolidating Statements of Income
(Loss)

For the Nine Months Ended September 30,
2004


|                                 |                                         |         |        |             |  |                |       |              |  |   |      |   |  |   |        |       | 
|-------------------------------- | --------------------------------------- | ------- | ------ | ----------- |  | -------------- | ----- | ------------ |  | - | ---- | - |  | - | ------ | ----- | 
|                                 |                                         |         |        |             |  | Consolidation/ |       |             
|                                 |                                         |         |        |             |  | Elimination    |       |             
|                                 |                                         | Debtors |        | Non-Debtors |  | Entries        |       | Consolidated
|                                 |                                         |         |        |             |  |                |       |             
|Net sales                        |                                         | $       | 792.7  |             |  | $              |      |              |  | $ |     |   |  | $ | 792.7  |      
|                                 |                                         |         |        |             |  |                |       |              |  |   |      |   |  |   |        |      
|Costs and expenses              |                                         |         |        |             |  |                |       |              |  |   |      |   |  |   |        |      
|                                 | Operating costs and expenses            |         |        | 785.3       |  |                |       | .5           |  |   |      |   |  |   |        | 785.8 | 
|                                 | Other operating charges (benefits), net |         |        | 154.7       |  |                |       |             |  |   |      |  |  |   |        | 154.7 | 
|                                 |                                         |         |        |             |  |                |       |              |  |   |      |   |  |   |        |      
|                                 |                                         |         | 940.0  |             |  |                | .5    |              |  |   |     |   |  |   | 940.5  |      
|                                 |                                         |         |        |             |  |                |       |              |  |   |      |   |  |   |        |      
|Operating loss                   |                                         |         | (147.3 | )           |  |                | (.5   | )            |  |   |     |   |  |   | (147.8 | )    
|Interest expense                 |                                         |         | (6.4   | )           |  |                |      |              |  |   |     |   |  |   | (6.4   | )    
|All other income (expense), net  |                                         |         | (29.7  | )           |  |                | .1    |              |  |   | 5.9  |   |  |   | (23.7  | )    
|Income taxes                     |                                         |         | (13.5  | )           |  |                |      |              |  |   |     |   |  |   | (13.5  | )    
|Equity in income of subsidiaries |                                         |         | (53.4  | )           |  |                |      |              |  |   | 53.4 |   |  |   |       |      
|                                 |                                         |         |        |             |  |                |       |              |  |   |      |   |  |   |        |      
|Loss from continuing operations  |                                         |         | (250.3 | )           |  |                | (.4   | )            |  |   | 59.3 |   |  |   | (191.4 | )    
|Discontinued operations          |                                         |         | 141.2  |             |  |                | (58.9 | )            |  |   |     |   |  |   | 82.3   |      
|                                 |                                         |         |        |             |  |                |       |              |  |   |      |   |  |   |        |      
|Net loss                         |                                         | $       | (109.1 | )           |  | $              | (59.3 | )            |  | $ | 59.3 |   |  | $ | (109.1 | )    
|                                 |                                         |         |        |             |  |                |       |              |  |   |      |   |  |   |        |      

Condensed Consolidating Statements of Income
(Loss)

For the Nine Months Ended September 30,
2003


|                                 |                                         |         |        |             |  |                |       |              |  |   |       |       |   |   |        |       | 
|-------------------------------- | --------------------------------------- | ------- | ------ | ----------- |  | -------------- | ----- | ------------ |  | - | ----- | ----- | - | - | ------ | ----- | 
|                                 |                                         |         |        |             |  | Consolidation/ |       |             
|                                 |                                         |         |        |             |  | Elimination    |       |             
|                                 |                                         | Debtors |        | Non-Debtors |  | Entries        |       | Consolidated
|                                 |                                         |         |        |             |  |                |       |             
|Net sales                        |                                         | $       | 626.6  |             |  | $              |      |              |  | $ | (13.4 | )     |   | $ | 613.2  |      
|                                 |                                         |         |        |             |  |                |       |              |  |   |       |       |   |   |        |      
|Costs and expenses              |                                         |         |        |             |  |                |       |              |  |   |       |       |   |   |        |      
|                                 | Operating costs and expenses            |         |        | 676.9       |  |                |       | .5           |  |   |       | (13.4 | ) |   |        | 664.0 | 
|                                 | Other operating charges (benefits), net |         |        | 4.7         |  |                |       |             |  |   |       |      |   |   |        | 4.7   | 
|                                 |                                         |         |        |             |  |                |       |              |  |   |       |       |   |   |        |      
|                                 |                                         |         | 681.6  |             |  |                | .5    |              |  |   | (13.4 | )     |   |   | 668.7  |      
|                                 |                                         |         |        |             |  |                |       |              |  |   |       |       |   |   |        |      
|Operating loss                   |                                         |         | (55.0  | )           |  |                | (.5   | )            |  |   |      |       |   |   | (55.5  | )    
|Interest expense                 |                                         |         | (7.1   | )           |  |                |      |              |  |   |      |       |   |   | (7.1   | )    
|All other income (expense), net  |                                         |         | (37.3  | )           |  |                | .2    |              |  |   | 8.2   |       |   |   | (28.9  | )    
|Income taxes                     |                                         |         | (5.8   | )           |  |                |      |              |  |   |      |       |   |   | (5.8   | )    
|Equity in income of subsidiaries |                                         |         | (14.3  | )           |  |                |      |              |  |   | 14.3  |       |   |   |       |      
|                                 |                                         |         |        |             |  |                |       |              |  |   |       |       |   |   |        |      
|Loss from continuing operations  |                                         |         | (119.5 | )           |  |                | (.3   | )            |  |   | 22.5  |       |   |   | (97.3  | )    
|Discontinued operations          |                                         |         | (95.5  | )           |  |                | (22.2 | )            |  |   |      |       |   |   | (117.7 | )    
|                                 |                                         |         |        |             |  |                |       |              |  |   |       |       |   |   |        |      
|Net loss                         |                                         | $       | (215.0 | )           |  | $              | (22.5 | )            |  | $ | 22.5  |       |   | $ | (215.0 | )    
|                                 |                                         |         |        |             |  |                |       |              |  |   |       |       |   |   |        |      

16



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Condensed Consolidating Statements of Cash
Flows

For the Nine Months Ended September 30,
2004


|                                                |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |        |  
|----------------------------------------------- | ---------------------------------------------- | ------- | ------ | ----------- | - | -------------- | ----- | ------------ | - | - | - | - |  | - | ------ | ------ | -
|                                                |                                                |         |        |             |   | Consolidation/ |       |             
|                                                |                                                |         |        |             |   | Elimination    |       |             
|                                                |                                                | Debtors |        | Non-Debtors |   | Entries        |       | Consolidated
|                                                |                                                |         |        |             |   |                |       |             
|Net cash provided (used) by:                    |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       
|Operating activities                           |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       
|                                                | Continuing operations                          |         | $      | (47.9       | ) |                | $     |             |   |   | $ |  |  |   | $      | (47.9  | )
|                                                | Discontinued operations                        |         |        | 23.0        |   |                |       | 17.5         |   |   |   |  |  |   |        | 40.5   |  
|                                                |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       
|                                                |                                                |         | (24.9  | )           |   |                | 17.5  |              |   |   |  |   |  |   | (7.4   | )     
|                                                |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       
|Investing activities                           |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       
|                                                | Continuing operations                          |         |        | (10.2       | ) |                |       |             |   |   |   |  |  |   |        | (10.2  | )
|                                                | Discontinued operations                        |         |        | 331.4       |   |                |       | (2.9         | ) |   |   |  |  |   |        | 328.5  |  
|                                                |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       
|                                                |                                                |         | 321.2  |             |   |                | (2.9  | )            |   |   |  |   |  |   | 318.3  |       
|                                                |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       
|Financing activities                           |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       
|                                                | Continuing operations                          |         |        | (1.7        | ) |                |       |             |   |   |   |  |  |   |        | (1.7   | )
|                                                | Discontinued operations                        |         |        | (298.3      | ) |                |       | (2.9         | ) |   |   |  |  |   |        | (312.9 | )
|                                                |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       
|                                                |                                                |         | (300.0 | )           |   |                | (14.6 | )            |   |   |  |   |  |   | (314.6 | )     
|                                                |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       
|Net decrease in cash and cash
    equivalents  |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       
|                                                | Cash and cash equivalents, beginning of period |         |        | (3.7        | ) |                |       |             |   |   |   |  |  |   |        | (3.7   | )
|                                                | Cash and cash equivalents, end of period       |         |        | 35.5        |   |                |       | .1           |   |   |   |  |  |   |        | 35.6   |  
|                                                |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       
|                                                |                                                | $       | 31.8   |             |   | $              | .1    |              |   | $ |  |   |  | $ | 31.9   |       
|                                                |                                                |         |        |             |   |                |       |              |   |   |   |   |  |   |        |       

17



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Condensed Consolidating Statements of Cash
Flows

For the Nine Months Ended September 30,
2003


|                                               |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |       |  
|---------------------------------------------- | ----------------------- | ------- | ------ | ----------- | - | -------------- | ----- | ------------ | - | - | - | - |  | - | ----- | ----- | -
|                                               |                         |         |        |             |   | Consolidation/ |       |             
|                                               |                         |         |        |             |   | Elimination    |       |             
|                                               |                         | Debtors |        | Non-Debtors |   | Entries        |       | Consolidated
|                                               |                         |         |        |             |   |                |       |             
|Net cash provided (used) by:                   |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |      
|Continuing operations                         |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |      
|                                               | Continuing operations   |         | $      | (35.7       | ) |                | $     |             |   |   | $ |  |  |   | $     | (35.7 | )
|                                               | Discontinued operations |         |        | (65.7       | ) |                |       | 20.1         |   |   |   |  |  |   |       | (45.6 | )
|                                               |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |      
|                                               |                         |         | (101.4 | )           |   |                | 20.1  |              |   |   |  |   |  |   | (81.3 | )    
|                                               |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |      
|Investing activities                          |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |      
|                                               | Continuing operations   |         |        | 75.8        |   |                |       |             |   |   |   |  |  |   |       | 75.8  |  
|                                               | Discontinued operations |         |        | .2          |   |                |       | (20.1        | ) |   |   |  |  |   |       | (19.9 | )
|                                               |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |      
|                                               |                         |         | 76.0   |             |   |                | (20.1 | )            |   |   |  |   |  |   | 55.9  |      
|                                               |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |      
|Financing activities                          |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |      
|                                               | Continuing operations   |         |        | (4.0        | ) |                |       |             |   |   |   |  |  |   |       | (4.0  | )
|                                               | Discontinued operations |         |        |            |   |                |       |             |   |   |   |  |  |   |       |      |  
|                                               |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |      
|                                               |                         |         | (4.0   | )           |   |                |      |              |   |   |  |   |  |   | (4.0  | )    
|                                               |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |      
|Net increase in cash and cash equivalents      |                         |         | (29.4  | )           |   |                |      |              |   |   |  |   |  |   | (29.4 | )    
|Cash and cash equivalents, beginning of period |                         |         | 77.6   |             |   |                |      |              |   |   |  |   |  |   | 77.6  |      
|                                               |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |      
|Cash and cash equivalents, end of period       |                         | $       | 48.2   |             |   | $              |      |              |   | $ |  |   |  | $ | 48.2  |      
|                                               |                         |         |        |             |   |                |       |              |   |   |   |   |  |   |       |      

Classification of Liabilities as
Liabilities Not Subject to Compromise Versus
Liabilities Subject to
Compromise.Liabilities not
subject to compromise include: (1) liabilities incurred
after the Filing Date of the Cases; (2) pre-Filing Date
liabilities that the Debtors expect to pay in full, including
priority tax and employee claims and certain environmental
liabilities, even though certain of these amounts may not be
paid until a plan or plans of reorganization is effective; and
(3) pre-Filing Date liabilities that have been approved for
payment by the Court and that the Debtors expect to pay (in
advance of a plan or plans of reorganization) over the next
twelve-month period in the ordinary course of business,
including certain employee related items (salaries, vacation and
medical benefits), claims subject to a currently existing
collective bargaining agreement, and certain postretirement
medical and other costs associated with retirees (however, see
Note (2) to the table below).

Liabilities subject to compromise refer to all
other pre-Filing Date liabilities of the Debtors. The amounts of
the various categories of liabilities that are subject to
compromise are set forth below. These amounts represent the
Companys estimates of known or probable pre-Filing Date
claims that are likely to be resolved in connection with the
Cases. Such claims remain subject to future adjustments.
Further, the Debtors currently believe that, with limited
exceptions, it is likely that substantially all pre-Filing Date
claims will be settled at less than 100% of their face value and
the equity interests of the Companys stockholders will be
cancelled without consideration.

18



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


The amounts subject to compromise at
September 30, 2004 and December 31, 2003 consisted of
the following items:

|                                                                                                |                                                                                 |               |         |              |  |   |         |       | 
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------- | ------- | ------------ |  | - | ------- | ----- | 
|                                                                                                |                                                                                 | September 30, |         | December 31,
|                                                                                                |                                                                                 | 2004          |         | 2003        
|                                                                                                |                                                                                 |               |         |             
|Items, absent the Cases, that would have been
    considered current:                           |                                                                                 |               |         |              |  |   |         |      
|                                                                                                | Accounts payable                                                                |               | $       | 56.2         |  |   | $       | 50.8  | 
|                                                                                                | Accrued interest                                                                |               |         | 47.5         |  |   |         | 47.5  | 
|                                                                                                | Accrued salaries, wages and related expenses(1)                                 |               |         | 159.0        |  |   |         | 159.0 | 
|                                                                                                | Accrued postretirement medical obligation(2)                                    |               |         |             |  |   |         | 32.5  | 
|                                                                                                | Other accrued liabilities (including asbestos
    liability of $130.0  Note 7) |               |         | 134.0        |  |   |         | 148.0 | 
|Items, absent the Cases, that would have been
    considered long-term:                         |                                                                                 |               |         |              |  |   |         |      
|                                                                                                | Accrued pension benefits                                                        |               |         | 331.5        |  |   |         | 289.0 | 
|                                                                                                | Accrued postretirement medical obligation(2)                                    |               |         | 719.1        |  |   |         | 652.4 | 
|                                                                                                | Long-term liabilities(3)                                                        |               |         | 586.5        |  |   |         | 592.6 | 
|                                                                                                | Debt (Note 5)                                                                   |               |         | 848.2        |  |   |         | 848.2 | 
|                                                                                                |                                                                                 |               |         |              |  |   |         |      
|                                                                                                |                                                                                 |               | 2,882.0 |              |  |   | 2,820.0 |      
|Less discontinued operations reported separately
    (primarily related to current liabilities) |                                                                                 |               | (26.0   | )            |  |   | (36.8   | )    
|                                                                                                |                                                                                 |               |         |              |  |   |         |      
|                                                                                                |                                                                                 | $             | 2,856.0 |              |  | $ | 2,783.2 |      
|                                                                                                |                                                                                 |               |         |              |  |   |         |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Accrued salaries, wages and related expenses
    represent estimated minimum pension contributions that, absent
    the Cases, would have otherwise been payable. Amounts as of
    September 30, 2004 and December 31, 2003 include
    approximately $100.0 associated with estimated special liquidity
    and other pension contributions that were not made. See Note 11
    in respect to the Companys pension contributions to its
    domestic pension plans as well as the possibility of incremental
    pension liabilities that may ultimately be recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(2) | In February 2004, the Company concluded an
    agreement with the 1114 Committee and union representatives that
    represent the vast majority of the hourly employees that
    provides for the termination of the existing salaried and hourly
    postretirement benefit plans, subject to certain conditions. The
    Company included postretirement medical obligations expected to
    be paid in respect of periods through May 31, 2004 in the
    accompanying balance sheet at September 30, 2004 and
    December 31, 2003, as liabilities not subject to
    compromise. Such amounts total $1.1 at September 30, 2004
    and $32.5 at December 31, 2003 (see Note 9 of Notes to
    Consolidated Financial Statements in the Companys Annual
    Report on Form 10-K for the year ended December 31, 2003
    for additional information about termination of postretirement
    benefit plans). The Company is no longer making payments in
    respect of retiree medical (other than VEBA payments as defined
    in Note 11). See Note 11 for additional discussions
    regarding the retiree medical plan.
|   
|(3) | Long-term liabilities include hearing loss claims
    of $15.8 at September 30, 2004 and December 31, 2003
    (see Note 7), environmental liabilities of $50.0 at
    September 30, 2004 and December 31, 2003 (see
    Note 7) and asbestos liabilities of $480.0 at
    September 30, 2004 and December 31, 2003 (see
    Note 7).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

The classification of liabilities not
subject to compromise versus liabilities subject to
compromise is based on currently available information and
analysis. As the Cases proceed and additional information and
analysis is completed or, as the Court rules on relevant
matters, the classification of amounts between these

19



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


two categories may change. The amount of any such
changes could be significant. Additionally, as the Company
evaluates the proofs of claim filed in the Cases, adjustments
will be made for those claims that the Company believes will
probably be allowed by the Court. The amount of such claims
could be significant. For example, pursuant to the PBGC
settlement agreement, which is subject to Court approval (see
Note 11), the PBGC will be allowed a $14.0 administrative
claim and the Company will contribute an estimated $4.4 to
certain hourly pension plans which it will continue to sponsor.
Assuming that the PBGC settlement agreement is approved by the
Court, such amounts would be reclassified from liabilities
subject to compromise to liabilities not subject to compromise.

Reorganization
Items.Reorganization items under the
Cases are expense or income items that are incurred or realized
by the Company because it is in reorganization. These items
include, but are not limited to, professional fees and similar
types of expenses incurred directly related to the Cases, loss
accruals or gains or losses resulting from activities of the
reorganization process, and interest earned on cash accumulated
by the Debtors because they are not paying their pre-Filing Date
liabilities. For the quarter and nine month periods ended
September 30, 2004 and 2003, reorganization items were as
follows:

|                  |  |               |      |                   |  |      |     |      |  |   |      |   |  |   |      |  
|----------------- |  | ------------- | ---- | ----------------- |  | ---- | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                  |  |               |      |                  
|                  |  | Quarter Ended |      | Nine Months Ended
|                  |  | September 30, |      | September 30,    
|                  |  |               |      |                  
|                  |  | 2004          |      | 2003              |  | 2004 |     | 2003
|                  |  |               |      |                   |  |      |     |     
|Professional fees |  | $             | 10.2 |                   |  | $    | 5.5 |      |  | $ | 28.7 |   |  | $ | 20.7 |  
|Interest income   |  |               | (.3  | )                 |  |      | (.2 | )    |  |   | (.4  | ) |  |   | (.7  | )
|Other             |  |               | .1   |                   |  |      | .1  |      |  |   | .6   |   |  |   | .2   |  
|                  |  |               |      |                   |  |      |     |      |  |   |      |   |  |   |      |  
|                  |  | $             | 10.0 |                   |  | $    | 5.4 |      |  | $ | 28.9 |   |  | $ | 20.2 |  
|                  |  |               |      |                   |  |      |     |      |  |   |      |   |  |   |      |  

2.     General

This Quarterly Report on Form 10-Q should be
read in conjunction with the Companys Annual Report on
Form 10-K for the year ended December 31, 2003.

Going Concern.The
interim consolidated financial statements of the Company have
been prepared on a going concern basis which
contemplates the realization of assets and the liquidation of
liabilities in the ordinary course of business; however, as a
result of the commencement of the Cases, such realization of
assets and liquidation of liabilities are subject to a
significant number of uncertainties. Specifically, the interim
consolidated financial statements do not present: (a) the
realizable value of assets on a liquidation basis or the
availability of such assets to satisfy liabilities, (b) the
amount which will ultimately be paid to settle liabilities and
contingencies which may be allowed in the Cases, or (c) the
effect of any changes that may occur in connection with the
Debtors capitalizations or operations of the Debtors as a
result of a plan of reorganization. Because of the ongoing
nature of the Cases, the discussions and consolidated financial
statements contained herein are subject to material
uncertainties.

Additionally, as discussed above (see Financial
Statement Presentation in Note 1), the Company believes
that it would, upon emergence, apply fresh start accounting to
its consolidated financial statements which would also adversely
impact the comparability of the September 30, 2004
financial statements to the financial statements of the entity
upon emergence.

Principles of
Consolidation.The Company is a wholly
owned subsidiary of Kaiser, which is a subsidiary of MAXXAM Inc.
(MAXXAM).

The accompanying unaudited interim consolidated
financial statements have been prepared in accordance with GAAP
for interim financial information and the rules and regulations
of the Securities and

20



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Exchange Commission. Accordingly, these financial
statements do not include all of the disclosures required by
GAAP for complete financial statements. In the opinion of
management, the unaudited interim consolidated financial
statements furnished herein include all adjustments, all of
which are of a normal recurring nature unless otherwise noted,
necessary for a fair statement of the results for the interim
periods presented.

The preparation of financial statements in
accordance with GAAP requires the use of estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities
known to exist as of the date the financial statements are
published, and the reported amounts of revenues and expenses
during the reporting period. Uncertainties with respect to such
estimates and assumptions are inherent in the preparation of the
Companys consolidated financial statements; accordingly,
it is possible that the actual results could differ from these
estimates and assumptions, which could have a material effect on
the reported amounts of the Companys consolidated
financial position and results of operations.

Operating results for the quarter and nine month
periods ended September 30, 2004, are not necessarily indicative
of the results that may be expected for the year ending
December 31, 2004.

Discontinued
Operations.As part of the
Companys plan to divest certain of its commodity assets,
as more fully discussed in Notes 1 and 4, the Company completed
the sale of its interests in and related to Alpart, Gramercy,
Kaiser Jamaica Bauxite Company(KJBC),Valco
and the Mead facility and certain related property (the
Mead Facility) (collectively, the sold
commodity interests). In accordance with Statement of
Financial Accounting Standards No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets(SFAS
No. 144), the assets, liabilities, operating results
and gains from sale of the Companys interests in and
related to the sold commodity interests have been reported as
discontinued operations in the accompanying financial statements.

Under SFAS No. 144, only those assets,
liabilities and operating results that are being
sold/discontinued are treated as discontinued
operations. In the case of the sale of Gramercy/ KJBC and
the Mead Facility, the buyers did not assume such items as
workers compensation, pension or postretirement benefit
obligations in respect of the former employees of these
facilities. As discussed more fully in Note 1, the Company
expects that retained obligations will generally be resolved in
the context of any plan or plans of reorganization. As such, the
balances related to such obligations are still included in the
consolidated financial statements. Because the Company owned a
65% interest in Alpart, Alparts balances and results of
operations were fully consolidated into the Companys
consolidated financial statements. Accordingly, the amounts
reflected below for Alpart include the 35% interest in Alpart
owned by Hydro Aluminium as. (Hydro). Hydros
share of the net investment in Alpart is reflected as minority
interest.

The balances and operating results associated
with the Companys interests in and related to Alpart and
Gramercy/ KJBC were previously included in the Bauxite and
Alumina business segment and the balances and operating results
associated with the Companys interests in and related to
Valco and the Mead Facility were previously included in the
Primary Aluminum business segment. The Company has also reported
as discontinued operations the portion of the Commodity
Marketing external hedging activities that were attributable to
the Companys interests in and related to Alpart, Gramercy/
KJBC and Valco.

21



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


The carrying amounts as of September 30,
2004 and December 31, 2003 of the assets and liabilities in
respect of the Companys interest in and related to the
sold commodity interests included in discontinued operations
were as follows:

|                                                           |  |                    |      |                   |  |       |      |           |  |           |       |       |  |   |       |  |  |   |       |   |  |   |       | 
|---------------------------------------------------------- |  | ------------------ | ---- | ----------------- |  | ----- | ---- | --------- |  | --------- | ----- | ----- |  | - | ----- |  |  | - | ----- | - |  | - | ----- | 
|                                                           |  |                    |      |                  
|                                                           |  | September 30, 2004 |      | December 31, 2003
|                                                           |  |                    |      |                  
|                                                           |  |                    |      | Primary           |  |       |      |           |  | Primary   |       |      
|                                                           |  | Alumina            |      | Aluminum          |  |       |      | Alumina   |  | Aluminum  |       |      
|                                                           |  | Interests          |      | Interests         |  | Total |      | Interests |  | Interests |       | Total
|                                                           |  |                    |      |                   |  |       |      |           |  |           |       |      
|Current assets (primarily receivables and
    inventories) |  | $                  | 58.7 |                   |  | $     | 37.3 |           |  | $         | 96.0  |       |  | $ | 135.6 |  |  | $ | 43.1  |   |  | $ | 178.7 | 
|Property, plant and equipment, net                         |  |                    | .5   |                   |  |       | 41.4 |           |  |           | 41.9  |       |  |   | 305.2 |  |  |   | 77.3  |   |  |   | 382.5 | 
|Other assets                                               |  |                    | 5.9  |                   |  |       | 1.9  |           |  |           | 7.8   |       |  |   | 11.5  |  |  |   | 2.0   |   |  |   | 13.5  | 
|                                                           |  |                    |      |                   |  |       |      |           |  |           |       |       |  |   |       |  |  |   |       |   |  |   |       | 
|                                                           |  | $                  | 65.1 |                   |  | $     | 80.6 |           |  | $         | 145.7 |       |  | $ | 452.3 |  |  | $ | 122.4 |   |  | $ | 574.7 | 
|                                                           |  |                    |      |                   |  |       |      |           |  |           |       |       |  |   |       |  |  |   |       |   |  |   |       | 
|Current liabilities                                        |  | $                  | 56.0 |                   |  | $     | 53.1 |           |  | $         | 109.1 |       |  | $ | 75.5  |  |  | $ | 61.5  |   |  | $ | 137.0 | 
|Long-term debt                                             |  |                    |     |                   |  |       |     |           |  |           |      |       |  |   | 22.0  |  |  |   |      |   |  |   | 22.0  | 
|Long-term liabilities                                      |  |                    | 2.4  |                   |  |       | 11.9 |           |  |           | 14.3  |       |  |   | 16.1  |  |  |   | (.4   | ) |  |   | 15.7  | 
|Liabilities subject to compromise                          |  |                    | 26.0 |                   |  |       |     |           |  |           | 26.0  |       |  |   | 21.4  |  |  |   | 15.4  |   |  |   | 36.8  | 
|Minority interest                                          |  |                    |     |                   |  |       | 13.9 |           |  |           | 13.9  |       |  |   | 105.9 |  |  |   | 15.2  |   |  |   | 121.1 | 
|                                                           |  |                    |      |                   |  |       |      |           |  |           |       |       |  |   |       |  |  |   |       |   |  |   |       | 
|                                                           |  | $                  | 84.4 |                   |  | $     | 78.9 |           |  | $         | 163.3 |       |  | $ | 240.9 |  |  | $ | 91.7  |   |  | $ | 332.6 | 
|                                                           |  |                    |      |                   |  |       |      |           |  |           |       |       |  |   |       |  |  |   |       |   |  |   |       | 

Income statement information in respect of the
Companys interest in and related to the sold commodity
interests for the quarter and nine month periods ended
September 30, 2004 and 2003 included in income
(loss) from discontinued operations was as follows:

|                                                             |  |                    |       |                    |  |       |      |           |  |           |       |       |  |   |       |   |  |   |       |   |  |   |       |  
|------------------------------------------------------------ |  | ------------------ | ----- | ------------------ |  | ----- | ---- | --------- |  | --------- | ----- | ----- |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                                             |  |                    |       |                   
|                                                             |  | Quarter Ended      |       | Quarter Ended     
|                                                             |  | September 30, 2004 |       | September 30, 2003
|                                                             |  |                    |       |                   
|                                                             |  |                    |       | Primary            |  |       |      |           |  | Primary   |       |      
|                                                             |  | Alumina            |       | Aluminum           |  |       |      | Alumina   |  | Aluminum  |       |      
|                                                             |  | Interests          |       | Interests          |  | Total |      | Interests |  | Interests |       | Total
|                                                             |  |                    |       |                    |  |       |      |           |  |           |       |      
|Net sales                                                    |  | $                  | 79.2  |                    |  | $     |     |           |  | $         | 79.2  |       |  | $ | 124.0 |   |  | $ |      |   |  | $ | 124.0 |  
|Operating income (loss)                                      |  |                    | (1.8  | )                  |  |       | (4.1 | )         |  |           | (5.9  | )     |  |   | (30.1 | ) |  |   | (12.0 | ) |  |   | (42.1 | )
|Gain on sale of commodity interests                          |  |                    | 101.6 |                    |  |       |     |           |  |           | 101.6 |       |  |   |      |   |  |   |      |   |  |   |      |  
|Income (loss) before income taxes and
    minority interests |  |                    | 100.5 |                    |  |       | (4.1 | )         |  |           | 96.4  |       |  |   | (30.5 | ) |  |   | (12.0 | ) |  |   | (42.5 | )
|Net income (loss)                                            |  |                    | 100.9 |                    |  |       | (3.7 | )         |  |           | 97.2  |       |  |   | (30.1 | ) |  |   | (9.6  | ) |  |   | (39.7 | )

22



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


|                                                             |  |                    |       |                    |  |       |       |           |  |           |       |       |  |   |       |   |  |   |       |   |  |   |        |  
|------------------------------------------------------------ |  | ------------------ | ----- | ------------------ |  | ----- | ----- | --------- |  | --------- | ----- | ----- |  | - | ----- | - |  | - | ----- | - |  | - | ------ | -
|                                                             |  |                    |       |                   
|                                                             |  | Nine Months Ended  |       | Nine Months Ended 
|                                                             |  | September 30, 2004 |       | September 30, 2003
|                                                             |  |                    |       |                   
|                                                             |  |                    |       | Primary            |  |       |       |           |  | Primary   |       |      
|                                                             |  | Alumina            |       | Aluminum           |  |       |       | Alumina   |  | Aluminum  |       |      
|                                                             |  | Interests          |       | Interests          |  | Total |       | Interests |  | Interests |       | Total
|                                                             |  |                    |       |                    |  |       |       |           |  |           |       |      
|Net sales                                                    |  | $                  | 381.6 |                    |  | $     |      |           |  | $         | 381.6 |       |  | $ | 384.2 |   |  | $ | 27.5  |   |  | $ | 411.7  |  
|Operating income (loss)                                      |  |                    | 18.0  |                    |  |       | (58.5 | )(1)      |  |           | (40.5 | )     |  |   | (84.1 | ) |  |   | (39.5 | ) |  |   | (123.6 | )
|Gain on sale of commodity interests                          |  |                    | 101.6 |                    |  |       | 23.4  |           |  |           | 125.0 |       |  |   |      |   |  |   |      |   |  |   |       |  
|Income (loss) before income taxes and
    minority interests |  |                    | 119.6 |                    |  |       | (34.9 | )         |  |           | 84.7  |       |  |   | (85.4 | ) |  |   | (39.0 | ) |  |   | (124.4 | )
|Net income (loss)                                            |  |                    | 115.8 |                    |  |       | (33.5 | )         |  |           | 82.3  |       |  |   | (87.5 | ) |  |   | (30.2 | ) |  |   | (117.7 | )



---



|    |                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Primary Aluminum interests for the nine months
    ended September 30, 2004 includes a Valco-related
    impairment charge of $33.0 (see Notes 3 and 4).

Derivative Financial
Instruments.Hedging transactions
using derivative financial instruments are primarily designed to
mitigate the Companys exposure to changes in prices for
certain of the products which the Company sells and consumes
and, to a lesser extent, to mitigate the Companys exposure
to change in foreign currency exchange rates. the Company does
not utilize derivative financial instruments for trading or
other speculative purposes. The Companys derivative
activities are initiated within guidelines established by
management and approved by the Companys board of
directors. Hedging transactions are executed centrally on behalf
of all of the Companys business segments to minimize
transaction costs, monitor consolidated net exposure and allow
for increased responsiveness to changes in market factors.

See Notes 2 and 13 of Notes to
Consolidated Financial Statements in the Companys Annual
Report on Form 10-K for the year ended December 31,
2003 for additional information regarding derivative financial
instruments.

3.     Inventories

The classification of inventories, after
deducting inventories related to discontinued operations, is as
follows:

|                      |                                                          |               |       |              |  |   |       |      | 
|--------------------- | -------------------------------------------------------- | ------------- | ----- | ------------ |  | - | ----- | ---- | 
|                      |                                                          | September 30, |       | December 31,
|                      |                                                          | 2004          |       | 2003        
|                      |                                                          |               |       |             
|Fabricated products  |                                                          |               |       |              |  |   |       |     
|                      | Finished products                                        |               | $     | 25.4         |  |   | $     | 27.8 | 
|                      | Work in process                                          |               |       | 47.4         |  |   |       | 30.1 | 
|                      | Raw materials                                            |               |       | 33.8         |  |   |       | 22.8 | 
|                      | Operating supplies and repairs and maintenance
    parts |               |       | 11.8         |  |   |       | 11.7 | 
|                      |                                                          |               |       |              |  |   |       |     
|                      |                                                          |               | 118.4 |              |  |   | 92.4  |     
|                      |                                                          |               |       |              |  |   |       |     
|Commodities          |                                                          |               |       |              |  |   |       |     
|                      | Bauxite and alumina                                      |               |       | 12.9         |  |   |       | 10.1 | 
|                      | Primary aluminum                                         |               |       | .1           |  |   |       | .1   | 
|                      |                                                          |               |       |              |  |   |       |     
|                      |                                                          |               | 13.0  |              |  |   | 10.2  |     
|                      |                                                          |               |       |              |  |   |       |     
|                      |                                                          | $             | 131.4 |              |  | $ | 102.6 |     
|                      |                                                          |               |       |              |  |   |       |     

23



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


The above tables exclude commodities inventories
related to discontinued operations of $50.8 in 2004 and $103.6
in 2003. Inventories related to discontinued operations in 2004
have been reduced by a net charge of $1.2 in the first quarter
of 2004 to write-down certain alumina inventories to their
estimated net realizable value as a result of the Companys
sale of its interests in and related to Valco (see Notes 2
and 4).

Substantially all product inventories are stated
at last-in, first-out (LIFO) cost, not in excess of
market. Replacement cost is not in excess of LIFO cost.

4.     Property,
Plant, And Equipment

The major classes of property, plant, and
equipment, after deducting property, plant and equipment, net
related to discontinued operations, are as follows:

|                                   |  |               |        |              |  |   |        |  
|---------------------------------- |  | ------------- | ------ | ------------ |  | - | ------ | -
|                                   |  | September 30, |        | December 31,
|                                   |  | 2004          |        | 2003        
|                                   |  |               |        |             
|Land and improvements              |  | $             | 8.7    |              |  | $ | 8.7    |  
|Buildings                          |  |               | 65.3   |              |  |   | 65.3   |  
|Machinery and equipment            |  |               | 462.3  |              |  |   | 454.9  |  
|Construction in progress           |  |               | 5.6    |              |  |   | 8.3    |  
|                                   |  |               |        |              |  |   |        |  
|                                   |  |               | 541.9  |              |  |   | 537.2  |  
|Accumulated depreciation           |  |               | (324.2 | )            |  |   | (307.1 | )
|                                   |  |               |        |              |  |   |        |  
|Property, plant and equipment, net |  | $             | 217.7  |              |  | $ | 230.1  |  
|                                   |  |               |        |              |  |   |        |  

The above tables exclude property, plant and
equipment, net of discontinued operations of $41.9 in 2004 and
$382.5 in 2003 (see Note 2).

The following discusses the divestiture
activities of certain of the Companys commodity assets
during the nine month period ended September 30, 2004 and
year ended December 31, 2003.

2004 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As previously disclosed, on July 1, 2004,
    with Court approval, the Company completed the sale of its
    interests in and related to Alpart for a base purchase price of
    $295.0 plus certain adjustments of approximately $20.0. The
    transaction resulted in a gross sales price of approximately
    $315.0, subject to certain post-closing adjustments, which have
    not yet been determined, and a pre-tax gain of approximately
    $101.6. Offsetting the cash proceeds were approximately $14.5 of
    payments made by the Company to fund the prepayment of the
    Companys share of the Alpart-related debt (see
    Note 5) and $3.3 of transaction-related costs. The balance
    of the proceeds are being held in escrow primarily for the
    benefit of certain secured and other creditors as outlined in
    the AJC/ KJC Plan. In accordance with SFAS No. 144,
    balances and results of operations related to the Companys
    interests and related to Alpart have been reported as
    discontinued operations in the accompanying financial statements
    (see Note 2).
|
| |  | In May 2004, the Company entered into an
    agreement to sell its interests in and related to the Gramercy
    facility and KJBC. The sale closed on October 1, 2004 with
    Court approval. Net proceeds from the sale were approximately
    $23.0, subject to various closing and post closing adjustments.
    A substantial portion of the proceeds is likely to be used or
    reserved to satisfy transaction related costs and obligations.
    The Companys interests in and related to the Gramercy
    facility and KJBC have been reported as discontinued operations
    in the accompanying financial statements (see Note 2). The
    Company currently expects any gain or loss on the sale to be
    relatively modest.                                                                                                                                                                                                                                                                                                                                                                        

24



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | As more fully discussed in Note 14 of Notes
    to Consolidated Financial Statements in the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 2003, during 2003, the Company and Valco
    participated in extensive negotiations with the GoG and the
    Volta River Authority (VRA) regarding the power
    situation and other matters. Such negotiations did not result in
    a resolution of such matters. However, as an outgrowth of such
    negotiations, the Company and the GoG entered into a Memorandum
    of Understanding (MOU) in December 2003 pursuant to
    which the Company would sell its 90% interest in and related to
    Valco to the GoG. The Company collected $5.0 pursuant to the
    MOU. However, a new financial agreement was reached in May 2004
    and the MOU was amended. Under the revised financial terms, the
    Company was to retain the $5.0 already paid by the GoG and $13.0
    more was to be paid by the GoG as full and final consideration
    for the transaction at closing. The Company also agreed to fund
    certain end of service benefits of Valco employees (estimated to
    be approximately $9.8) which the GoG was to assume under the
    original MOU. The agreement was approved by the Court on
    September 29, 2004. The sale closed on October 29,
    2004. As the revised purchase price under the amended MOU was
    well below the Companys recorded value for Valco, the
    Company recorded a non-cash impairment charge of $31.8 in its
    March 31, 2004 financial statements to reduce the carrying
    value of its interests in and related to Valco at March 31,
    2004 to the amount of the expected proceeds. The Companys
    interests in and related to Valco have been reported as
    discontinued operations in the accompanying financial statements
    (see Note 2). The Company currently expects any gain or
    loss on the sale to be relatively modest.
|
| |  | In June 2004, with Court approval, the Company
    completed the sale of the Mead Facility for approximately $7.4
    plus assumption of certain site-related liabilities. The sale,
    which was approved by the Court, closed in June 2004. The sale
    resulted in net proceeds of approximately $6.2 and a pre-tax
    gain of approximately $23.4. The pre-tax gain includes the
    impact from the sale of certain non-operating land in the first
    quarter of 2004 that was adjacent to the Mead Facility. The
    pre-tax gain on the sale of this property had been deferred
    pending the finalization of the sale of the Mead Facility and
    transfer of the site-related liabilities. Proceeds from the sale
    of the Mead Facility totaling $4.0 are being held in escrow as
    Restricted proceeds from sale of commodity interests until the
    value of the secured claim of the holders of the 7.6% solid
    waste disposal revenue bonds is determined by the Court (see
    Note 5). The assets, liabilities and operating results of
    the Mead Facility have been reported as discontinued operations
    in the accompanying financial statements (see Note 2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | On September 27, 2004, the Court approved a
    motion to hold an auction in October 2004 in respect of the
    Companys interests in and related to QAL and approved
    certain bidding procedures. The motion outlined a two-prong
    approach to ensure that an auction would take place. First the
    Company signed a stalking horse agreement to sell
    its interest in and related to QAL to Comalco Aluminium Limited
    (Comalco), one of its partners in QAL, for a base
    price of $308.0 cash plus purchase of the Companys alumina
    and bauxite inventories, and subject to certain working capital
    adjustments and the assumption of the Companys obligations
    in respect of approximately $60.0 of QAL debt (see Note 7).
    The Company would also transfer its existing alumina sales
    contracts and other agreements related to QAL. The agreement was
    supplemented by a letter agreement in which Comalcos
    parent companies agreed that the execution of the stalking horse
    agreement satisfied, or that such parties otherwise waived,
    certain rights that they would otherwise have under an existing
    agreement with the Company. The stalking horse agreement also
    included a provision for a payment of a termination fee of $11.0
    to Comalco upon the sale of the Companys interests in QAL
    pursuant to the auction process if Comalco is not the ultimate
    purchaser. Separately, the Company entered into an agreement
    with Glencore AG (Glencore), whereby Glencore
    obligated itself to submit a bid of $400.0 in cash plus the other                                                                                                                                                                                                                                                                                                                                                            

25



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)




| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | payments and adjustments described above. The
    Company paid Glencore a fee of $7.7 in September 2004 upon
    submission of its qualified bid which amount has been included
    in the September 30, 2004 balance sheet as a deferred
    charge. The auction occurred in October 2004 and, after
    consultation with the UCC and others, the Company entered into
    an agreement with the successful bidder to sell its interests in
    and related to QAL under the same terms as the Comalco agreement
    described above for a base price of approximately $401.0. The
    agreement was approved by the Court on November 8, 2004.
    The Company has targeted a closing date for the transaction
    during the first quarter of 2005. However, the transaction is
    subject to a number of approvals including from QALs
    lenders and the Australian government. The Glencore bid and
    related purchase obligation remains in effect until the earlier
    of the closing of a transaction with another party or at least
    mid-April 2005. As described in Note 1, the Company expects
    that a substantial majority of the proceeds from the sale of the
    Companys interests in and related to QAL would be held in
    escrow for the benefit of KAACs creditors until a plan for
    KAAC can be filed and approved by the Court. Note 12
    contains information regarding the pro forma effects on the
    Companys historical financial statement information
    presented herein assuming that the sale of the Companys
    interests in and related to QAL are ultimately sold.

2003 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In January 2003, the Court approved the sale of
    the Tacoma facility to the Port of Tacoma (the
    Port). Gross proceeds from the sale, before
    considering approximately $4.0 of proceeds being held in escrow
    pending the resolution of certain environmental and other
    issues, were approximately $12.1. The Port also agreed to assume
    the on-site environmental remediation obligations. The sale
    closed in February 2003. The sale resulted in a pre-tax gain of
    approximately $9.5 (which amount was reflected in Other
    operating charges (benefits), net  see Note 9).
    The operating results of the Tacoma facility for 2004 and 2003
    have not been reported as discontinued operations in the
    accompanying Statements of Consolidated Income (Loss) because
    such amounts were not material.                                                                                                                                                                               
|
| |  | The Company had a long-term liability, net of
    estimated subleases income, on an office complex in Oakland,
    California, in which the Company had not maintained offices for
    a number of years, but for which it was responsible for lease
    payments as master tenant through 2008 under a
    sale-and-leaseback agreement. The Company also held an
    investment in certain notes issued by the owners of the building
    (which were included in Other assets). In October 2002, the
    Company entered into a contract to sell its interests and
    obligations in the office complex. As the contract amount was
    less than the assets net carrying value (included in Other
    assets), the Company recorded a non-cash impairment charge in
    2002 of approximately $20.0. The sale was approved by the Court
    in February 2003 and closed in March 2003. Net cash proceeds
    were approximately $61.1.                                                                                         
|
| |  | In July 2003, with Court approval, the Company
    sold certain equipment at the Trentwood facility that was no
    longer required as a part of past product rationalizations.
    Proceeds from the sale were approximately $7.0, resulting in a
    net gain of approximately $5.0 after considering sale-related
    costs. The gain on the sale of this equipment has been netted
    against additional impairment charges of approximately $1.1
    associated with equipment to be abandoned or otherwise disposed
    of primarily as a result of production rationalizations (which
    amounts were reflected in Other operating charges (benefits),
    net  see Note 9). The equipment that was sold in
    July 2003 had been impaired to a zero basis in the fourth
    quarter of 2001. The impairment was based on information
    available at that time and the expectation that proceeds from
    the eventual sale of the equipment would be fully offset by
    sale-related costs to be borne by the Company.

26



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


5.     Long-Term
Debt

Debt, after deducting debt related to
discontinued operations, consists of the following:

|                                                                                                           |                                                             |               |        |              |  |   |        |       | 
|---------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------- | ------ | ------------ |  | - | ------ | ----- | 
|                                                                                                           |                                                             | September 30, |        | December 31,
|                                                                                                           |                                                             | 2004          |        | 2003        
|                                                                                                           |                                                             |               |        |             
|Secured:                                                                                                   |                                                             |               |        |              |  |   |        |      
|                                                                                                           | Post-Petition Credit Agreement                              |               | $      |             |  |   | $      |      | 
|                                                                                                           | 7.6% Solid Waste Disposal Revenue Bonds due 2027            |               |        | 1.0          |  |   |        | 1.0   | 
|                                                                                                           | Other borrowings (fixed rate)                               |               |        | 2.4          |  |   |        | 2.5   | 
|Unsecured or Undersecured:                                                                                 |                                                             |               |        |              |  |   |        |      
|                                                                                                           | 9 7/8% Senior Notes due 2002, net (see
    Note 1)          |               |        | 172.8        |  |   |        | 172.8 | 
|                                                                                                           | 10 7/8% Senior Notes due 2006, net (see
    Note 1)         |               |        | 225.0        |  |   |        | 225.0 | 
|                                                                                                           | 12 3/4% Senior Subordinated Notes due 2003
    (see Note 1) |               |        | 400.0        |  |   |        | 400.0 | 
|                                                                                                           | 7.6% Solid Waste Disposal Revenue Bonds due 2027            |               |        | 18.0         |  |   |        | 18.0  | 
|                                                                                                           | Other borrowings (fixed and variable rates)                 |               |        | 32.4         |  |   |        | 32.4  | 
|                                                                                                           |                                                             |               |        |              |  |   |        |      
|Total                                                                                                      |                                                             |               | 851.6  |              |  |   | 851.7  |      
|Less  Current portion                                                                                     |                                                             |               | (1.2   | )            |  |   | (1.3   | )    
|Pre-Filing
    Date claims included in subject to
    compromise        (i.e.
    unsecured debt) (Note 1) |                                                             |               | (848.2 | )            |  |   | (848.2 | )    
|                                                                                                           |                                                             |               |        |              |  |   |        |      
|                                                                                                           |                                                             | $             | 2.2    |              |  | $ | 2.2    |      
|                                                                                                           |                                                             |               |        |              |  |   |        |      

The above tables exclude debt (8 1/4% Alpart
CARIFA Loans) related to discontinued operations of $22.0 in
2003.

Post-Petition Credit
Agreement.On February 12, 2002,
the Company and Kaiser entered into a post-petition credit
agreement (the DIP Facility), with a group of
lenders for debtor-in-possession financing. In March 2003,
certain of the Additional Debtors were added as co-guarantors
and the DIP Facility lenders received super-priority status with
respect to certain of the Additional Debtors assets. The
DIP Facility provides for a secured, revolving line of credit
through the earlier of February 13, 2005, the effective
date of a plan of reorganization or voluntary termination by the
Company. Under the DIP Facility, the Company is able to borrow
amounts by means of revolving credit advances and to have issued
for its benefit letters of credit (up to $100.0) in an aggregate
amount equal to the lesser of $200.0 or a borrowing base
relating to eligible accounts receivable, eligible inventory and
a fixed asset subcomponent, reduced by certain reserves, as
defined in the DIP Facility agreement. The DIP Facility is
guaranteed by the Company and certain significant subsidiaries
of the Company. Interest on any outstanding borrowings will bear
a spread over either a base rate or LIBOR, at the Companys
option. As of September 30, 2004, $148.0 was available to
the Company under the DIP Facility (of which up to $94.6 could
be used for additional letters of credit) and no borrowings were
outstanding under the revolving credit facility.

The DIP Facility requires the Company to comply
with certain covenants and places restrictions on the
Companys, Kaisers and the Companys
subsidiaries ability to, among other things, incur debt
and liens, make investments, pay dividends, sell assets,
undertake transactions with affiliates, make capital
expenditures, and enter into unrelated lines of business.

On October 28, 2004, the Company and the DIP
lenders completed an amendment to the DIP Facility. The
amendment was approved by the Court on October 28, 2004.
The major provisions of the amendment included: (1) a
financial covenant was reset based on current forecasts;
(2) approval of the sale of the

27



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Companys interest in and related to QAL and
formal approval of the sales of Alpart, Gramercy/ KJBC and Valco
that had been previously approved through limited waivers that
were to expire on October 31, 2004; (3) a reset of the
availability of the fixed asset subcomponent of the borrowing
base to $50.0; (4) reduction of the commitment amount of
the DIP Facility from $285.0 to $200.0; (5) reduction of
the maximum letters of credit amount from $125.0 to $100.0; and
(6) a requirement for lender approval in respect of any
agreement for settlement or release of intercompany claims
except an agreement in form and substance identical to the
Intercompany Agreement.

The Company has previously disclosed that in
connection with the amendment and the completion of the
previously announced commodity asset sales, it expects that the
amount of borrowing base available under the DIP Facility would
be adequate to support the Companys liquidity requirements
through the remainder of the Cases. This belief is based on the
fact that it was the commodity assets that subjected the Company
to the most variability and exposure from both a price risk
basis as well as from an operating perspective. While there can
be no assurances, based on recent primary aluminum prices and
recent market conditions for fabricated aluminum products, the
Company currently expects availability under the DIP Facility to
remain near or above the $100.0 range.

The DIP Facility is currently scheduled to expire
in February 2005. As discussed in Note 1, the Company
currently believes it is unlikely that it will emerge from the
Cases until sometime in the first half of 2005. As such, it may
be necessary for the Company to extend the DIP Facility or make
alternative financing arrangements. While the Company believes
that if necessary, it would be successful in negotiating an
extension to the DIP Facility or adequate alternative financing
arrangements, no assurances can be given in this regard.

7.6% Solid Waste Disposal Revenue
Bonds.The 7.6% solid waste disposal
revenue bonds (the Solid Waste Bonds) were secured
by certain (but not all) of the facilities and equipment at the
Mead Facility which was sold in June 2004 (see Note 4). The
Company believes that the value of the collateral that secured
the Solid Waste Bonds was in the $1.0 range and, as a result,
has reclassified $18.0 of the Solid Waste Bonds balance to
Liabilities subject to compromise (see Note 1). However, in
connection with the sale of the Mead Facility, $4.0 of the
proceeds were placed in escrow for the benefit of the holders of
the Solid Waste Bonds until the value of the secured claim of
the bondholders is determined by the Court. The Company expects
that the value of the secured claim will be resolved during
early 2005 either through a negotiated resolution or a process
of litigation. As the Solid Waste Bonds were not a part of the
Mead Facility sale transaction, they were not reported as
discontinued operations in the accompanying Consolidated Balance
Sheets.

8 1/4% Alpart CARIFA
Loans.In December 1991, Alpart
entered into a loan agreement with the Caribbean Basin Projects
Financing Authority (CARIFA). Alparts
obligations under the loan agreement were secured by two letters
of credit aggregating $23.5. The Company was a party to one of
the two letters of credit in the amount of $15.3 in respect of
its 65% ownership interest in Alpart. Alpart also agreed to
indemnify bondholders of CARIFA for certain tax payments that
could result from events, as defined, that adversely affect the
tax treatment of the interest income on the bonds.

Pursuant to the CARIFA loan agreement, the Alpart
CARIFA financing was repaid in connection with the sale of the
Companys interests in and related to Alpart, which were
sold on July 1, 2004 (see Notes 1 and 4). Upon
such payment, the Companys letter of credit obligation
under the DIP Facility securing the loans was cancelled.

In accordance with SFAS No. 144, the CARIFA
loans balance of $22.0 as of December 31, 2003 has been
reported as discontinued operations in the accompanying
financial statements (see Note 2).

28



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


6.     Income
Taxes

The income tax (provision) benefit for the
quarters ended September 30, 2004 and 2003, the nine month
periods ended September 30, 2004 and 2003, relates
primarily to foreign income taxes. For the quarter and nine
month periods ended September 30, 2004 and 2003, as a
result of the Cases, the Company did not recognize any U.S.
income tax benefit for the losses incurred from its domestic
operations (including temporary differences) or any U.S. income
tax benefit for foreign income taxes. Instead, the increases in
federal and state deferred tax assets as a result of additional
net operating losses and foreign tax credits generated in 2004
and 2003 were fully offset by increases in valuation allowances.
See Note 8 of Notes to Consolidated Financial Statements in
the Companys Annual Report on Form 10-K for the year
ended December 31, 2003 for additional information
regarding the Deferred Tax Assets and Valuation Allowances.

The reported amounts are net of income tax
(provision) benefit related to discontinued operations of $.4
and $.9 for the quarters ended September 30, 2004 and 2003,
respectively, and $(6.9) and $.9, for the nine month periods
ended September 30, 2004 and 2003, respectively.

7.     Commitments
and Contingencies

Impact of Reorganization
Proceedings.During the pendency of
the Cases, substantially all pending litigation, except certain
environmental claims and litigation, against the Debtors is
stayed. Generally, claims against a Debtor arising from actions
or omissions prior to its Filing Date will be settled in
connection with its plan of reorganization.

Commitments.The
Company has a variety of financial commitments, including
purchase agreements, tolling arrangements, forward foreign
exchange and forward sales contracts (see Note 8), letters
of credit, and guarantees. Such purchase agreements and tolling
arrangements include long-term agreements for the purchase and
tolling of bauxite into alumina in Australia by QAL. These
obligations are scheduled to expire in 2008. Under the
agreements, the Company is unconditionally obligated to pay its
proportional share (20%) of debt, operating costs, and certain
other costs of QAL. The Companys share of the aggregate
minimum amount of required future principal payments as of
September 30, 2004, was $60.0 which amount matures in varying
amounts during the 2005 to 2008 period. The Companys share
of QALs debt increased by approximately $8.0 during 2003
as additional drawdowns on QAL financing (the Companys
share $40.0) more than offset the Companys share ($32.0)
of QALs debt principal payment. During July 2002, the
Company made payments of approximately $29.5 to QAL to fund the
Companys share of QALs scheduled debt maturities.
The Companys share of payments, including operating costs
and certain other expenses under the agreements, has generally
ranged between $70-$100 over the past three years. However, as
discussed more fully in Notes 1 and 4, the Company has entered
into an agreement to sell its interests in QAL and, in
connection with the sale, the Companys obligations in
respect of its share of QALs debt will be assumed by the
buyer. The Company also has agreements to supply alumina to and
to purchase aluminum from Anglesey.

Minimum rental commitments under operating leases
at December 31, 2003, are as follows: years ending
December 31, 2004  $7.5; 2005  $4.7;
2006   $2.1; 2007  $.3; 2008 
$.2; thereafter  $.7. Pursuant to the Code, the
Debtors may elect to reject or assume unexpired pre-petition
leases. At this time, no final decisions have been made as to
which significant pre-petition leases will be accepted or
rejected (see Note 1). Rental expenses were $15.2, $38.3 and
$41.0, for the years ended December 31, 2003, 2002 and
2001, respectively.

Environmental
Contingencies.The Company and Kaiser
are subject to a number of environmental laws, to fines or
penalties assessed for alleged breaches of the environmental
laws, and to claims and litigation based upon such laws. The
Company currently is subject to a number of claims under the
Comprehensive

29



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 (CERCLA), and, along
with certain other entities, has been named as a potentially
responsible party for remedial costs at certain third-party
sites listed on the National Priorities List under CERCLA.

Based on the Companys evaluation of these
and other environmental matters, the Company has established
environmental accruals, primarily related to potential solid
waste disposal and soil and groundwater remediation matters. At
September 30, 2004, the balance of such accruals was $91.5
(of which $50.0 was included in Liabilities subject to
compromise  see Note 1). These environmental accruals
represent the Companys estimate of costs reasonably
expected to be incurred in the ordinary course of business based
on presently enacted laws and regulations, currently available
facts, existing technology, and the Companys assessment of
the likely remediation action to be taken. In the ordinary
course, the Company expects that these remediation actions would
be taken over the next several years and estimates that annual
expenditures to be charged to these environmental accruals will
be approximately $25.4 in 2004, $2.2 to $4.3 per year for the
years 2005 through 2008 and an aggregate of approximately $45.7
thereafter. Approximately $20.2 of the adjustments to the
environmental liabilities in 2003 (see below) that applied to
non-owned property sites has been included in the after 2008
balance because such amounts are expected to be settled solely
in connection with the Debtors plan or plans of
reorganization.

The September 30, 2004 accrual balance
includes approximately $23.2 that was provided during the third
quarter of 2003. Approximately $20.2 of the amount provided in
the third quarter of 2003 relates to the previously disclosed
multi-site settlement agreement with various federal and state
governmental regulatory authorities and other parties in respect
of the Companys environmental exposure at a number of
non-owned sites. Under this agreement, among other things, the
Company agreed to claims at such sites totaling $25.6 ($20.2
greater than amounts that had previously been accrued for these
sites) and, in return, the governmental regulatory authorities
agreed that such claims would be treated as pre-Filing Date
unsecured claims (i.e. liabilities subject to compromise). The
Company recorded in the third quarter of 2003 the portion of the
$20.2 accrual that relates to locations with active operations
($15.7) in Other operating charges (benefits), net (see Note 9).
The remainder of the accrual ($4.5), which related to locations
that have not operated for a number of years was recorded in the
third quarter of 2003 in Other income (expense) (see Note 9).

During the second quarter of 2004 and the third
quarter of 2003, the Company also provided additional accruals
totaling approximately $1.4 and $3.0, respectively, associated
with certain Company-owned properties with no current operations
(recorded in Other income (expense)) (see Note 9). The June 2004
accrual resulted from facts and circumstances determined in the
ordinary course of business. The additional September 2003
accruals resulted primarily from additional cost estimation
efforts undertaken by the Company in connection with its
reorganization efforts. Both the June 2004 and September 2003
additional accruals were recorded as liabilities not subject to
compromise as they relate to properties owned by the Company.

The Company has previously disclosed that it is
possible that its assessment of environmental accruals could
increase because it may be in the interests of all stakeholders
to agree to increased amounts to, among other things, achieve a
claim treatment that is favorable and to expedite the
reorganization process. The September 2003 multi-site settlement
is one example of such a situation.

In the Companys Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004, the Company
reported that it was close to entering agreements with various
parties pursuant to which a substantial portion of the
unresolved environmental claims could be resolved for
approximately $25.0 -$30.0. In the third quarter of 2004,
agreements with the affected parties were reached and Court
approval for such agreements was

30



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


received. During October 2004, the Company paid
approximately $27.3 to resolve these liabilities. The amounts
paid approximated the amount of liabilities recorded and did not
result in any material net gain or loss.

As additional facts are developed and definitive
remediation plans and necessary regulatory approvals for
implementation of remediation are established or alternative
technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental
accruals. The Company believes that it is reasonably possible
that costs associated with these environmental matters may
exceed current accruals by amounts that could range, in the
aggregate, up to an estimated $24.0 (a majority of which are
estimated to relate to owned sites that are likely not subject
to compromise). As the resolution of these matters is subject to
further regulatory review and approval, no specific assurance
can be given as to when the factors upon which a substantial
portion of this estimate is based can be expected to be
resolved. However, the Company is currently working to resolve
certain of these matters.

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

Other Environmental
Matters.During April 2004, the
Company was served with a subpoena for documents and has been
notified by Federal authorities that they are investigating
certain environmental compliance issues with respect to the
Companys Trentwood facility in the State of Washington.
The Company is undertaking its own internal investigation of the
matter through specially retained counsel to ensure that it has
all relevant facts regarding Trentwoods compliance with
applicable environmental laws. The Company believes it is in
compliance with all applicable environmental laws and
requirements at the Trentwood facility and intends to defend any
claims or charges, if any should result, vigorously. The Company
cannot assess what, if any, impacts this matter may have on the
Companys financial statements.

Asbestos
Contingencies.The Company has been
one of many defendants in a number of lawsuits, some of which
involve claims of multiple persons, in which the plaintiffs
allege that certain of their injuries were caused by, among
other things, exposure to asbestos during, and as a result of,
their employment or association with the Company or exposure to
products containing asbestos produced or sold by the Company.
The lawsuits generally relate to products the Company has not
sold for more than 20 years. As of the initial Filing Date,
approximately 112,000 claims were pending. The lawsuits are
currently stayed by the Cases.

Due to the Cases, holders of asbestos claims are
stayed from continuing to prosecute pending litigation and from
commencing new lawsuits against the Debtors. However, during the
pendency of the Cases, the Company expects additional asbestos
claims will be filed as part of the claims process. A separate
creditors committee representing the interests of the
asbestos claimants, the ACC, has been appointed. The
Debtors obligations with respect to present and future
asbestos claims will be resolved pursuant to a plan of
reorganization.

The Company has accrued a liability for estimated
asbestos-related costs for claims filed to date and an estimate
of claims to be filed through 2011. At September 30, 2004,
the balance of such accrual was $610.1, all of which was
included in Liabilities subject to compromise (see Note 1). The
Companys estimate is based on the Companys view, at
September 30, 2004, of the current and anticipated number
of asbestos-related claims, the timing and amounts of
asbestos-related payments, the status of ongoing litigation and
settlement initiatives, and the advice of Wharton Levin
Ehrmantraut & Klein, P.A., with respect to the current state
of the law related to asbestos claims. However, there are
inherent uncertainties involved in estimating asbestos-related
costs and the Companys actual costs could exceed the
Companys estimates due to changes in facts and
circumstances after the date of each estimate. Further, while
the Company does not presently believe

31



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


there is a reasonable basis for estimating
asbestos-related costs beyond 2011 and, accordingly, no accrual
has been recorded for any costs which may be incurred beyond
2011, the Company expects that the plan of reorganization
process may require an estimation of the Companys entire
asbestos-related liability, which may go beyond 2011, and that
such costs could be substantial.

The Company believes that it has insurance
coverage available to recover a substantial portion of its
asbestos-related costs. Although the Company has settled
asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements and
disputes with carriers exist. The timing and amount of future
recoveries from these insurance carriers will depend on the
pendency of the Cases and on the resolution of any disputes
regarding coverage under the applicable insurance policies. The
Company believes that substantial recoveries from the insurance
carriers are probable and additional amounts may be recoverable
in the future if additional claims are added. The Company
reached this conclusion after considering its prior
insurance-related recoveries in respect of asbestos-related
claims, existing insurance policies, and the advice of Heller
Ehrman White & McAuliffe LLP with respect to applicable
insurance coverage law relating to the terms and conditions of
those policies. During 2000, the Company filed suit in San
Francisco Superior Court against a group of its insurers, which
suit was thereafter split into two related actions. Additional
insurers were added to the litigation in 2000 and 2002. During
October 2001, June 2003, February 2004 and April 2004, the court
ruled favorably on a number of policy interpretation issues.
Additionally, one of the favorable October 2001 rulings was
affirmed in February 2002 by an intermediate appellate court in
response to a petition from the insurers. The rulings did not
result in any changes to the Companys estimates of its
current or future asbestos-related insurance recoveries. The
trial court may hear additional issues from time to time. Given
the expected significance of probable future asbestos-related
payments, the receipt of timely and appropriate payments from
its insurers is critical to a successful plan of reorganization
and the Companys long-term liquidity.

The following tables present historical
information regarding the Companys asbestos-related
balances and cash flows:

|                                         |  |               |       |              |  |   |       | 
|---------------------------------------- |  | ------------- | ----- | ------------ |  | - | ----- | 
|                                         |  | September 30, |       | December 31,
|                                         |  | 2004          |       | 2003        
|                                         |  |               |       |             
|Liability                                |  | $             | 610.1 |              |  | $ | 610.1 | 
|Receivable (included in Other assets)(1) |  |               | 463.1 |              |  |   | 465.4 | 
|                                         |  |               |       |              |  |   |       | 
|                                         |  | $             | 147.0 |              |  | $ | 144.7 | 
|                                         |  |               |       |              |  |   |       | 

|                                             |  |                    |     |           |  |   |        |  
|-------------------------------------------- |  | ------------------ | --- | --------- |  | - | ------ | -
|                                             |  | Nine Months Ended  |     | Inception
|                                             |  | September 30, 2004 |     | To Date  
|                                             |  |                    |     |          
|Payments made, including related legal costs |  | $                  |    |           |  | $ | (355.7 | )
|Insurance recoveries(2)                      |  |                    | 2.3 |           |  |   | 265.8  |  
|                                             |  |                    |     |           |  |   |        |  
|                                             |  | $                  | 2.3 |           |  | $ | (89.9  | )
|                                             |  |                    |     |           |  |   |        |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The asbestos-related receivable was determined on
    the same basis as the asbestos-related cost accrual. However, no
    assurances can be given that the Company will be able to project
    similar recovery percentages for future asbestos-related claims
    or that the amounts related to future asbestos-related claims
    will not exceed the Companys aggregate insurance coverage.
    As of September 30, 2004 and December 31, 2003, $3.8
    and $6.1, respectively, of the receivable amounts relate to
    costs paid. The remaining receivable amounts relate to costs
    that are expected to be paid by the Company in the future.

32



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)




|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Excludes certain amounts paid by insurers into a
    separate escrow account (in respect of future settlements) more
    fully disclosed below.

During the pendency of the Cases, all asbestos
litigation is stayed. As a result, the Company does not expect
to make any asbestos payments in the near term. Despite the
Cases, the Company continues to pursue insurance collections in
respect of asbestos-related amounts paid prior to its Filing
Date.

Management continues to monitor claims activity,
the status of lawsuits (including settlement initiatives),
legislative developments, and costs incurred in order to
ascertain whether an adjustment to the existing accruals should
be made to the extent that historical experience may differ
significantly from the Companys underlying assumptions.
Additional asbestos-related claims are likely to be asserted as
a part of the Chapter 11 process. Management cannot at this
time reasonably predict the ultimate number of such claims or
the amount of the associated liability. However, it is likely
that such amounts could exceed, perhaps significantly, the
liability amounts reflected in the Companys consolidated
financial statements, which (as previously stated) is only
reflective of an estimate of claims through 2011. The
Companys obligations in respect of the currently pending
and future asbestos-related claims will ultimately be determined
(and resolved) as a part of the overall Chapter 11
proceedings. It is anticipated that resolution of these matters
could be a lengthy process. Management will continue to
periodically reassess its asbestos-related liabilities and
estimated insurance recoveries as the Cases proceed. However,
absent unanticipated developments such as asbestos-related
legislation, material developments in other asbestos-related
proceedings or in the Companys Chapter 11
proceedings, it is not anticipated that the Company will have
sufficient information to reevaluate its asbestos-related
obligations and estimated insurance recoveries until later in
the Cases. Any adjustments ultimately deemed to be required as a
result of any reevaluation of the Companys
asbestos-related liabilities or estimated insurance recoveries
could have a material impact on the Companys future
financial statements.

The Company has entered into settlement
agreements with several of the insurers whose asbestos-related
obligations are primarily in respect of future asbestos claims.
These settlement agreements were approved by the Court. In
accordance with the Court approval, the insurers are to pay
certain amounts, pursuant to the terms of an escrow agreement,
into a fund (the Escrow Fund) in which the Company
has no interest, but which amounts will be available for the
ultimate settlement of the Companys asbestos-related
claims. Because the Escrow Fund is under the control of the
escrow agent, who will make distributions only pursuant to a
Court order, the Escrow Fund is not included in the accompanying
consolidated balance sheet at September 30, 2004. In
addition, since neither the Company nor Kaiser received any
economic benefit or suffered any economic detriment and have not
been relieved of any asbestos-related obligation as a result of
the receipt of the escrow funds, neither the asbestos-related
receivable nor the asbestos-related liability have been adjusted
as a result of these transactions. As of September 30,
2004, the insurers had paid $10.0 into the Escrow Fund. It is
possible that settlements with additional insurers will occur.
However, no assurance can be given that such settlements will
occur.

Labor Matters.In
connection with the United Steelworkers of America (the
USWA) strike and subsequent lock-out by the Company,
which was settled in September 2000, certain allegations of
unfair labor practices (ULPs) were filed with the
National Labor Relations Board (NLRB) by the USWA.
As previously disclosed, the Company responded to all such
allegations and believed that they were without merit.
Twenty-two of twenty-four allegations of ULPs previously brought
against the Company by the USWA have been dismissed. A trial
before an administrative law judge for the two remaining
allegations concluded in September 2001. In May 2002, the
administrative law judge ruled against the Company in respect of
the two remaining ULP allegations and recommended that the NLRB
award back wages, plus interest, less any earnings of the
workers during the period of the lockout. The administrative law
judges ruling did not contain

33



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


any specific amount of proposed award and was not
self-executing. The USWA filed a proof of claim for $240.0 in
the Cases in respect of this matter.

In January 2004, as part of its settlement with
the USWA with respect to pension and retiree medical benefits,
the Company and the USWA agreed to settle their case pending
before the NLRB, subject to approval of the NLRB General Counsel
and the Court and ratification by union members. The settlement
was subsequently ratified by the union members in February 2004.
Further, the settlement with respect to retiree medical and
pension benefits and the NLRB case has been approved by the
Court subject to certain conditions. The agreement may be
terminated by the USWA, the Company or the UCC in certain
circumstances (see Note 9 of Notes of Consolidated Financial
Statements in the Companys Annual Report on Form 10-K
for the year ended December 31, 2003). Under the terms of
the agreement, solely for the purposes of determining
distributions in connection with the reorganization, an
unsecured pre-petition claim in the amount of $175.0 will be
allowed. As more fully discussed in Note 11, the USWA settlement
was amended in October 2004 and such settlement is subject to
certain contingencies. As such, the settlement has not been
deemed probable and, thus this amount was not
reflected in the Companys consolidated financial
statements at September 30, 2004.

However, the charge and an offsetting liability
associated with the settlement of this matter will be reflected
in the Companys consolidated financial statements if and
when the agreement with the USWA is ultimately approved by the
Court. Also, as part of the agreement, the Company agreed, among
other things, to adopt a position of neutrality regarding the
unionization of any employees of the reorganized company.

Settled Hearing Loss
Claims.During February 2004, the
Company reached a settlement in respect of 400 claims, which
alleged that certain individuals who were employees of the
Company, principally at a facility previously owned and operated
by the Company in Louisiana, suffered hearing loss in connection
with their employment. Under the terms of the settlement, which
is still subject to Court approval, the claimants will be
allowed pre-petition claims totaling $15.8. As such, the Company
recorded a $15.8 charge (in Other operating charges (benefits),
net) in the fourth quarter of 2003 and a corresponding
obligation (included in Liabilities subject to
compromise  see Note 1). However, no cash payments by
the Company are required in respect of these amounts. Rather the
settlement agreement contemplates that, at emergence, these
claims will be transferred to a separate trust along with
certain rights against certain corresponding insurance policies
of the Company and that such insurance policies will be the sole
source of recourse to the claimants. While the Company believes
that the insurance policies are of value, no amounts have been
reflected in the Companys financial statements at
September 30, 2004 in respect of such policies as the
Company could not with the level of certainty necessary
determine the amount of recoveries that were probable.

Other Personal Injury Claims.The Company has received other
personal injury claims related to noise induced hearing loss
(approximately 2,900 claims) and exposure to silica and coal tar
pitch volatiles (approximately 3,900 claims and 300 claims,
respectively). The Company believes that all such claims are
pre-petition claims that will be resolved by the Cases. The
Company cannot presently determine the impact or value of these
claims. However, the Company currently expects that all such
claims will be transferred, along with certain rights against
certain corresponding insurance policies, to a separate trust
along with (similar to) the settled hearing loss cases discussed
above, whether or not such claims are settled prior to the
Companys emergence from the Cases.

Other Contingencies.The Company is involved in various other claims, lawsuits, and
other proceedings relating to a wide variety of matters related
to past or present operations. While uncertainties are inherent
in the final outcome of such matters, and it is presently
impossible to determine the actual costs that ultimately may be
incurred, management currently believes that the resolution of
such uncertainties and the incurrence

34



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


of such costs should not have a material adverse
effect on the Companys consolidated financial position,
results of operations, or liquidity.

8.     Derivative
Financial Instruments and Related Hedging Programs

In conducting its business, the Company has
historically used various instruments, including forward
contracts and options, to manage the risks arising from
fluctuations in aluminum prices, energy prices and exchange
rates. The Company entered into hedging transactions from time
to time to limit its exposure resulting from (1) its
anticipated sales of alumina, primary aluminum, and fabricated
aluminum products, net of expected purchase costs for items that
fluctuate with aluminum prices, (2) the energy price risk
from fluctuating prices for natural gas, fuel oil and diesel oil
used in its production process, and (3) foreign currency
requirements with respect to its cash commitments with foreign
subsidiaries and affiliates. As the Companys hedging
activities were generally designed to lock-in a specified price
or range of prices, gains or losses on the derivative contracts
utilized in the hedging activities generally offset at least a
portion of any losses or gains, respectively, on the
transactions being hedged.

After considering completed sales of Alpart,
Gramercy/ KJBC and Valco, and assuming that the Companys
interests in and related to QAL are sold (and that Anglesey
remains a part of the emerging entity), the Company would no
longer be a net seller of alumina and aluminum. Rather, net
sales of primary aluminum by Anglesey (reduced partially by the
equivalent primary aluminum impact of its alumina requirements)
would only offset a portion of the primary aluminum requirements
of the fabricated products business. As such, the emerging
entity would be a net consumer of primary aluminum. However, the
Companys pricing of fabricated aluminum products is
generally intended to lock-in a conversion margin (representing
the value added from the fabrication process(es)) and to pass
metal price risk on to its customers. While the fabricated
aluminum products business does from time to time, enter into
fixed price arrangements (that include the primary aluminum
price component), in such instances, the Company may use third
party hedging instruments to eliminate price exposure or may
consider the related metal price risk as being offset by (as a
notional (internal) hedge) primary aluminum to be produced
at Anglesey. At September 30, 2004, the fabricated products
business held contracts for the delivery of fabricated aluminum
products that have the effect of fixing or capping the metal
price component of those contracts during the last quarter of
2004 and for the period 2005  2008 totaling
approximately (in 000 pounds of primary aluminum): 2004: 34,000,
2005: 84,000, 2006: 35,000, 2007: 34,000, and 2008: 10,000.

The following table summarizes the Companys
material derivative positions at September 30, 2004.

|                                       |  |        |                     |           |  |                |        |           |  |  |    |   |  |   |     | 
|-------------------------------------- |  | ------ | ------------------- | --------- |  | -------------- | ------ | --------- |  |  | -- | - |  | - | --- | 
|                                       |  |        |                     |           |  | Estimated % of |        |          
|                                       |  |        |                     | Notional  |  | Periods Sales/ |        | Carrying/
|                                       |  |        |                     | Amount Of |  | Purchases      |        | Market   
|Commodity                              |  | Period |                     | Contracts |  | Hedged         |        | Value    
|                                       |  |        |                     |           |  |                |        |          
|Aluminum (in tons*)  Option contracts |  |        | 10/04 through 12/06 |           |  |                | 63,000 |           |  |  | (a | ) |  | $ | 1.4 | 



---



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| | * | All references to tons in this report refer to
    metric tons of 2,204.6 pounds.



|    |                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The percentage hedged will depend on when and if
    the possible disposition of the Companys interest in and
    related to QAL actually occurs.

The Company anticipates that, subject to
prevailing economic conditions, it may enter into additional
hedging transactions with respect to primary aluminum prices and
foreign currency values to protect the interests of its
constituents. However, no assurance can be given as to when or
if the Company will enter into such additional hedging
activities.

35



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


As of September 30, 2004, the Company had
sold forward a vast majority of the alumina available to it in
excess of its projected internal smelting requirements for the
remainder of 2004 and for 2005 and 2006 at prices indexed to
future prices of primary aluminum. The Company anticipates that
such contracts will be sold/ transferred as a part of the
ongoing commodity asset disposition process. However, no
assurance can be provided in this respect.

9.     Other
Operating Charges (Benefits), Net and Other Income
(Expense)

Other Operating (Charges) Benefits, Net.The income (loss) impact
associated with other operating (charges) benefits, net,
after deducting other operating (charges) benefits, net
related to discontinued operations, for the quarter and nine
month periods ended September 30, 2004 and 2003, was as
follows (the business segment to which the item is applicable is
indicated):

|                                                                                                                    |  |               |        |                   |  |      |       |      |  |   |        |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ----------------- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                                                                                    |  |               |        |                  
|                                                                                                                    |  | Quarter Ended |        | Nine Months Ended
|                                                                                                                    |  | September 30, |        | September 30,    
|                                                                                                                    |  |               |        |                  
|                                                                                                                    |  | 2004          |        | 2003              |  | 2004 |       | 2003
|                                                                                                                    |  |               |        |                   |  |      |       |     
|Pension charges related to pension plans whose
    responsibility was assumed by the PBGC  Corporate
    (Note 11) |  | $             | (155.5 | )                 |  | $    |      |      |  | $ | (155.5 | ) |  | $ |      |  
|Environmental multi-site settlement 
    Corporate (Note 7)                                                        |  |               |       |                   |  |      | (15.7 | )    |  |   |       |   |  |   | (15.7 | )
|Gain on sale of equipment, net 
    Fabricated Products (Note 4)                                                   |  |               |       |                   |  |      | 3.9   |      |  |   |       |   |  |   | 3.9   |  
|Gain on sale of Tacoma facility 
    Primary Aluminum (Note 4)                                                     |  |               |       |                   |  |      |      |      |  |   |       |   |  |   | 9.5   |  
|Restructured transmission service
    agreement  Primary Aluminum                                                  |  |               |       |                   |  |      | (3.2  | )    |  |   |       |   |  |   | (3.2  | )
|Other                                                                                                               |  |               | .8     |                   |  |      |      |      |  |   | .8     |   |  |   | .8    |  
|                                                                                                                    |  |               |        |                   |  |      |       |      |  |   |        |   |  |   |       |  
|                                                                                                                    |  | $             | (154.7 | )                 |  | $    | (15.0 | )    |  | $ | (154.7 | ) |  | $ | (4.7  | )
|                                                                                                                    |  |               |        |                   |  |      |       |      |  |   |        |   |  |   |       |  

The above tables exclude other operating
(charges) benefits, net related to discontinued operations
of $101.0 for the quarter ended September 30, 2004 and
$92.5 and $(1.4) for the nine month periods ended
September 30, 2004 and 2003, respectively.

Other Income
(Expense).Other income (expense) for
the quarter and nine month periods ended September 30, 2004
includes a gain of approximately $1.9 on the sale of
non-operating real estate. Other income (expense) for the nine
month period ended September 30, 2004 also includes a gain
of approximately $6.3 which resulted from the settlement of
outstanding obligations of a former affiliate offset, in part,
by a $1.4 adjustment to the environmental liabilities (see
Note 7). Other income (expense) for the quarter and nine
month periods ended September 30, 2003, included
adjustments to the environmental liabilities of approximately
$7.5 (see Note 7). Other income (expense) for the nine
month period ended September 30, 2003, also included
approximately $1.7 of adverse foreign currency exchange impacts
associated with a foreign tax settlement.

10.     Operating
Segment Information

The Company has historically used a portion of
its bauxite and alumina production for additional processing at
its downstream facilities. Transfers between business units are
made at estimated market prices. The accounting policies of the
segments are the same as those described in Note 2 of Notes
to Consolidated Financial Statements in the Companys
Annual Report on Form 10-K for the year ended
December 31, 2003.

36



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Business unit results are evaluated internally by
management before any allocation of corporate overhead and
without any charge for income taxes or interest expense. See
Note 17 of Notes to Consolidated Financial Statements in
the Companys Annual Report on Form 10-K for the year
ended December 31, 2003.

As a result of the completed sales of the
Companys interests in and related to Alpart, Gramercy/
KJBC, Valco and the Mead Facility, the balances and results of
operations in respect of such assets/ interests are now
considered discontinued operations (see Note 2). The
presentation below restates the Bauxite and Alumina and Primary
Aluminum segments related amounts for such reclassifications.
The amounts remaining in Bauxite and Alumina relate almost
entirely to the Companys interest in and related to QAL
which are expected to be sold during the first quarter of 2005.
The amounts remaining in Primary Aluminum relate almost entirely
to the Companys interests in and related to Anglesey that
the Company currently expects to retain.

Financial information by operating segment, after
the discontinued operations reclassification, for the
quarter and nine month periods ended September 30, 2004 and
2003 is as follows:

|                               |                                                      |               |        |                   |   |      |       |       |   |   |        |        |   |   |       |       |  
|------------------------------ | ---------------------------------------------------- | ------------- | ------ | ----------------- | - | ---- | ----- | ----- | - | - | ------ | ------ | - | - | ----- | ----- | -
|                               |                                                      |               |        |                  
|                               |                                                      | Quarter Ended |        | Nine Months Ended
|                               |                                                      | September 30, |        | September 30,    
|                               |                                                      |               |        |                  
|                               |                                                      | 2004          |        | 2003              |   | 2004 |       | 2003 
|                               |                                                      |               |        |                   |   |      |       |      
|Net Sales:                     |                                                      |               |        |                   |   |      |       |       |   |   |        |        |   |   |       |      
|                               | Fabricated Products                                  |               | $      | 206.1             |   |      | $     | 145.4 |   |   | $      | 580.8  |   |   | $     | 443.4 |  
|                               | Primary Aluminum                                     |               |        | 35.6              |   |      |       | 26.8  |   |   |        | 96.1   |   |   |       | 75.6  |  
|                               | Bauxite and Alumina                                  |               |        | 40.0              |   |      |       | 30.4  |   |   |        | 115.5  |   |   |       | 92.8  |  
|                               | Commodities Marketing                                |               |        | .1                |   |      |       | .5    |   |   |        | .3     |   |   |       | 1.4   |  
|                               |                                                      |               |        |                   |   |      |       |       |   |   |        |        |   |   |       |      
|                               |                                                      | $             | 281.8  |                   |   | $    | 203.1 |       |   | $ | 792.7  |        |   | $ | 613.2 |      
|                               |                                                      |               |        |                   |   |      |       |       |   |   |        |        |   |   |       |      
|Operating income (loss):       |                                                      |               |        |                   |   |      |       |       |   |   |        |        |   |   |       |      
|                               | Fabricated Products                                  |               | $      | 11.4              |   |      | $     | (5.5  | ) |   | $      | 13.9   |   |   | $     | (12.4 | )
|                               | Primary Aluminum                                     |               |        | 5.2               |   |      |       | 3.2   |   |   |        | 15.7   |   |   |       | .4    |  
|                               | Bauxite and Alumina                                  |               |        | 9.2               |   |      |       | 3.4   |   |   |        | 27.9   |   |   |       | 16.1  |  
|                               | Commodities Marketing                                |               |        | (1.8              | ) |      |       | .6    |   |   |        | (5.5   | ) |   |       | 2.6   |  
|                               | Eliminations                                         |               |        | 1.2               |   |      |       | .4    |   |   |        | 8.2    |   |   |       | 1.4   |  
|                               | Corporate and Other                                  |               |        | (21.4             | ) |      |       | (20.0 | ) |   |        | (53.3  | ) |   |       | (58.9 | )
|                               | Other Operating (Charges) Benefits, Net
    (Note 9) |               |        | (154.7            | ) |      |       | (15.0 | ) |   |        | (154.7 | ) |   |       | (4.7  | )
|                               |                                                      |               |        |                   |   |      |       |       |   |   |        |        |   |   |       |      
|                               |                                                      | $             | (150.9 | )                 |   | $    | (32.9 | )     |   | $ | (147.8 | )      |   | $ | (55.5 | )    
|                               |                                                      |               |        |                   |   |      |       |       |   |   |        |        |   |   |       |      
|Depreciation and amortization: |                                                      |               |        |                   |   |      |       |       |   |   |        |        |   |   |       |      
|                               | Fabricated Products                                  |               | $      | 5.8               |   |      | $     | 5.7   |   |   | $      | 16.5   |   |   | $     | 17.5  |  
|                               | Primary Aluminum                                     |               |        | .1                |   |      |       | .4    |   |   |        | .2     |   |   |       | 1.2   |  
|                               | Bauxite and Alumina (Note 4)(a)                      |               |        |                  |   |      |       |      |   |   |        |       |   |   |       |      |  
|                               | Corporate and Other                                  |               |        |                  |   |      |       | .2    |   |   |        | .2     |   |   |       | 1.6   |  
|                               |                                                      |               |        |                   |   |      |       |       |   |   |        |        |   |   |       |      
|                               |                                                      | $             | 5.9    |                   |   | $    | 6.3   |       |   | $ | 16.9   |        |   | $ | 20.3  |      
|                               |                                                      |               |        |                   |   |      |       |       |   |   |        |        |   |   |       |      

37



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


|                   |                                       |               |     |                   |   |      |    |      |    |   |     |     |   |   |      |      |     | 
|------------------ | ------------------------------------- | ------------- | --- | ----------------- | - | ---- | -- | ---- | -- | - | --- | --- | - | - | ---- | ---- | --- | 
|                   |                                       |               |     |                  
|                   |                                       | Quarter Ended |     | Nine Months Ended
|                   |                                       | September 30, |     | September 30,    
|                   |                                       |               |     |                  
|                   |                                       | 2004          |     | 2003              |   | 2004 |    | 2003
|                   |                                       |               |     |                   |   |      |    |     
|Income taxes paid: |                                       |               |     |                   |   |      |    |      |    |   |     |     |   |   |      |     
|                   | Fabricated Products                  |               |     |                   |   |      |    |      |    |   |     |     |   |   |      |      |    
|                   |                                       | Canada        |     | $                 |  |      |    | $    | .3 |   |     | $   |  |   |      | $    | 4.4 | 
|                   |                                       |               |     |                   |   |      |    |      |    |   |     |     |   |   |      |     
|                   | Commodities, Corporate and Other(b)  |               |     |                   |   |      |    |      |    |   |     |     |   |   |      |      |    
|                   | United States                         |               |     |                  |   |      |    |     |    |   |     |    |   |   |      | .1   |    
|                   | Australia                             |               |     | 1.4               |   |      |    | .2   |    |   |     | 4.0 |   |   |      | 23.7 |    
|                   |                                       |               |     |                   |   |      |    |      |    |   |     |     |   |   |      |     
|                   |                                       |               | 1.4 |                   |   |      | .2 |      |    |   | 4.0 |     |   |   | 23.8 |     
|                   |                                       |               |     |                   |   |      |    |      |    |   |     |     |   |   |      |     
|                   |                                       | $             | 1.4 |                   |   | $    | .5 |      |    | $ | 4.0 |     |   | $ | 28.2 |     
|                   |                                       |               |     |                   |   |      |    |      |    |   |     |     |   |   |      |     



---



|    |                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Depreciation and amortization expense excludes
    depreciation and amortization expense of discontinued operations
    (related to Alpart and Gramercy/ KJBC) of $.1 and $9.9 for the
    quarters ended September 30, 2004 and 2003, respectively,
    and $9.1 and $29.7 for the nine month periods ended
    September 30, 2004 and 2003, respectively (see Note 2).
|   
|(b) | Income taxes paid by discontinued operations
    during the quarters ended September 30, 2004 and 2003, were
    $2.7 and $4.0, respectively, and during the nine month periods
    ended September 30, 2004 and 2003, were $4.5 and $16.5,
    respectively.                                                                                                           

The decline in 2004 depreciation and amortization
expense in the Bauxite and Alumina segment is primarily the
result of the significant impairment charge of Gramercy/ KJBC
recorded in the fourth quarter of 2003. The decline in the
year-to-date 2004 depreciation and amortization expense in the
Primary Aluminum segment is primarily due to the impairment
charge of Valco recorded in the first quarter of 2004.

The decrease in taxes paid in 2004 was primarily
due to the payment in the first quarter of 2003 of $22.0 of
foreign income taxes related to prior years.

11.     Employee
Benefit and Incentive Plans

Historical Pension
Plans.The PBGC assumed responsibility
for the Companys Salaried Employees Retirement Plan in
December 2003. During the third quarter of 2004, the PBGC
assumed responsibility for the Companys Inactive Pension
Plan, which covers certain former hourly employees at locations
that were sold or discontinued a number of years ago, and the
Companys Kaiser Aluminum Pension Plan, which covers active
and retired employees at certain locations who are represented
by the USWA. The Salaried Employees Retirement Plan, the
Inactive Pension Plan and the Kaiser Aluminum Pension Plan are
hereinafter collectively referred to as the Terminated
Plans. The PBGCs assumption of the Terminated Plans
resulted in the Company recognizing non-cash pension charges of
approximately $121.2 in the fourth quarter of 2003 and
approximately $155.5 in the third quarter of 2004 (see
Note 9 of Notes to Consolidated Financial Statements in the
Companys Annual Report on Form 10-K for the year
ended December 31, 2003). The amount of the charges
recorded and the expected liability to the PBGC currently
recorded in the Companys financial statements have been
determined by the Company based on assumptions that are
consistent with the GAAP criteria for valuing ongoing plans as
more fully discussed in Note 9 of Notes to Consolidated
Financial Statements in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003. The
Company believes this represents a reasonable interim estimation
methodology as there are reasonable arguments that may be made
that could result in the final allowed claim amounts being
either more or less than that reflected in the financial
statements.

38



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


However, in October 2004, the Company executed a
settlement agreement with the PBGC under which the Company and
the PBGC agreed, among other things, that: (a) the Company
will continue to sponsor the Companys remaining pension
plans (which primarily are in respect of hourly employees at
Fabricated Products facilities) and will satisfy the estimated
$4.4 minimum funding contribution for these plans after the
settlement agreement is approved by the Court; (b) the PBGC
will have an allowed post-petition administrative claim of
$14.0, which is expected to be paid upon the consummation of a
plan of reorganization for the Company or the consummation of a
plan for KAAC, whichever comes first; and (c) the PBGC will
have allowed pre-petition unsecured claims in respect of the
Terminated Plans in the amount of $616.0, which will be resolved
in a plan or plans of reorganization provided that the
PBGCs cash recovery from proceeds of the Companys
sale of its interests in and related to Alpart and QAL will be
limited to 32% of the net proceeds distributable to holders of
the Companys Senior Notes, Sub Notes and the PBGC. The
PBGC settlement agreement is subject to Court approval. Court
hearings on the PBGC settlement agreement are expected to be
conducted in early 2005. Objections have been filed to the
settlement and no assurances can be provided as to the outcome.

The amount of pension liability related to the
Terminated Plans that was recorded in the consolidated balance
sheet at September 30, 2004 was approximately $476.0 based
on the interim methodology described above. This compares to the
$630.0 total claim amount agreed to by the Company in the
October 2004 PBGC settlement. The Company has not recorded the
full value of the PBGC settlement as, given the contested nature
of the settlement and the requirement for Court approval, such
settlement was not determined to be probable, which
is the criteria for recognition under GAAP. If the PBGC
settlement agreement is approved, the Company would be required
to record a non-cash charge of approximately $154.0.

New Accounting
Pronouncement.Statement of Financial
Accounting Standards No. 132 (revised), Employers
Disclosure about Pensions and Other Postretirement Benefits(SFAS No. 132 (revised)) was issued and was
effective in the fourth quarter of 2003. SFAS No. 132
(revised) requires, beginning with the first quarter of 2004,
the disclosure of (1) the amount of the net periodic
pension and other postretirement benefits costs recognized
during the quarter and year-to-date periods and (2) the
total amount of employers contributions paid, and expected
to be paid during 2004.

The following table presents the components of
net periodic benefit costs for the quarter and nine month
periods ended September 30, 2004 and 2003:

|                                                 |  |                             |      |                                 |  |                  |      |              |  |      |      |      |  |      |      |      |  |   |       |   |  |   |       |   |  |   |       |   |  |   |       |  
|------------------------------------------------ |  | --------------------------- | ---- | ------------------------------- |  | ---------------- | ---- | ------------ |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  | - | ----- | - |  | - | ----- | - |  | - | ----- | - |  | - | ----- | -
|                                                 |  |                             |      |                                
|                                                 |  | Quarter Ended September 30, |      | Nine Months Ended September 30,
|                                                 |  |                             |      |                                
|                                                 |  |                             |      |                                 |  |                  |      |             
|                                                 |  | Pension                     |      | Medical/Life                    |  |                  |      | Medical/Life
|                                                 |  | Benefits                    |      | Benefits                        |  | Pension Benefits |      | Benefits    
|                                                 |  |                             |      |                                 |  |                  |      |             
|                                                 |  | 2004                        |      | 2003                            |  | 2004             |      | 2003         |  | 2004 |      | 2003 |  | 2004 |      | 2003
|                                                 |  |                             |      |                                 |  |                  |      |              |  |      |      |      |  |      |      |     
|Service cost                                     |  | $                           | 1.5  |                                 |  | $                | 2.6  |              |  | $    | 1.7  |      |  | $    | 1.8  |      |  | $ | 4.9   |   |  | $ | 7.8   |   |  | $ | 5.2   |   |  | $ | 5.3   |  
|Interest cost                                    |  |                             | 9.2  |                                 |  |                  | 15.2 |              |  |      | 14.8 |      |  |      | 12.8 |      |  |   | 31.2  |   |  |   | 45.6  |   |  |   | 44.2  |   |  |   | 38.5  |  
|Expected return on plan assets                   |  |                             | (6.6 | )                               |  |                  | (9.7 | )            |  |      |     |      |  |      |     |      |  |   | (22.7 | ) |  |   | (29.1 | ) |  |   |      |   |  |   |      |  
|Amortization of prior service cost               |  |                             | .9   |                                 |  |                  | .9   |              |  |      | (5.3 | )    |  |      | (5.6 | )    |  |   | 2.7   |   |  |   | 2.7   |   |  |   | (16.3 | ) |  |   | (16.9 | )
|Amortization of net (gain) loss                  |  |                             | 1.4  |                                 |  |                  | 4.0  |              |  |      | 6.1  |      |  |      | 2.4  |      |  |   | 5.0   |   |  |   | 12.0  |   |  |   | 18.5  |   |  |   | 7.3   |  
|                                                 |  |                             |      |                                 |  |                  |      |              |  |      |      |      |  |      |      |      |  |   |       |   |  |   |       |   |  |   |       |   |  |   |       |  
|Net periodic benefit costs                       |  |                             | 6.4  |                                 |  |                  | 13.0 |              |  |      | 17.3 |      |  |      | 11.4 |      |  |   | 21.1  |   |  |   | 39.0  |   |  |   | 51.6  |   |  |   | 34.2  |  
|Less discontinued operations reported separately |  |                             | (2.7 | )                               |  |                  | (3.6 | )            |  |      | (1.2 | )    |  |      | (3.0 | )    |  |   | (8.0  | ) |  |   | (10.8 | ) |  |   | (9.9  | ) |  |   | (8.9  | )
|                                                 |  |                             |      |                                 |  |                  |      |              |  |      |      |      |  |      |      |      |  |   |       |   |  |   |       |   |  |   |       |   |  |   |       |  
|                                                 |  | $                           | 3.7  |                                 |  | $                | 9.4  |              |  | $    | 16.1 |      |  | $    | 8.4  |      |  | $ | 13.1  |   |  | $ | 28.2  |   |  | $ | 41.7  |   |  | $ | 25.3  |  
|                                                 |  |                             |      |                                 |  |                  |      |              |  |      |      |      |  |      |      |      |  |   |       |   |  |   |       |   |  |   |       |   |  |   |       |  

39



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


The periodic pension costs associated with the
Terminated Plans were $5.3 and $11.5 for the quarters ended
September 30, 2004 and 2003, and $16.9 and $34.5 for the
nine month periods ended September 30, 2004 and 2003,
respectively.

As discussed more fully below, on June 1,
2004, the Court entered an order, subject to certain conditions,
authorizing the Company to implement termination of its
postretirement medical plan as of May 31, 2004 and the
Companys plan to make advance payments to one or more
Voluntary Employee Beneficiary Associations (each a
VEBA). As previously disclosed, pending the
resolution of all contingencies in respect of the termination of
the existing postretirement medical benefit plan, the Company
has continued to accrue costs based on the existing plan and has
treated the VEBA contribution as a reduction of its liability
under the plan.

See Note 9 of Notes to Consolidated
Financial Statements in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003 for key
assumptions with respect to the Companys pension plans and
other postretirement benefit plans.

Cash Flow  

Domestic Plans.As
previously discussed, the Company, since filing the
Chapter 11 proceedings, has not made any further
significant contributions to any of its domestic pension plans.
As discussed above, if the PBGC settlement is ultimately
approved by the Court, the Company will be required to pay $4.4
in respect of minimum funding contributions for retained pension
plans and will be required to pay approximately $14.0 at the
earlier of the emergence of the Company or KAAC in respect of
post-petition administrative claims of the PBGC. Any other
payments to the PBGC are expected to be limited to recoveries
under the Debtors plans of reorganization.

Upon emergence from Chapter 11 proceedings,
the Company anticipates that it will provide some form of
defined contribution pension plan in respect of its salaried
employees. Any such plans ultimately adopted will be subject to
a number of approvals. The Company currently estimates that the
total annual cash cost of such plans would be less than $5.0
and, if approved, would likely be required to be funded
commencing some time in 2005.

Pursuant to the terms of the USWA agreement (see
Note 7), the Company will be required to make annual
contributions into the Steelworkers Pension Trust on the basis
of one dollar per USWA employee hour worked. In addition, the
Company will institute a defined contribution pension plan for
active USWA employees. The Company contributions to the plan
will range from eight hundred dollars to twenty-four hundred
dollars per employee per year, depending on age. The Company
currently estimates that contributions to the new USWA plan and
the retained hourly pension plans will range from $3.0 to $6.0
per year.

As a replacement for the Companys previous
postretirement benefit plans, the Company agreed to contribute
certain amounts to one or more VEBAs. Such contributions
are to include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An amount not to exceed $36.0 and payable on
    emergence from the Chapter 11 proceedings so long as the
    Companys liquidity (i.e. cash plus borrowing availability)
    is at least $50.0 after considering such payments. To the extent
    that less than the full $36.0 is paid and the Companys
    interests in Anglesey are subsequently sold, a portion of such
    sales proceeds, in certain circumstances, will be used to pay
    the shortfall.

40



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)




| |   |                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On an annual basis, 10% of the first $20.0 of
    annual cash flow, as defined, plus 20% of annual cash flow, as
    defined, in excess of $20.0. Such annual payments shall not
    exceed $20.0 and will also be limited (with no carryover to
    future years) to the extent that the payments do not cause the
    Companys liquidity to be less than $50.0.
|
| |  | Advances of $3.1 in June 2004 and $1.9 per month
    thereafter until the Company emerges from the Cases. Any
    advances made pursuant to such agreement will constitute a
    credit toward the $36.0 maximum contribution due upon emergence.                                                                                                                 

On June 1, 2004, the Court approved an order
making the agreements regarding pension and postretirement
medical benefits effective on June 1, 2004 notwithstanding
that the Intercompany Agreement was not effective as of that
date. However, the Court order provided that if the Debtors and
the UCC had not signed the Intercompany Agreement and filed a
motion seeking the approval of such agreement by June 30,
2004, the UCC would have the right (but not the requirement) at
any time thereafter to direct the Debtors to terminate the USWA
agreement and other agreements to terminate postretirement
medical benefits 60 days from the date of the UCC notice.

In October 2004, the Company entered into an
amendment to the USWA agreement to satisfy certain technical
requirements for the follow-on hourly pension plans discussed
above. The Company also agreed to pay an additional $1.0 to the
VEBA after the satisfaction of various conditions. The amended
agreement is subject to Court approval. The Company currently
anticipates that the Court will approve the amended agreement in
November 2004.

While the Intercompany Agreement has been signed
and filed with the Court, because the USWA agreement can be
terminated by the USWA or the Company if the Intercompany
Agreement is not approved by the Court, or by the UCC under
certain conditions, the Company cannot conclude that termination
of the retiree medical program is probable.
Therefore, as discussed above, the Company continues to accrue
for costs under the retiree medical program and treat VEBA
contributions as a reduction of that liability.

Foreign Plans.Contributions to foreign pension plans were approximately $9.8
and $9.0 during 2003 and 2002, respectively, and primarily
related to the Companys interests in commodity assets
being considered for sale. As a result of the sales of the
Companys investments in such assets, future contributions
to foreign pension plans will decline to a nominal amount,
beginning in the fourth quarter of 2004.



|    |                                
|--- | -------------------------------
|12. | Pro Forma Financial Information

As discussed in Note 4, subsequent to
September 30, 2004, the Company received Court approval to
sell its interest in and related to QAL. The transaction is
currently expected to close during the first quarter of 2005.
While no assurances can be provided in respect of the closing of
the QAL disposition, the Company believes that such disposition
is probable. Accordingly, the Company is providing
condensed consolidating balance sheet, income (loss) and cash
flow information for the periods presented in these financial
statements. This pro forma financial information has been
prepared to summarize the consolidated financial position,
consolidated results of operations and consolidated cash flows
of the Company as if the QAL disposition had occurred at the end
of the indicated period in the case of the pro forma condensed
consolidated balance sheet information and at the beginning of
the indicated periods in the case of the pro forma condensed
consolidating income (loss) and pro forma condensed consolidated
cash flow information.

The following information does not purport to be
indicative of financial position or results of operations of the
Company as of such date or for such periods, nor are they
indicative of future results. Furthermore, this pro forma
financial information does not reflect changes which will or may
occur as a result of the sale of the Companys interests in
and related to QAL, the ongoing Cases and other matters.

41



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Pro Forma Condensed Consolidating Balance
Sheet

September 30, 2004


|                                                            |                                                    |            |          |             |  |             |       |           |   |   |        |        |   |   |          |       | 
|----------------------------------------------------------- | -------------------------------------------------- | ---------- | -------- | ----------- |  | ----------- | ----- | --------- | - | - | ------ | ------ | - | - | -------- | ----- | 
|                                                            |                                                    |            |          | Disposition |  |             |       |          
|                                                            |                                                    |            |          | of QAL      |  | Pro Forma   |       |          
|                                                            |                                                    | Historical |          | Interests   |  | Adjustments |       | Pro Forma
|                                                            |                                                    |            |          |             |  |             |       |          
|Current assets                                              |                                                    | $          | 316.4    |             |  | $           | (31.8 | )         |   | $ |       |        |   | $ | 284.6    |      
|Discontinued operations current assets                     |                                                    |            | 96.0     |             |  |             | 31.8  |           |   |   | (127.8 | )      |   |   |         |      
|Investments in and advance to unconsolidated
    affiliates |                                                    |            | 55.5     |             |  |             | (38.1 | )         |   |   |       |        |   |   | 17.4     |      
|Property, plant and equipment, net                          |                                                    |            | 217.7    |             |  |             |      |           |   |   |       |        |   |   | 217.7    |      
|Restricted proceeds from sale of commodity
    interests    |                                                    |            | 302.6    |             |  |             |      |           |   |   | 427.2  |        |   |   | 729.8    |      
|Other assets                                                |                                                    |            | 488.1    |             |  |             |      |           |   |   |       |        |   |   | 488.1    |      
|Discontinued operations long-term assets                   |                                                    |            | 49.7     |             |  |             | 38.1  |           |   |   | (87.8  | )      |   |   |         |      
|                                                            |                                                    |            |          |             |  |             |       |           |   |   |        |        |   |   |          |      
|                                                            |                                                    | $          | 1,526.0  |             |  | $           |      |           |   | $ | 211.6  |        |   | $ | 1,737.6  |      
|                                                            |                                                    |            |          |             |  |             |       |           |   |   |        |        |   |   |          |      
|Liabilities not subject to compromise                      |                                                    |            |          |             |  |             |       |           |   |   |        |        |   |   |          |      
|                                                            | Current liabilities                                |            | $        | 200.9       |  |             | $     | (40.7     | ) |   | $      |       |   |   | $        | 160.2 | 
|                                                            | Discontinued operations current liabilities       |            |          | 109.1       |  |             |       | 40.7      |   |   |        | (149.8 | ) |   |          |      | 
|                                                            | Long-term liabilities                              |            |          | 46.7        |  |             |       |          |   |   |        |       |   |   |          | 46.7  | 
|                                                            | Discontinued operations long-term
    liabilities |            |          | 54.2        |  |             |       | .4        |   |   |        | (54.6  | ) |   |          |      | 
|Liabilities subject to compromise                           |                                                    |            | 2,856.0  |             |  |             | (.4   | )         |   |   |       |        |   |   | 2,855.6  |      
|Stockholders equity (deficit)                              |                                                    |            | (1,740.9 | )           |  |             |      |           |   |   | 416.0  |        |   |   | (1,324.9 | )    
|                                                            |                                                    |            |          |             |  |             |       |           |   |   |        |        |   |   |          |      
|                                                            |                                                    | $          | 1,526.0  |             |  | $           |      |           |   | $ | 211.6  |        |   | $ | 1,737.6  |      
|                                                            |                                                    |            |          |             |  |             |       |           |   |   |        |        |   |   |          |      

42



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Pro Forma Condensed Consolidating Balance
Sheet

December 31, 2003


|                                                            |                                                    |            |          |             |  |             |       |           |   |   |        |        |   |   |          |       | 
|----------------------------------------------------------- | -------------------------------------------------- | ---------- | -------- | ----------- |  | ----------- | ----- | --------- | - | - | ------ | ------ | - | - | -------- | ----- | 
|                                                            |                                                    |            |          | Disposition |  |             |       |          
|                                                            |                                                    |            |          | of QAL      |  | Pro Forma   |       |          
|                                                            |                                                    | Historical |          | Interests   |  | Adjustments |       | Pro Forma
|                                                            |                                                    |            |          |             |  |             |       |          
|Current assets                                              |                                                    | $          | 252.5    |             |  | $           | (15.0 | )         |   | $ |       |        |   | $ | 237.5    |      
|Discontinued operations current assets                     |                                                    |            | 178.7    |             |  |             | 15.0  |           |   |   | (193.7 | )      |   |   |         |      
|Investments in and advance to unconsolidated
    affiliates |                                                    |            | 50.9     |             |  |             | (37.8 | )         |   |   |       |        |   |   | 13.1     |      
|Property, plant and equipment, net                          |                                                    |            | 230.1    |             |  |             |      |           |   |   |       |        |   |   | 230.1    |      
|Restricted proceeds from sale of commodity
    interests    |                                                    |            |         |             |  |             |      |           |   |   | 729.2  |        |   |   | 729.2    |      
|Other assets                                                |                                                    |            | 520.5    |             |  |             |      |           |   |   |       |        |   |   | 520.5    |      
|Discontinued operations long-term assets                   |                                                    |            | 396.0    |             |  |             | 37.8  |           |   |   | (433.8 | )      |   |   |         |      
|                                                            |                                                    |            |          |             |  |             |       |           |   |   |        |        |   |   |          |      
|                                                            |                                                    | $          | 1,628.7  |             |  | $           |      |           |   | $ | 101.7  |        |   | $ | 1,730.4  |      
|                                                            |                                                    |            |          |             |  |             |       |           |   |   |        |        |   |   |          |      
|Liabilities not subject to compromise                      |                                                    |            |          |             |  |             |       |           |   |   |        |        |   |   |          |      
|                                                            | Current liabilities                                |            | $        | 182.5       |  |             | $     | (39.0     | ) |   | $      |       |   |   | $        | 143.5 | 
|                                                            | Discontinued operations current liabilities       |            |          | 137.0       |  |             |       | 39.0      |   |   |        | (176.0 | ) |   |          |      | 
|                                                            | Long-term liabilities                              |            |          | 61.6        |  |             |       |          |   |   |        |       |   |   |          | 61.6  | 
|                                                            | Discontinued operations long-term
    liabilities |            |          | 195.6       |  |             |       | .5        |   |   |        | (196.1 | ) |   |          |      | 
|Liabilities subject to compromise                           |                                                    |            | 2,783.2  |             |  |             | (.5   | )         |   |   |       |        |   |   | 2,782.7  |      
|Stockholders equity (deficit)                              |                                                    |            | (1,731.2 | )           |  |             |      |           |   |   | 473.8  |        |   |   | (1,257.4 | )    
|                                                            |                                                    |            |          |             |  |             |       |           |   |   |        |        |   |   |          |      
|                                                            |                                                    | $          | 1,628.7  |             |  | $           |      |           |   | $ | 101.7  |        |   | $ | 1,730.4  |      
|                                                            |                                                    |            |          |             |  |             |       |           |   |   |        |        |   |   |          |      

Pro Forma Condensed Consolidating Statement of
Income (Loss)

For the Quarter Ended September 30,
2004


|                                |                                         |            |        |             |  |             |       |           |   |   |     |     |   |   |        |       | 
|------------------------------- | --------------------------------------- | ---------- | ------ | ----------- |  | ----------- | ----- | --------- | - | - | --- | --- | - | - | ------ | ----- | 
|                                |                                         |            |        | Disposition |  |             |       |          
|                                |                                         |            |        | of QAL      |  | Pro Forma   |       |          
|                                |                                         | Historical |        | Interests   |  | Adjustments |       | Pro Forma
|                                |                                         |            |        |             |  |             |       |          
|Net Sales                       |                                         | $          | 281.8  |             |  | $           | (40.0 | )         |   | $ | (.1 | )   |   | $ | 241.7  |      
|                                |                                         |            |        |             |  |             |       |           |   |   |     |     |   |   |        |      
|Costs and expenses             |                                         |            |        |             |  |             |       |           |   |   |     |     |   |   |        |      
|                                | Operating costs and expenses            |            |        | 278.0       |  |             |       | (30.8     | ) |   |     | (.1 | ) |   |        | 247.1 | 
|                                | Other operating charges (benefits), net |            |        | 154.7       |  |             |       |          |   |   |     |    |   |   |        | 154.7 | 
|                                |                                         |            |        |             |  |             |       |           |   |   |     |     |   |   |        |      
|                                |                                         |            | 432.7  |             |  |             | (30.8 | )         |   |   | (.1 | )   |   |   | 401.8  |      
|                                |                                         |            |        |             |  |             |       |           |   |   |     |     |   |   |        |      
|Operating income (loss)         |                                         |            | (150.9 | )           |  |             | (9.2  | )         |   |   |    |     |   |   | (160.1 | )    
|Interest expense                |                                         |            | (2.3   | )           |  |             |      |           |   |   |    |     |   |   | (2.3   | )    
|All other income (expense), net |                                         |            | (8.7   | )           |  |             |      |           |   |   |    |     |   |   | (8.7   | )    
|Income taxes                    |                                         |            | (4.7   | )           |  |             | 3.3   |           |   |   |    |     |   |   | (1.4   | )    
|                                |                                         |            |        |             |  |             |       |           |   |   |     |     |   |   |        |      
|Loss from continuing operations |                                         | $          | (166.6 | )           |  | $           | (5.9  | )         |   | $ |    |     |   | $ | (172.5 | )    
|                                |                                         |            |        |             |  |             |       |           |   |   |     |     |   |   |        |      

43



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Pro Forma Condensed Consolidating Statement of
Income (Loss)

For the Quarter Ended September 30,
2003


|                                |                                         |            |       |             |  |             |       |           |   |   |     |     |   |   |       |       | 
|------------------------------- | --------------------------------------- | ---------- | ----- | ----------- |  | ----------- | ----- | --------- | - | - | --- | --- | - | - | ----- | ----- | 
|                                |                                         |            |       | Disposition |  |             |       |          
|                                |                                         |            |       | of QAL      |  | Pro Forma   |       |          
|                                |                                         | Historical |       | Interests   |  | Adjustments |       | Pro Forma
|                                |                                         |            |       |             |  |             |       |          
|Net sales                       |                                         | $          | 203.1 |             |  | $           | (30.4 | )         |   | $ | (.5 | )   |   | $ | 172.2 |      
|                                |                                         |            |       |             |  |             |       |           |   |   |     |     |   |   |       |      
|Costs and expenses             |                                         |            |       |             |  |             |       |           |   |   |     |     |   |   |       |      
|                                | Operating costs and expenses            |            |       | 221.0       |  |             |       | (27.0     | ) |   |     | (.7 | ) |   |       | 193.3 | 
|                                | Other operating charges (benefits), net |            |       | 15.0        |  |             |       |          |   |   |     |    |   |   |       | 15.0  | 
|                                |                                         |            |       |             |  |             |       |           |   |   |     |     |   |   |       |      
|                                |                                         |            | 236.0 |             |  |             | (27.0 | )         |   |   | (.7 | )   |   |   | 208.3 |      
|                                |                                         |            |       |             |  |             |       |           |   |   |     |     |   |   |       |      
|Operating loss                  |                                         |            | (32.9 | )           |  |             | (3.4  | )         |   |   | .2  |     |   |   | (36.1 | )    
|Interest expense                |                                         |            | (2.5  | )           |  |             |      |           |   |   |    |     |   |   | (2.5  | )    
|All other income (expense), net |                                         |            | (12.1 | )           |  |             |      |           |   |   |    |     |   |   | (12.1 | )    
|Income taxes                    |                                         |            | (1.4  | )           |  |             | 1.1   |           |   |   |    |     |   |   | (.3   | )    
|                                |                                         |            |       |             |  |             |       |           |   |   |     |     |   |   |       |      
|Loss from continuing operations |                                         | $          | (48.9 | )           |  | $           | (2.3  | )         |   | $ | .2  |     |   | $ | (51.0 | )    
|                                |                                         |            |       |             |  |             |       |           |   |   |     |     |   |   |       |      

Pro Forma Condensed Consolidating Statement of
Income (Loss)

For the Nine Months Ended September 30,
2004


|                                |                                         |            |        |             |  |             |        |           |   |   |      |      |   |   |        |       | 
|------------------------------- | --------------------------------------- | ---------- | ------ | ----------- |  | ----------- | ------ | --------- | - | - | ---- | ---- | - | - | ------ | ----- | 
|                                |                                         |            |        | Disposition |  |             |        |          
|                                |                                         |            |        | of QAL      |  | Pro Forma   |        |          
|                                |                                         | Historical |        | Interests   |  | Adjustments |        | Pro Forma
|                                |                                         |            |        |             |  |             |        |          
|Net Sales                       |                                         | $          | 792.7  |             |  | $           | (115.5 | )         |   | $ | (.3  | )    |   | $ | 676.9  |      
|                                |                                         |            |        |             |  |             |        |           |   |   |      |      |   |   |        |      
|Costs and expenses             |                                         |            |        |             |  |             |        |           |   |   |      |      |   |   |        |      
|                                | Operating costs and expenses            |            |        | 785.8       |  |             |        | (87.6     | ) |   |      | (1.2 | ) |   |        | 697.0 | 
|                                | Other operating charges (benefits), net |            |        | 154.7       |  |             |        |          |   |   |      |     |   |   |        | 154.7 | 
|                                |                                         |            |        |             |  |             |        |           |   |   |      |      |   |   |        |      
|                                |                                         |            | 940.5  |             |  |             | (87.6  | )         |   |   | (1.2 | )    |   |   | 851.7  |      
|                                |                                         |            |        |             |  |             |        |           |   |   |      |      |   |   |        |      
|Operating income (loss)         |                                         |            | (147.8 | )           |  |             | (27.9  | )         |   |   | .9   |      |   |   | (174.8 | )    
|Interest expense                |                                         |            | (6.4   | )           |  |             |       |           |   |   |     |      |   |   | (6.4   | )    
|All other income (expense), net |                                         |            | (23.7  | )           |  |             |       |           |   |   |     |      |   |   | (23.7  | )    
|Income taxes                    |                                         |            | (13.5  | )           |  |             | 8.2    |           |   |   |     |      |   |   | (5.3   | )    
|                                |                                         |            |        |             |  |             |        |           |   |   |      |      |   |   |        |      
|Loss from continuing operations |                                         | $          | (191.4 | )           |  | $           | (19.7  | )         |   | $ | .9   |      |   | $ | (210.2 | )    
|                                |                                         |            |        |             |  |             |        |           |   |   |      |      |   |   |        |      

44



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Pro Forma Condensed Consolidating Statement of
Income (Loss)

For the Nine Months Ended September 30,
2003


|                                |                                         |            |       |             |  |             |       |           |   |   |      |      |   |   |        |       | 
|------------------------------- | --------------------------------------- | ---------- | ----- | ----------- |  | ----------- | ----- | --------- | - | - | ---- | ---- | - | - | ------ | ----- | 
|                                |                                         |            |       | Disposition |  |             |       |          
|                                |                                         |            |       | of QAL      |  | Pro Forma   |       |          
|                                |                                         | Historical |       | Interests   |  | Adjustments |       | Pro Forma
|                                |                                         |            |       |             |  |             |       |          
|Net sales                       |                                         | $          | 613.2 |             |  | $           | (92.8 | )         |   | $ | (1.4 | )    |   | $ | 519.0  |      
|                                |                                         |            |       |             |  |             |       |           |   |   |      |      |   |   |        |      
|Costs and expenses             |                                         |            |       |             |  |             |       |           |   |   |      |      |   |   |        |      
|                                | Operating costs and expenses            |            |       | 664.0       |  |             |       | (76.7     | ) |   |      | (1.4 | ) |   |        | 585.9 | 
|                                | Other operating charges (benefits), net |            |       | 4.7         |  |             |       |          |   |   |      |     |   |   |        | 4.7   | 
|                                |                                         |            |       |             |  |             |       |           |   |   |      |      |   |   |        |      
|                                |                                         |            | 668.7 |             |  |             | (76.7 | )         |   |   | (1.4 | )    |   |   | 590.6  |      
|                                |                                         |            |       |             |  |             |       |           |   |   |      |      |   |   |        |      
|Operating loss                  |                                         |            | (55.5 | )           |  |             | (16.1 | )         |   |   |     |      |   |   | (71.6  | )    
|Interest expense                |                                         |            | (7.1  | )           |  |             |      |           |   |   |     |      |   |   | (7.1   | )    
|All other income (expense), net |                                         |            | (28.9 | )           |  |             | 1.7   |           |   |   |     |      |   |   | (27.2  | )    
|Income taxes                    |                                         |            | (5.8  | )           |  |             | 3.2   |           |   |   |     |      |   |   | (2.6   | )    
|                                |                                         |            |       |             |  |             |       |           |   |   |      |      |   |   |        |      
|Loss from continuing operations |                                         | $          | (97.3 | )           |  | $           | (11.2 | )         |   | $ |     |      |   | $ | (108.5 | )    
|                                |                                         |            |       |             |  |             |       |           |   |   |      |      |   |   |        |      

Pro Forma Condensed Consolidating Statement of
Cash Flows

For the Nine Months Ended September 30,
2004


|                                           |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |        |  
|------------------------------------------ | ------------------------------------------------ | ---------- | ------ | ----------- | - | ----------- | ----- | --------- | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                           |                                                  |            |        | Disposition |   |             |       |          
|                                           |                                                  |            |        | of QAL      |   | Pro Forma   |       |          
|                                           |                                                  | Historical |        | Interests   |   | Adjustments |       | Pro Forma
|                                           |                                                  |            |        |             |   |             |       |          
|Net cash provided (used) by:               |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |       
|Operating activities                      |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |       
|                                           | Continuing operations                            |            | $      | (47.9       | ) |             | $     | (13.5     | ) |   | $      |       |   |   | $      | (61.4  | )
|                                           | Discontinued operations                          |            |        | 40.5        |   |             |       |          |   |   |        | (40.5  | ) |   |        |       |  
|                                           |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |       
|                                           |                                                  |            | (7.4   | )           |   |             | (13.5 | )         |   |   | (40.5  | )      |   |   | (61.4  | )     
|                                           |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |       
|Investing activities                      |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |       
|                                           | Continuing operations                            |            |        | (10.2       | ) |             |       |          |   |   |        |       |   |   |        | (10.2  | )
|                                           | Discontinued operations                          |            |        | 328.5       |   |             |       |          |   |   |        | 427.2  |   |   |        | 755.7  |  
|                                           |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |       
|                                           |                                                  |            | 318.3  |             |   |             |      |           |   |   | 427.2  |        |   |   | 745.5  |       
|                                           |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |       
|Financing activities                      |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |       
|                                           | Continuing operations                            |            |        | (1.7        | ) |             |       |          |   |   |        |       |   |   |        | (1.7   | )
|                                           | Discontinued operations                          |            |        | (312.9      | ) |             |       |          |   |   |        | (427.2 | ) |   |        | (740.1 | )
|                                           |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |       
|                                           |                                                  |            | (314.6 | )           |   |             |      |           |   |   | (427.2 | )      |   |   | (741.8 | )     
|                                           |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |       
|                                           | Net decrease in cash and cash equivalents        |            |        | (3.7        | ) |             |       | (13.5     | ) |   |        | (40.5  | ) |   |        | (57.7  | )
|                                           | Cash and cash equivalents at beginning of period |            |        | 35.6        |   |             |       | (.1       | ) |   |        |       |   |   |        | 35.5   |  
|                                           |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |       
|Cash and cash equivalents at end of period |                                                  | $          | 31.9   |             |   | $           | (13.6 | )         |   | $ | (40.5  | )      |   | $ | (22.2  | )(1)  
|                                           |                                                  |            |        |             |   |             |       |           |   |   |        |        |   |   |        |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The pro forma negative cash balance assumes the
    hypothetical disposition of all of the sold commodity interests
    as of January 1, 2004 and that cash flow from those
    operations would, therefore, not have been available to the
    Company. However, this negative amount does not consider impacts
    of the Intercompany Agreement, the impacts of the Cases or
    availability under the DIP Facility. See Notes 1 and 5 for
    discussion of these matters.

45



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


Pro Forma Condensed Consolidating Statement of
Cash Flows

For the Nine Months Ended September 30,
2003


|                                           |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |        |  
|------------------------------------------ | -------------------------------------------------------- | ---------- | ----- | ----------- | - | ----------- | ---- | --------- | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                           |                                                          |            |       | Disposition |   |             |      |          
|                                           |                                                          |            |       | of QAL      |   | Pro Forma   |      |          
|                                           |                                                          | Historical |       | Interests   |   | Adjustments |      | Pro Forma
|                                           |                                                          |            |       |             |   |             |      |          
|Net cash provided (used) by:               |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |       
|Operating activities                      |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |       
|                                           | Continuing operations                                    |            | $     | (35.7       | ) |             | $    | (2.5      | ) |   | $      |       |   |   | $      | (38.2  | )
|                                           | Discontinued operations                                  |            |       | (45.6       | ) |             |      |          |   |   |        | 45.6   |   |   |        |       |  
|                                           |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |       
|                                           |                                                          |            | (81.3 | )           |   |             | (2.5 | )         |   |   | 45.6   |        |   |   | (38.2  | )     
|                                           |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |       
|Investing activities                      |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |       
|                                           | Continuing operations                                    |            |       | 75.8        |   |             |      |          |   |   |        |       |   |   |        | 75.8   |  
|                                           | Discontinued operations                                  |            |       | (19.9       | ) |             |      |          |   |   |        | 729.2  |   |   |        | 709.3  |  
|                                           |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |       
|                                           |                                                          |            | 55.9  |             |   |             |     |           |   |   | 729.2  |        |   |   | 785.1  |       
|                                           |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |       
|Financing activities                      |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |       
|                                           | Continuing operations                                    |            |       | (4.0        | ) |             |      |          |   |   |        |       |   |   |        | (4.0   | )
|                                           | Discontinued operations                                  |            |       |            |   |             |      |          |   |   |        | (729.2 | ) |   |        | (729.2 | )
|                                           |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |       
|                                           |                                                          |            | (4.0  | )           |   |             |     |           |   |   | (729.2 | )      |   |   | (733.2 | )     
|                                           |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |       
|                                           | Net increase (decrease) in cash and cash
    equivalents |            |       | (29.4       | ) |             |      | (2.5      | ) |   |        | 45.6   |   |   |        | 13.7   |  
|                                           | Cash and cash equivalents at beginning of period         |            |       | 77.6        |   |             |      |          |   |   |        |       |   |   |        | 77.6   |  
|                                           |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |       
|Cash and cash equivalents at end of period |                                                          | $          | 48.2  |             |   | $           | (2.5 | )         |   | $ | 45.6   |        |   | $ | 91.3   |       
|                                           |                                                          |            |       |             |   |             |      |           |   |   |        |        |   |   |        |       

Pro Forma Adjustments:

|    |                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | For purposes of the pro forma balance sheet
    information presented above, the Company has assumed that the
    closing dates of Gramercy/ KJBC, Valco and QAL disposition
    transactions occurred as of the respective balance sheet date.
    As such, the Company has reflected the full amount of the
    proceeds from these transactions as a restricted asset in the
    pro forma balance sheet information.
|   
|(b) | For purposes of the pro forma income (loss)
    information presented above, the Company has assumed that
    approximately 25% of its derivative hedging activities in the
    quarter and nine month periods ended September 30, 2004 and
    2003 related to the Companys interests in and related to
    QAL.                                                                                                      



|    |                                   
|--- | ----------------------------------
|13. | Supplemental Guarantor Information

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

The accompanying financial information presents
consolidating balance sheets, statements of income (loss) and
statements of cash flows showing separately the Company,
Subsidiary Guarantors, other subsidiaries and eliminating
entries. Other subsidiaries discontinued operations
include Alpart and the related discontinued operations of KAII.
Subsidiary Guarantors discontinued operations include the
discontinued operations of AJI, KJC, KBC and Valco. See
Note 2 for additional information with regard to
discontinued

46



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


operations. Certain reclassifications of prior
year information were made to conform to the current
presentation.

CONDENSED CONSOLIDATING BALANCE
SHEETS

September 30, 2004


|                                                             |  |         |          |            |  |              |         |             |  |              |         |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------ |  | ------- | -------- | ---------- |  | ------------ | ------- | ----------- |  | ------------ | ------- | - |  | - | -------- | - |  | - | -------- | -
|                                                             |  |         |          | Subsidiary |  | Other        |         | Eliminating |  |             
|                                                             |  | Company |          | Guarantors |  | Subsidiaries |         | Entries     |  | Consolidated
|                                                             |  |         |          |            |  |              |         |             |  |             
|ASSETS                                                      
|Current assets                                               |  | $       | 233.6    |            |  | $            | 39.2    |             |  | $            | 43.6    |   |  | $ |         |   |  | $ | 316.4    |  
|Discontinued operations current assets                      |  |         | 50.4     |            |  |              |        |             |  |              | 45.6    |   |  |   |         |   |  |   | 96.0     |  
|Investments in subsidiaries                                  |  |         | 2,770.6  |            |  |              |        |             |  |              |        |   |  |   | (2,770.6 | ) |  |   |         |  
|Intercompany advances receivable (payable)                   |  |         | (2,353.1 | )          |  |              | 597.0   |             |  |              | 1,756.1 |   |  |   |         |   |  |   |         |  
|Investments in and advances to unconsolidated
    affiliates |  |         | 17.4     |            |  |              | 38.1    |             |  |              |        |   |  |   |         |   |  |   | 55.5     |  
|Property and equipment, net                                  |  |         | 178.9    |            |  |              | 20.6    |             |  |              | 18.2    |   |  |   |         |   |  |   | 217.7    |  
|Deferred income taxes                                        |  |         | (88.5    | )          |  |              | 41.6    |             |  |              | 46.9    |   |  |   |         |   |  |   |         |  
|Restricted proceeds from sale of commodity
    interests     |  |         | 32.1     |            |  |              | 270.5   |             |  |              |        |   |  |   |         |   |  |   | 302.6    |  
|Other assets                                                 |  |         | 487.8    |            |  |              | .3      |             |  |              |        |   |  |   |         |   |  |   | 488.1    |  
|Discontinued operations long-term assets                    |  |         | .6       |            |  |              |        |             |  |              | 49.1    |   |  |   |         |   |  |   | 49.7     |  
|                                                             |  |         |          |            |  |              |         |             |  |              |         |   |  |   |          |   |  |   |          |  
|                                                             |  | $       | 1,329.8  |            |  | $            | 1,007.3 |             |  | $            | 1,959.5 |   |  | $ | (2,770.6 | ) |  | $ | 1,526.0  |  
|                                                             |  |         |          |            |  |              |         |             |  |              |         |   |  |   |          |   |  |   |          |  
|                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)          
|Current liabilities                                          |  | $       | 142.9    |            |  | $            | 45.6    |             |  | $            | 12.4    |   |  | $ |         |   |  | $ | 200.9    |  
|Discontinued operations current liabilities                 |  |         | 29.5     |            |  |              | 10.5    |             |  |              | 69.1    |   |  |   |         |   |  |   | 109.1    |  
|Other long-term liabilities                                  |  |         | 45.1     |            |  |              | 1.0     |             |  |              | (1.6    | ) |  |   |         |   |  |   | 44.5     |  
|Long-term debt                                               |  |         | 2.2      |            |  |              |        |             |  |              |        |   |  |   |         |   |  |   | 2.2      |  
|Discontinued operations long-term
    liabilities           |  |         | 27.2     |            |  |              |        |             |  |              | 27.0    |   |  |   |         |   |  |   | 54.2     |  
|Liabilities subject to compromise                            |  |         | 2,823.8  |            |  |              | 18.4    |             |  |              | 13.8    |   |  |   |         |   |  |   | 2,856.0  |  
|Stockholders equity (deficit)                               |  |         | (1,740.9 | )          |  |              | 931.8   |             |  |              | 1,838.8 |   |  |   | (2,770.6 | ) |  |   | (1,740.9 | )
|                                                             |  |         |          |            |  |              |         |             |  |              |         |   |  |   |          |   |  |   |          |  
|                                                             |  | $       | 1,329.8  |            |  | $            | 1,007.3 |             |  | $            | 1,959.5 |   |  | $ | (2,770.6 | ) |  | $ | 1,526.0  |  
|                                                             |  |         |          |            |  |              |         |             |  |              |         |   |  |   |          |   |  |   |          |  

47



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


CONDENSED CONSOLIDATING BALANCE
SHEETS

December 31, 2003


|                                                             |  |         |          |            |  |              |       |             |  |              |         |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------ |  | ------- | -------- | ---------- |  | ------------ | ----- | ----------- |  | ------------ | ------- | - |  | - | -------- | - |  | - | -------- | -
|                                                             |  |         |          | Subsidiary |  | Other        |       | Eliminating |  |             
|                                                             |  | Company |          | Guarantors |  | Subsidiaries |       | Entries     |  | Consolidated
|                                                             |  |         |          |            |  |              |       |             |  |             
|ASSETS                                                      
|Current assets                                               |  | $       | 174.9    |            |  | $            | 54.8  |             |  | $            | 22.8    |   |  | $ |         |   |  | $ | 252.5    |  
|Discontinued operations current assets                      |  |         | 56.7     |            |  |              | 3.2   |             |  |              | 118.8   |   |  |   |         |   |  |   | 178.7    |  
|Investments in subsidiaries                                  |  |         | 2,617.2  |            |  |              | 174.0 |             |  |              |        |   |  |   | (2,791.2 | ) |  |   |         |  
|Intercompany advances receivable (payable)                   |  |         | (2,203.0 | )          |  |              | 511.9 |             |  |              | 1,691.1 |   |  |   |         |   |  |   |         |  
|Investments in and advances to unconsolidated
    affiliates |  |         | 13.2     |            |  |              | 37.7  |             |  |              |        |   |  |   |         |   |  |   | 50.9     |  
|Property and equipment, net                                  |  |         | 185.1    |            |  |              | 21.4  |             |  |              | 23.6    |   |  |   |         |   |  |   | 230.1    |  
|Deferred income taxes                                        |  |         | (88.5    | )          |  |              | 41.6  |             |  |              | 46.9    |   |  |   |         |   |  |   |         |  
|Other assets                                                 |  |         | 519.9    |            |  |              | .2    |             |  |              | .4      |   |  |   |         |   |  |   | 520.5    |  
|Discontinued operations long-term assets                    |  |         | 6.4      |            |  |              |      |             |  |              | 389.6   |   |  |   |         |   |  |   | 396.0    |  
|                                                             |  |         |          |            |  |              |       |             |  |              |         |   |  |   |          |   |  |   |          |  
|                                                             |  | $       | 1,281.9  |            |  | $            | 844.8 |             |  | $            | 2,293.2 |   |  | $ | (2,791.2 | ) |  | $ | 1,628.7  |  
|                                                             |  |         |          |            |  |              |       |             |  |              |         |   |  |   |          |   |  |   |          |  
|                                                            
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)          
|Current liabilities                                          |  | $       | 129.2    |            |  | $            | 44.1  |             |  | $            | 9.2     |   |  | $ |         |   |  | $ | 182.5    |  
|Discontinued operations current liabilities                 |  |         | 32.0     |            |  |              |      |             |  |              | 105.0   |   |  |   |         |   |  |   | 137.0    |  
|Other long-term liabilities                                  |  |         | 59.1     |            |  |              | 1.0   |             |  |              | (.7     | ) |  |   |         |   |  |   | 59.4     |  
|Long-term debt                                               |  |         | 2.2      |            |  |              |      |             |  |              |        |   |  |   |         |   |  |   | 2.2      |  
|Discontinued operations long-term
    liabilities           |  |         | 37.7     |            |  |              | 11.4  |             |  |              | 41.0    |   |  |   | 105.5    |   |  |   | 195.6    |  
|Liabilities subject to compromise                            |  |         | 2,752.9  |            |  |              | 16.5  |             |  |              | 13.8    |   |  |   |         |   |  |   | 2,783.2  |  
|Stockholders equity (deficit)                               |  |         | (1,731.2 | )          |  |              | 771.8 |             |  |              | 2,124.9 |   |  |   | (2,896.7 | ) |  |   | (1,731.2 | )
|                                                             |  |         |          |            |  |              |       |             |  |              |         |   |  |   |          |   |  |   |          |  
|                                                             |  | $       | 1,281.9  |            |  | $            | 844.8 |             |  | $            | 2,293.2 |   |  | $ | (2,791.2 | ) |  | $ | 1,628.7  |  
|                                                             |  |         |          |            |  |              |       |             |  |              |         |   |  |   |          |   |  |   |          |  

48



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(LOSS)

For the Quarter Ended September 30,
2004


|                                         |                                         |         |        |            |  |              |       |             |  |              |      |      |  |   |        |        |   |   |        |       | 
|---------------------------------------- | --------------------------------------- | ------- | ------ | ---------- |  | ------------ | ----- | ----------- |  | ------------ | ---- | ---- |  | - | ------ | ------ | - | - | ------ | ----- | 
|                                         |                                         |         |        | Subsidiary |  | Other        |       | Eliminating |  |             
|                                         |                                         | Company |        | Guarantors |  | Subsidiaries |       | Entries     |  | Consolidated
|                                         |                                         |         |        |            |  |              |       |             |  |             
|Net sales                                |                                         | $       | 245.1  |            |  | $            | 97.0  |             |  | $            | 62.1 |      |  | $ | (122.4 | )      |   | $ | 281.8  |      
|Costs and expenses:                      |                                         |         |        |            |  |              |       |             |  |              |      |      |  |   |        |        |   |   |        |      
|                                         | Operating costs and expenses            |         |        | 252.3      |  |              |       | 95.0        |  |              |      | 53.1 |  |   |        | (122.4 | ) |   |        | 278.0 | 
|                                         | Other operating charges (benefits), net |         |        | 154.7      |  |              |       |            |  |              |      |     |  |   |        |       |   |   |        | 154.7 | 
|                                         |                                         |         |        |            |  |              |       |             |  |              |      |      |  |   |        |        |   |   |        |      
|Operating income (loss)                  |                                         |         | (161.9 | )          |  |              | 2.0   |             |  |              | 9.0  |      |  |   |       |        |   |   | (150.9 | )    
|Interest expense                         |                                         |         | (2.3   | )          |  |              |      |             |  |              |     |      |  |   |       |        |   |   | (2.3   | )    
|Reorganization items                     |                                         |         | (10.0  | )          |  |              |      |             |  |              |     |      |  |   |       |        |   |   | (10.0  | )    
|Other income (expense) net               |                                         |         | 8.7    |            |  |              | (9.9  | )           |  |              | 2.5  |      |  |   |       |        |   |   | 1.3    |      
|Benefit (provision) for income taxes     |                                         |         | (1.2   | )          |  |              | (3.3  | )           |  |              | (.2  | )    |  |   |       |        |   |   | (4.7   | )    
|Equity in income of subsidiaries         |                                         |         | 108.0  |            |  |              |      |             |  |              |     |      |  |   | (108.0 | )      |   |   |       |      
|                                         |                                         |         |        |            |  |              |       |             |  |              |      |      |  |   |        |        |   |   |        |      
|Income (loss) from continuing operations |                                         |         | (58.7  | )          |  |              | (11.2 | )           |  |              | 11.3 |      |  |   | (108.0 | )      |   |   | (166.6 | )    
|Discontinued operations                  |                                         |         | (10.7  | )          |  |              | 108.0 |             |  |              | (.1  | )    |  |   |       |        |   |   | 97.2   |      
|                                         |                                         |         |        |            |  |              |       |             |  |              |      |      |  |   |        |        |   |   |        |      
|Net income (loss)                        |                                         | $       | (69.4  | )          |  | $            | 96.8  |             |  | $            | 11.2 |      |  | $ | (108.0 | )      |   | $ | (69.4  | )    
|                                         |                                         |         |        |            |  |              |       |             |  |              |      |      |  |   |        |        |   |   |        |      

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(LOSS)

For the Quarter Ended September 30,
2003


|                                     |                                 |         |       |            |  |              |       |             |  |              |      |      |  |   |        |        |   |   |       |       | 
|------------------------------------ | ------------------------------- | ------- | ----- | ---------- |  | ------------ | ----- | ----------- |  | ------------ | ---- | ---- |  | - | ------ | ------ | - | - | ----- | ----- | 
|                                     |                                 |         |       | Subsidiary |  | Other        |       | Eliminating |  |             
|                                     |                                 | Company |       | Guarantors |  | Subsidiaries |       | Entries     |  | Consolidated
|                                     |                                 |         |       |            |  |              |       |             |  |             
|Net sales                            |                                 | $       | 181.3 |            |  | $            | 105.6 |             |  | $            | 64.5 |      |  | $ | (148.3 | )      |   | $ | 203.1 |      
|Costs and expenses:                  |                                 |         |       |            |  |              |       |             |  |              |      |      |  |   |        |        |   |   |       |      
|                                     | Operating costs and expenses    |         |       | 209.4      |  |              |       | 118.1       |  |              |      | 41.8 |  |   |        | (148.3 | ) |   |       | 221.0 | 
|                                     | Other operating (benefits), net |         |       | 14.8       |  |              |       | .2          |  |              |      |     |  |   |        |       |   |   |       | 15.0  | 
|                                     |                                 |         |       |            |  |              |       |             |  |              |      |      |  |   |        |        |   |   |       |      
|Operating income (loss)              |                                 |         | (42.9 | )          |  |              | (12.7 | )           |  |              | 22.7 |      |  |   |       |        |   |   | (32.9 | )    
|Interest expense                     |                                 |         | (2.4  | )          |  |              |      |             |  |              | (.1  | )    |  |   |       |        |   |   | (2.5  | )    
|Reorganization items                 |                                 |         | (5.4  | )          |  |              |      |             |  |              |     |      |  |   |       |        |   |   | (5.4  | )    
|Other income (expense), net          |                                 |         | (2.1  | )          |  |              | (7.9  | )           |  |              | 3.3  |      |  |   |       |        |   |   | (6.7  | )    
|Benefit (provision) for income taxes |                                 |         | (.3   | )          |  |              | (1.1  | )           |  |              |     |      |  |   |       |        |   |   | (1.4  | )    
|Equity in loss of subsidiaries       |                                 |         | (4.2  | )          |  |              |      |             |  |              |     |      |  |   | 4.2    |        |   |   |      |      
|                                     |                                 |         |       |            |  |              |       |             |  |              |      |      |  |   |        |        |   |   |       |      
|Loss from continuing operations      |                                 |         | (57.3 | )          |  |              | (21.7 | )           |  |              | 25.9 |      |  |   | 4.2    |        |   |   | (48.9 | )    
|Discontinued operations              |                                 |         | (31.3 | )          |  |              | (.1   | )           |  |              | (8.3 | )    |  |   |       |        |   |   | (39.7 | )    
|                                     |                                 |         |       |            |  |              |       |             |  |              |      |      |  |   |        |        |   |   |       |      
|Net loss                             |                                 | $       | (88.6 | )          |  | $            | (21.8 | )           |  | $            | 17.6 |      |  | $ | 4.2    |        |   | $ | (88.6 | )    
|                                     |                                 |         |       |            |  |              |       |             |  |              |      |      |  |   |        |        |   |   |       |      

49



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(LOSS)

For the Nine Months Ended September 30,
2004


|                                         |                                         |         |        |            |  |              |       |             |  |              |       |       |  |   |        |        |   |   |        |       | 
|---------------------------------------- | --------------------------------------- | ------- | ------ | ---------- |  | ------------ | ----- | ----------- |  | ------------ | ----- | ----- |  | - | ------ | ------ | - | - | ------ | ----- | 
|                                         |                                         |         |        | Subsidiary |  | Other        |       | Eliminating |  |             
|                                         |                                         | Company |        | Guarantors |  | Subsidiaries |       | Entries     |  | Consolidated
|                                         |                                         |         |        |            |  |              |       |             |  |             
|Net sales                                |                                         | $       | 693.9  |            |  | $            | 194.4 |             |  | $            | 375.4 |       |  | $ | (471.0 | )      |   | $ | 792.7  |      
|Costs and expenses:                      |                                         |         |        |            |  |              |       |             |  |              |       |       |  |   |        |        |   |   |        |      
|                                         | Operating costs and expenses            |         |        | 725.9      |  |              |       | 178.7       |  |              |       | 352.2 |  |   |        | (471.0 | ) |   |        | 785.8 | 
|                                         | Other operating charges (benefits), net |         |        | 154.7      |  |              |       |            |  |              |       |      |  |   |        |       |   |   |        | 154.7 | 
|                                         |                                         |         |        |            |  |              |       |             |  |              |       |       |  |   |        |        |   |   |        |      
|Operating income (loss)                  |                                         |         | (186.7 | )          |  |              | 15.7  |             |  |              | 23.2  |       |  |   |       |        |   |   | (147.8 | )    
|Interest expense                         |                                         |         | (6.4   | )          |  |              |      |             |  |              |      |       |  |   |       |        |   |   | (6.4   | )    
|Reorganization items                     |                                         |         | (28.9  | )          |  |              |      |             |  |              |      |       |  |   |       |        |   |   | (28.9  | )    
|Other income (expense) net               |                                         |         | (2.4   | )          |  |              | 8.4   |             |  |              | (.8   | )     |  |   |       |        |   |   | 5.2    |      
|Benefit (provision) for income taxes     |                                         |         | 8.5    |            |  |              | (8.2  | )           |  |              | (13.8 | )     |  |   |       |        |   |   | (13.5  | )    
|Equity in income of subsidiaries         |                                         |         | 126.4  |            |  |              |      |             |  |              |      |       |  |   | (126.4 | )      |   |   |       |      
|                                         |                                         |         |        |            |  |              |       |             |  |              |       |       |  |   |        |        |   |   |        |      
|Income (loss) from continuing operations |                                         |         | (89.5  | )          |  |              | 15.9  |             |  |              | 8.6   |       |  |   | (126.4 | )      |   |   | (191.4 | )    
|Discontinued operations                  |                                         |         | (19.6  | )          |  |              | 115.3 |             |  |              | (13.4 | )     |  |   |       |        |   |   | 82.3   |      
|                                         |                                         |         |        |            |  |              |       |             |  |              |       |       |  |   |        |        |   |   |        |      
|Net income (loss)                        |                                         | $       | (109.1 | )          |  | $            | 131.2 |             |  | $            | (4.8  | )     |  | $ | (126.4 | )      |   | $ | (109.1 | )    
|                                         |                                         |         |        |            |  |              |       |             |  |              |       |       |  |   |        |        |   |   |        |      

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(LOSS)

For the Nine Months Ended September 30,
2003


|                                |                                 |         |        |            |  |              |       |             |  |              |       |       |  |   |        |        |   |   |        |       | 
|------------------------------- | ------------------------------- | ------- | ------ | ---------- |  | ------------ | ----- | ----------- |  | ------------ | ----- | ----- |  | - | ------ | ------ | - | - | ------ | ----- | 
|                                |                                 |         |        | Subsidiary |  | Other        |       | Eliminating |  |             
|                                |                                 | Company |        | Guarantors |  | Subsidiaries |       | Entries     |  | Consolidated
|                                |                                 |         |        |            |  |              |       |             |  |             
|Net sales                       |                                 | $       | 577.9  |            |  | $            | 193.5 |             |  | $            | 360.3 |       |  | $ | (518.5 | )      |   | $ | 613.2  |      
|Costs and expenses:             |                                 |         |        |            |  |              |       |             |  |              |       |       |  |   |        |        |   |   |        |      
|                                | Operating costs and expenses    |         |        | 648.1      |  |              |       | 198.7       |  |              |       | 335.7 |  |   |        | (518.5 | ) |   |        | 664.0 | 
|                                | Other operating (benefits), net |         |        | 4.5        |  |              |       | .2          |  |              |       |      |  |   |        |       |   |   |        | 4.7   | 
|                                |                                 |         |        |            |  |              |       |             |  |              |       |       |  |   |        |        |   |   |        |      
|Operating income (loss)         |                                 |         | (74.7  | )          |  |              | (5.4  | )           |  |              | 24.6  |       |  |   |       |        |   |   | (55.5  | )    
|Interest expense                |                                 |         | (7.1   | )          |  |              |      |             |  |              |       |       |  |   |       |        |   |   | (7.1   | )    
|Reorganization items            |                                 |         | (20.2  | )          |  |              |      |             |  |              |      |       |  |   |       |        |   |   | (20.2  | )    
|Other income (expense), net     |                                 |         | 50.7   |            |  |              | (47.7 | )           |  |              | (11.7 | )     |  |   |       |        |   |   | (8.7   | )    
|Provision for income taxes      |                                 |         | (.8    | )          |  |              | (3.2  | )           |  |              | (1.8  | )     |  |   |       |        |   |   | (5.8   | )    
|Equity in loss of subsidiaries  |                                 |         | (65.9  | )          |  |              |      |             |  |              |      |       |  |   | 65.9   |        |   |   |       |      
|                                |                                 |         |        |            |  |              |       |             |  |              |       |       |  |   |        |        |   |   |        |      
|Loss from continuing operations |                                 |         | (118.0 | )          |  |              | (56.3 | )           |  |              | 11.1  |       |  |   | 65.9   |        |   |   | (97.3  | )    
|Discontinued operations         |                                 |         | (97.0  | )          |  |              | (4.9  | )           |  |              | (15.8 | )     |  |   |       |        |   |   | (117.7 | )    
|                                |                                 |         |        |            |  |              |       |             |  |              |       |       |  |   |        |        |   |   |        |      
|Net loss                        |                                 | $       | (215.0 | )          |  | $            | (61.2 | )           |  | $            | (4.7  | )     |  | $ | 65.9   |        |   | $ | (215.0 | )    
|                                |                                 |         |        |            |  |              |       |             |  |              |       |       |  |   |        |        |   |   |        |      

50



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF CASH
FLOWS

For the Nine Months Ended September 30,
2004


|                                                                           |                        |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |   |        |  
|-------------------------------------------------------------------------- | ---------------------- | ----------------------- | ----- | ---------- | ----- | ------------ | ------ | ----------- | ------ | ------------ | ----- | - | ----- | - | - | - | - | - | ------ | - | ------ | -
|                                                                           |                        |                         |       | Subsidiary |       | Other        |        | Eliminating |        |             
|                                                                           |                        | Company                 |       | Guarantors |       | Subsidiaries |        | Entries     |        | Consolidated
|                                                                           |                        |                         |       |            |       |              |        |             |        |             
|Net cash provided (used) by:                                               |                        |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |  
|                                                                           | Operating activities  |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |   |       
|                                                                           |                        | Continuing operations   |       | $          | (70.9 | )            |        | $           | 12.5   |              |       | $ | 10.5  |   |   | $ |  |   |        | $ | (47.9  | )
|                                                                           |                        | Discontinued operations |       |            | 10.2  |              |        |             | 3.2    |              |       |   | 27.1  |   |   |   |  |   |        |   | 40.5   |  
|                                                                           |                        |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |  
|                                                                           |                        |                         | (60.7 | )          |       |              | 15.7   |             |        |              | 37.6  |   |       |   |  |   |   |   | (7.4   | )
|                                                                           |                        |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |  
|                                                                           | Investing activities  |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |   |       
|                                                                           |                        | Continuing operations   |       |            | (9.3  | )            |        |             | (.3    | )            |       |   | (.6   | ) |   |   |  |   |        |   | (10.2  | )
|                                                                           |                        | Discontinued operations |       |            | 45.1  |              |        |             | 286.3  |              |       |   | (2.9  | ) |   |   |  |   |        |   | 328.5  |  
|                                                                           |                        |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |  
|                                                                           |                        |                         | 35.8  |            |       |              | 286.0  |             |        |              | (3.5  | ) |       |   |  |   |   |   | 318.3  |  
|                                                                           |                        |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |  
|                                                                           | Financing activities  |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |   |       
|                                                                           |                        | Continuing operations   |       |            | (1.7  | )            |        |             |       |              |       |   |      |   |   |   |  |   |        |   | (1.7   | )
|                                                                           |                        | Discontinued operations |       |            | (28.0 | )            |        |             | (270.3 | )            |       |   | (14.6 | ) |   |   |  |   |        |   | (312.9 | )
|                                                                           |                        |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |  
|                                                                           |                        |                         | (29.7 | )          |       |              | (270.3 | )           |        |              | (14.6 | ) |       |   |  |   |   |   | (314.6 | )
|                                                                           |                        |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |  
|                                                                          
|Intercompany activity                                                      |                        |                         | 50.3  |            |       |              | (31.1  | )           |        |              | (19.2 | ) |       |   |  |   |   |   |       |  
|                                                                           |                        |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |  
|Net (decrease) increase in cash and cash
    equivalents during the period |                        |                         | (4.3  | )          |       |              | .3     |             |        |              | .3    |   |       |   |  |   |   |   | (3.7   | )
|Cash and cash equivalents at beginning of period                           |                        |                         | 34.3  |            |       |              | .4     |             |        |              | .9    |   |       |   |  |   |   |   | 35.6   |  
|                                                                           |                        |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |  
|Cash and cash equivalents at end of period                                 |                        | $                       | 30.0  |            |       | $            | 0.7    |             |        | $            | 1.2   |   |       | $ |  |   |   | $ | 31.9   |  
|                                                                           |                        |                         |       |            |       |              |        |             |        |              |       |   |       |   |   |   |   |   |        |  

51



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(In millions of dollars)


(Unaudited)


CONDENSED CONSOLIDATING STATEMENTS OF CASH
FLOWS

For the Nine Months Ended September 30,
2003


|                                                                           |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |       |  
|-------------------------------------------------------------------------- | ----------------------- | ------- | ------ | ---------- | - | ------------ | ----- | ----------- | - | ------------ | ----- | ----- | - | - | - | - |  | - | ----- | ----- | -
|                                                                           |                         |         |        | Subsidiary |   | Other        |       | Eliminating |   |             
|                                                                           |                         | Company |        | Guarantors |   | Subsidiaries |       | Entries     |   | Consolidated
|                                                                           |                         |         |        |            |   |              |       |             |   |             
|Net cash provided (used) by:                                               |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      
|Operating activities                                                      |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      
|                                                                           | Continuing operations   |         | $      | (53.3      | ) |              | $     | 15.8        |   |              | $     | 1.8   |   |   |   |  |  |   | $     | (35.7 | )
|                                                                           | Discontinue operations  |         |        | (47.2      | ) |              |       | 11.8        |   |              |       | (10.2 | ) |   |   |  |  |   |       | (45.6 | )
|                                                                           |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      
|                                                                           |                         |         | (100.5 | )          |   |              | 27.6  |             |   |              | (8.4  | )     |   |   |  |   |  |   | (81.3 | )    
|                                                                           |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      
|Investing activities                                                      |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      
|                                                                           | Continuing operations   |         |        | 71.8       |   |              |       | (.1         | ) |              |       | 4.1   |   |   |   |  |  |   |       | 75.8  |  
|                                                                           | Discontinued operations |         |        | .2         |   |              |       |            |   |              |       | (20.1 | ) |   |   |  |  |   |       | (19.9 | )
|                                                                           |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      
|                                                                           |                         |         | 72.0   |            |   |              | (.1   | )           |   |              | (16.0 | )     |   |   |  |   |  |   | 55.9  |      
|                                                                           |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      
|Financing activities                                                      |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      
|                                                                           | Continuing operations   |         |        | (4.0       | ) |              |       |            |   |              |       |      |   |   |   |  |  |   |       | (4.0  | )
|                                                                           | Discontinued operations |         |        |           |   |              |       |            |   |              |       |      |   |   |   |  |  |   |       |      |  
|                                                                           |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      
|                                                                           |                         |         | (4.0   | )          |   |              |      |             |   |              |      |       |   |   |  |   |  |   | (4.0  | )    
|                                                                           |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      
|Intercompany activity                                                      |                         |         | 6.3    |            |   |              | (26.3 | )           |   |              | 20.0  |       |   |   |  |   |  |   |      |      
|                                                                           |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      
|Net (decrease) increase in cash and cash
    equivalents during the period |                         |         | (26.2  | )          |   |              | 1.2   |             |   |              | (4.4  | )     |   |   |  |   |  |   | (29.4 | )    
|Cash and cash equivalents at beginning of period                           |                         |         | 72.8   |            |   |              | .5    |             |   |              | 4.3   |       |   |   |  |   |  |   | 77.6  |      
|                                                                           |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      
|Cash and cash equivalents at end of period                                 |                         | $       | 46.6   |            |   | $            | 1.7   |             |   | $            | (.1   | )     |   | $ |  |   |  | $ | 48.2  |      
|                                                                           |                         |         |        |            |   |              |       |             |   |              |       |       |   |   |   |   |  |   |       |      



| |                                                           
| | ----------------------------------------------------------
| | Notes to Condensed Consolidating Financial
    Information

Income
Taxes The income tax
provision (benefit) for the quarter and nine month periods ended
September 30, 2004 and 2003, relate primarily to foreign
income taxes. For the quarter and nine month periods ended
September 30, 2004 and 2003, as a result of the Cases, the
Company did not recognize any U.S. income tax benefit for
the losses incurred from domestic operations (including
temporary differences) or any U.S. income tax benefit for
foreign income taxes. Instead, the increases in federal and
state deferred tax assets as a result of additional net
operating losses and foreign tax credits generated in 2004 and
2003 were offset by equal increases in valuation allowances.

Foreign
Currency The functional
currency of the Company and its subsidiaries is the United
States Dollar, and accordingly, pre-tax translation gains
(losses) are included in the Companys and Subsidiary
Guarantors operating income (loss) and other income
(expense), net balances. Such amounts for the Company totaled
$7.1 and $3.5 for the quarters ended September 30, 2004 and
2003, respectively, and $(11.2) and $41.6 for the nine month
periods ended September 30, 2004 and 2003, respectively.
Such amounts for the Subsidiary Guarantors totaled $(7.4) and
$(3.6) for the quarters ended September 30, 2004 and 2003,
respectively, and $11.8 and $(43.0) for the nine month periods
ended September 30, 2004 and 2003, respectively.

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

52



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##### 








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

This section should be read in conjunction with
the response to Part I, Item 1, of this Report.

This section contains statements which constitute
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
statements appear in a number of places in this
section (see, for example, Recent Events and
Developments, Results of Operations, and
Liquidity and Capital Resources). Such statements
can be identified by the use of forward-looking terminology such
as believes, expects, may,
estimates, will, should,
plans or anticipates or the negative
thereof or other variations thereon or comparable terminology,
or by discussions of strategy. Readers are cautioned that any
such forward-looking statements are not guarantees of future
performance and involve significant risks and uncertainties, and
that actual results may vary materially from those in the
forward-looking statements as a result of various factors. These
factors include the effectiveness of managements
strategies and decisions, general economic and business
conditions, developments in technology, new or modified
statutory or regulatory requirements, and changing prices and
market conditions. This section and Part I, Item 1.
Business  Factors Affecting Future
Performance in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003, each
identify other factors that could cause actual results to vary.
No assurance can be given that these are all of the factors that
could cause actual results to vary materially from the
forward-looking statements.

Reorganization Proceedings

Kaiser Aluminum & Chemical Corporation
(the Company), its parent company, Kaiser Aluminum
Corporation (Kaiser or KAC), and 24 of
the Companys subsidiaries have filed separate voluntary
petitions with United States Bankruptcy Court for the District
of Delaware (the Court) for reorganization under
Chapter 11 of the United States Bankruptcy Code (the
Code). The Company, Kaiser and 15 of the
Companys subsidiaries (the Original Debtors)
filed in the first quarter of 2002 and nine additional Company
subsidiaries (the Additional Debtors) filed in the
first quarter of 2003. The Original Debtors and Additional
Debtors are collectively referred to herein as the
Debtors and the Chapter 11 proceedings of these
entities are collectively referred to herein as the
Cases. For purposes of this Report, the term
Filing Date shall mean, with respect to any
particular Debtor, the date on which such Debtor filed its Case.
None of the Companys non-U.S. joint ventures are
included in the Cases. The Cases are being jointly administered.
The Debtors are managing their businesses in the ordinary course
as debtors-in-possession subject to the control and
administration of the Court.

As provided by the Code, the Debtors had the
exclusive right to propose a plan of reorganization for
120 days following the initial Filing Date. The Court has
subsequently approved several extensions of the exclusivity
period for all Debtors. Most recently, the Court approved an
extension of exclusivity as to all Debtors to February 28,
2005, but the approved order provides that exclusivity can be
terminated earlier with respect to AJI, KJC, KBC and KAAC, the
four entities that own or owned certain of the Company
commodity-related interests in Jamaica, which have been
sold/monetized, and in Australia, which are currently expected
to be sold in early 2005, in accordance with the terms of an
intercompany settlement agreement (the Intercompany
Agreement) that is pending before the Court. Additional
extensions may be sought. However, no assurance can be given
that any such future extension requests will be granted by the
Court. If the Debtors fail to file a plan of reorganization
during the exclusivity period, or if such plan is not accepted
by the requisite numbers of creditors and equity holders
entitled to vote on the plan, other parties in interest in the
Cases may be permitted to propose their own plan(s) of
reorganization for the Debtors.

The Debtors anticipate that substantially all
liabilities of the Debtors as of their Filing Date will be
settled under more than one plan of reorganization to be
proposed and voted on in accordance with the provisions of the
Code. As more fully discussed below, a joint plan was filed by
AJI and KJC in November 2004. Although the Debtors intend to
file and seek confirmation of additional plans, there can be no
assurance as to when the Debtors will file such additional plans
or as to whether any such plan or plans will be confirmed by the
Court and consummated.

In working toward one or more plans of
reorganization, the Debtors have been, and continue to be,
engaged in discussions with each of their key constituencies,
including the unsecured creditors committee (the

53



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##### 



UCC), the asbestos claimants
committee (the ACC) and a committee of salaried
retirees (the 1114 Committee and, together with
the UCC and the ACC, the Committees), the legal
representatives for potential future asbestos claimants (the
Asbestos Futures Representative) and potential
future silica and coal tar pitch volatile claimants (the
Silica/ CTPV Futures Representative and,
collectively with the Asbestos Futures Representative, the
Futures Representatives), the Pension Benefit
Guaranty Corporation (the PBGC) and the appropriate
union representatives. The ultimate treatment of individual
groups of creditors in any such plans of reorganization cannot
be determined definitively at this time. The ultimate treatment
of and recoveries to individual creditors is dependent on, among
other things, the total amount of claims against the Debtors as
ultimately determined by the Court, the priority of the
applicable claims, the outcome of ongoing discussions with the
key constituencies, the amount of value available for
distribution in respect of claims and the completion of the plan
confirmation process consistent with applicable bankruptcy law.


The Debtors objective is to achieve the
highest possible recoveries for all stakeholders, consistent
with the Debtors abilities to pay, and to continue the
operations of their core businesses. However, there can be no
assurance that the Debtors will be able to attain these
objectives or achieve a successful reorganization. While
valuation of the Debtors assets and estimation of
pre-Filing Date claims at this stage of the Cases are subject to
inherent uncertainties, the Debtors currently believe that, in
the aggregate, it is likely that their liabilities will be found
to significantly exceed the fair value of their assets.
Therefore, the Debtors currently believe that, with limited
exceptions, it is likely that substantially all pre-Filing Date
claims will be settled at less than 100% of their face value and
the equity interests of the Companys stockholders will be
cancelled without consideration. Further, the Debtors believe
that it is likely that: (a) the claims of pre-petition
creditors that are given certain priorities by statute or have
the benefit of guarantees or other contractual or structural
seniority will likely receive substantially greater recoveries
than pre-petition creditors that have no such priorities or
seniority; and (b) all pending and future asbestos-related
personal injury claims are likely to be resolved through the
formation, pursuant to a plan of reorganization, of a statutory
trust to which all claims would be directed by a channeling
injunction that would permanently remove all asbestos liability
from the Debtors. A similar trust arrangement is anticipated in
respect of pending and future silica and coal tar pitch
volatiles personal injury claims. A separate trust arrangement
is anticipated for hearing loss claims. The trusts would be
funded pursuant to statutory requirements and agreements with
representatives of the affected parties, using the Debtors
insurance assets and certain other consideration that has yet to
be agreed. No assurances can be provided that the foregoing will
ultimately be included in any plan(s) of reorganization the
Debtors may file. Further, while the Debtors believe it is
possible to successfully reorganize their operations and emerge
from Chapter 11 in the first half of 2005, their ability to
do so is subject to inherent market-related risks as well as
successful negotiation and Court approval for the treatment of
creditors consistent with the applicable bankruptcy law.

The Debtors Cases are being administered on
a consolidated basis. In fact, however, there are separate cases
for each Debtor or twenty-six Cases in total. The Company
believes that the impacts of the Cases and any plans of
reorganization proposed for individual Debtors will depend on
each Debtors specific circumstances and the differing
interests that creditors have in respect of such entities.

A substantial majority of the claims in the Cases
are against the Company. These include claims in respect of
substantially all of the Debtors debt obligations,
obligations in respect of pension and retiree medical benefits,
asbestos-related and personal injury claims, and known
environmental obligations. As such, all of these claimholders
will have claims against the Company that, except as further
described below, will have to be satisfied by the Companys
assets, which generally include the fabricated products plants
(other than the London, Ontario, Canada and Richmond, Virginia
extrusion facilities, which are owned by separate subsidiaries
that are also Debtors), the interests in Anglesey Aluminum
Limited (Anglesey), which are not currently expected
to be sold, and the Companys interest in and related to
the alumina refinery located in Gramercy, Louisiana
(Gramercy) and Volta Aluminium Company Limited
(Valco), which have been sold for nominal net
proceeds (see Note 4 of Notes to Interim Consolidated
Financial Statements). The Companys assets also include
certain intercompany receivables from certain of its Debtor
subsidiaries for funding provided to its joint venture
affiliates.

54



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##### 



In general, except as described below, there are
a relatively modest number or amount of third party trade and
other claims against the Companys other Debtor
subsidiaries. Sixteen of the Debtors (including KAC) have no
material ongoing activities or operations and have no material
assets or liabilities other than intercompany items. The Company
believes that it is likely that most, if not all, of these
entities will ultimately be merged out of existence or dissolved
in some manner. The remaining Debtor subsidiaries (which include
AJI, KJC, KAAC, Kaiser Aluminium International, Inc.,
(KAII), Kaiser Aluminum & Chemical of
Canada Limited (KACOCL), Kaiser Bauxite Company
(KBC), Kaiser Bellwood Corporation
(Bellwood), Kaiser Aluminum Technical Services, Inc.
(KATSI) and Kaiser Finance Corporation
(KFC)) own certain extrusion facilities or act
largely as intermediaries between the Company and certain of its
other subsidiaries and joint venture affiliates or interact with
third parties on behalf of the Company and its joint venture
affiliates. As such, the vast majority of the pre-petition
claims against such entities are related to intercompany
activities. However, certain of those entities holding claims
against the Company also have claims against certain Company
subsidiaries that own or owned the Companys interests in
joint venture affiliates and which represent a significant
portion of the Companys consolidated asset value. For
example, noteholders have claims against each of AJI and KJC
which together hold in escrow substantially all of the net
proceeds from the sale of the Companys interest in
Aluminum Partners of Jamaica (Alpart), and KAAC,
which owns the Companys interests in Queensland Alumina
Limited (QAL), as a result of AJI, KJC and KAAC
having been subsidiary guarantors of the Companys Senior
Notes (as defined below) and Sub Notes (as defined below).
Additionally, the PBGC, pursuant to statute, has joint and
several claims against the Company and all entities which are
80% or more owned by the Company (referred to as
Controlled Group Members). Controlled Group Members
include each of AJI, KJC and KAAC, as well as all of the other
Debtors. The only other significant claims against AJI, KJC and
KAAC are intercompany claims related to funding provided to
these entities by the Company. As such, it is likely that the
vast majority of the value realized in respect of the
Companys interests in Alpart and QAL is likely to be for
the benefit of the noteholders and the PBGC.

As discussed above, the Company has stated that
it expects that pre-Filing Date claims that have the benefit of
contractual or structural seniority will receive substantially
greater recoveries than pre-Filing Date claims that have no such
seniority. Accordingly, it has been the Companys
expectation that the holders of the Companys
9 7/8% Senior Notes and 10 7/8% Senior Notes
(collectively, the Senior Notes) will receive
substantially greater recoveries than the holders of claims in
respect of the Companys 12 3/4% Senior
Subordinated Notes (the Sub Notes). However, a group
of holders of the Sub Notes (the Sub
Note Group) has formed an unofficial committee to
represent all holders of Sub Notes and retained its own legal
counsel. The Sub Note Group is asserting that the Sub Note
holders claims against the Subsidiary Guarantors (such as
AJI, KJC and KAAC) may not, as a technical matter, be
contractually subordinate to the claims of holders of the Senior
Notes. The effect of such position, if ultimately sustained,
would be that the holders of Sub Notes would be on a par with
the holders of the Senior Notes in respect of proceeds from
sales of the Companys interests in and related to Alpart
and QAL. This position, if accepted by the Court, would
materially increase the recoveries to the holders of the Sub
Notes and materially decrease the recoveries to the holders of
the Senior Notes. The Company believes that the intent of the
indentures in respect of the Senior Notes and the Sub Notes was
to subordinate the claims of the Sub Note holders in respect of
the Subsidiary Guarantors. The Company cannot predict, however,
the ultimate resolution of the matters raised by the Sub
Note Group, when any such resolution will occur, or what
impact such resolution may have on the Company, the Cases or
distributions to affected noteholders.

In order to resolve the question of what
consideration from any sale or other disposition of AJI, KJC
and/or KAAC, or their respective assets, should be for the
benefit of the Company and its claimholders (in respect of the
Companys intercompany claims against such entities), the
Intercompany Agreement was reached between the UCC and the
Company and filed with the Court in October 2004. The
Intercompany Agreement is also intended to resolve substantially
all other pre-and post-petition intercompany claims between the
Debtors. Evidentiary hearings in respect of the Intercompany
Agreement are expected to begin in early 2005. The Intercompany
Agreement, which is subject to approval by the Court, provides,
among other things, for payments of cash by AJI, KJC and KAAC
from the sale of their respective interests in and related to
Alpart and QAL to the Company of at least $90.0 million in
respect of its intercompany claims against AJI,

55



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##### 



KJC and KAAC. Under the Intercompany Agreement,
such payments would be increased or decreased for any net cash
flows funded by or collected by the Company related to:
(a) the Companys interests in and related to Alpart
from January 1, 2004 through July 1, 2004 (estimated
to be between $20.0 million  $25.0 million
collected by the Company); (b) the Companys interests
in and related to QAL from July 1, 2004 through KAACs
emergence from Chapter 11 (estimated to be in the
$5.0 million range collected by the Company through
September 30, 2004); and (c) certain third party costs
and certain limited overhead of the Companys activities
related to AJI, KJC, KBC, KAAC and KFC. As provided under the
Intercompany Agreement, the Company was reimbursed for
approximately $14.5 million of payments made in the third
quarter of 2004 to retire Alpart-related debt. The Intercompany
Agreement calls for the remaining payments, other than
$28.0 million already made available to the Company but not
yet paid to the Company as of October 31, 2004 pending
finalization of the latest amendment to the DIP Facility, to be
made in specific increments to the Company at the emergence of
AJI, KJC and KAAC from Chapter 11. The Company expects that
all remaining proceeds from the sale of Alpart and QAL are
likely to be held in escrow for the benefit of creditors until
the applicable subsidiaries emerge from the Cases. The ACC, the
Futures Representatives and others have filed objections
to the Intercompany Agreement and no assurances can be provided
as to whether the Intercompany Agreement will be approved by the
Court.


On November 1, 2004, AJI and KJC filed a
joint plan of liquidation and related disclosure statement (the
AJI/ KJC Plan) with the Court. Under the proposed
AJI/ KJC Plan, the assets of those entities, consisting
primarily of the net proceeds received by them in connection
with the sale of their interests in Alpart, will be transferred
to a liquidation trust, whereupon AJI and KJC will be dissolved.
The liquidating trustee will then make distributions of cash to
the creditors of AJI and KJC in accordance with such plan. As
indicated in the AJI/ KJC Plan, it is currently anticipated that
AJI and KJC will have approximately $278.4 million of cash
available for distribution to creditors when the plan becomes
effective. Of the cash available for distribution,
$20.0 million is expected to be retained, subject to
certain terms and conditions, in a cash collateral account
securing the Post-Petition Credit Agreement until such financing
is terminated. The AJI/ KJC Plan outlines the specific treatment
and expected recoveries of AJI and KJC creditors. The AJI/ KJC
Plan indicates that, assuming the holders of the Sub Notes
accept the plan and after payment of priority claims and trust
expenses (initial reserves for which are expected to be
established in the range of $15.0 million to
$20.0 million ), AJI and KJC anticipate ultimately
distributing cash as follows (in millions):

|             |  |   |                 | 
|------------ |  | - | --------------- | 
|Senior Notes |  | $ | 162.7 to $171.1 | 
|PBGC         |  |   | $82.7 to $84.3  | 
|Sub Notes    |  |   | $8.0            | 

The $8.0 million payment to be made for the
benefit of holders of the Companys Sub Notes will be made
if, and only if, such holders approve the plan. In addition, the
plan provides that the Court will determine the amount, if any,
to be paid in respect of the Parish of St. James, State of
Louisiana, Solid Waste Disposal Revenue Bonds (the Revenue
Bonds). Any amounts paid in respect of the Sub Notes and
the Revenue Bonds will be paid from amounts that otherwise would
be distributed to holders of the Senior Notes. The disclosure
statement also indicates that it is currently anticipated that
the plan of liquidation for KAAC, which owns the Companys
interests in QAL, will provide for an additional
$8.0 million payment to the holders of Sub Notes if, and
only if, such holders of the Sub Notes vote to accept that plan.
As described in the AJI/KJC Plan, the plan and disclosure
statement will be subject to approval by the Court, and the plan
will be subject to a vote by certain creditors. The Company
anticipates that certain creditors are likely to challenge the
proposed AJI/ KJC Plan. The effectiveness of the AJI/ KJC Plan
is expressly conditioned on Court approval of the Intercompany
Agreement. This disclosure is not intended to be, nor should it
be construed to be, a solicitation for a vote on the AJI/ KJC
Plan. The AJI/ KJC Plan filed relates exclusively to AJI and KJC
and will have no impact on the normal, ongoing operation of the
Companys fabricated aluminum products business or other
operations.

As discussed above, because each Debtor entity
has different creditors and claim amounts and each Debtor has
different assets, the Company currently anticipates that the
recoveries of individual creditors will differ depending on the
Debtor entity against which a given creditor has a claim.
Another factor affecting creditor recoveries will be whether or
not intercompany claims are resolved pursuant to the Intercompany

56



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Agreement, which was jointly filed by the Debtors
and the UCC, or some other proposal. Certain holders of claims
and other stakeholders, in the their Court filings objecting to
approval of the Intercompany Agreement, have raised a question
as to whether all of the individual Debtors should be
substantively consolidated, which is specifically prohibited by
the Intercompany Agreement. In this context, substantive
consolidation would mean that the separate corporate
existences of the individual Debtor entities would be ignored
and all Debtors would be treated as a single enterprise for
purposes of the treatment of creditors claims in a single
plan of reorganization. The Company does not believe that
substantive consolidation of all Debtors is appropriate.
However, no assurances can be given as to whether a formal
substantive consolidation motion will be made by one or more
stakeholders or how the Court might rule on any such motion if
such motion were made. The Company believes that, if a
substantive consolidation motion seeking to treat all Debtors as
a single entity were made and ultimately approved by the Court,
recoveries by creditors who hold claims at Debtor entities where
there are otherwise fewer competing claims (e.g., AJI, KJC and
KAAC) could be significantly and adversely affected as compared
to their likely recoveries if the individual Debtor entities
(e.g. AJI, KJC and KAAC) were permitted (as is intended under
the Intercompany Agreement) to file separate plans of
reorganization and distribute their value only to the creditors
of those entities. It is also possible that the filing and any
potential litigation of such a substantive consolidation motion
that might occur could delay the Companys emergence.


At emergence from Chapter 11, the Company
will have to pay or otherwise provide for a material amount of
claims. Such claims include accrued but unpaid professional
fees, priority pension, tax and environmental claims, secured
claims, and certain post-petition obligations (collectively,
Exit Costs). The Company currently estimates that
its Exit Costs will be in the range of $60.0 million to
$80.0 million. The Companys estimate of Exit Costs is
less than that estimated in prior periods due in large part to
the payment of approximately $27.3 million of environmental
costs in October 2004 (see Note 7). The Company currently
expects to fund such Exit Costs using the proceeds to be
received under the Intercompany Agreement together with existing
cash resources and available borrowing availability under an
exit financing facility that would replace the current
Post-Petition Credit Agreement (see Note 5). If payments
made to the Company under the Intercompany Agreement together
with borrowing availability under an exit financing facility are
not sufficient to pay or otherwise provide for all Exit Costs,
the Company, Kaiser and some or all of the Companys other
Debtor subsidiaries will not be able to emerge from
Chapter 11 unless and until sufficient funding can be
obtained. Management believes it will be able to successfully
resolve any issues that may arise in respect of the Intercompany
Agreement and/or and exit financing facility or be able to
negotiate a reasonable alternative. However, no assurances can
be given in this regard.

The Company expects that, when the Company and
Kaiser ultimately file a plan or plans of reorganization, it is
likely to reflect the Companys strategic vision for
emergence from Chapter 11: (a) a standalone going
concern with manageable leverage and financial flexibility,
improved cost structure and competitive strength; (b) a
company positioned to execute its long-standing vision of market
leadership and growth in fabricated products; (c) a company
that delivers a broad product offering and leadership in service
and quality for its customers and distributors; and (d) a
company with continued ownership of those commodity assets that
have the potential to generate significant cash at steady-state
metal prices and/or which provide a strategic hedge against the
fabricated products business needs for primary aluminum.
While the Company intends to continue to pursue a standalone
fabricated products company emergence strategy, from time to
time the Debtors may also evaluate other reorganization
strategies, consistent with the Debtors responsibility to
maximize the recoveries for its stakeholders.

The Company believes that it is not likely that
it will emerge from the Cases until sometime in the first half
of 2005. The Company continues to push for an aggressive pace
that would allow it to file a disclosure statement and a plan or
plans of reorganization before the end of 2004. However, the
Companys ability to do so and to ultimately emerge from
the Cases is subject to a number of factors, including, among
others, confirmation of a plan of reorganization in accordance
with the applicable bankruptcy law and, accordingly, no
assurances can be given as to whether or when any plan or plans
of reorganization will ultimately be filed or confirmed.

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Recent Events and Developments

Liquidity/ Negative Cash
Flow.Cash and cash equivalents
decreased by $3.7 million during the first nine months of
2004. The net decrease resulted from cash used by operating
activities ($7.4 million) and financing activities
($314.6 million)  see Note 4 of Notes to
Interim Consolidated Financial Statements) offset by net cash
generated from investing activities of $318.3 million
(primarily an increase in restricted proceeds from sale of
commodity interests  see Note 4 of Notes to
Interim Consolidated Financial Statements). The cash used by
operating activities during the first nine months of 2004 was
primarily the result of increases in working capital
requirements (primarily inventory) associated with improving
demand and higher primary aluminum prices in the fabricated
products segment. These increases were offset by cash generated
from operating results most of which were increases associated
with discontinued operations. Results of Operations and
Liquidity and Capital Resources provides further information
regarding segment cash flows.

During the first nine months of 2003, cash and
cash equivalents decreased $29.4 million. The net decrease
resulted from cash used in operating activities
($81.3 million) and financing activities
($4.0 million) offset by cash generated from investing
activities of $55.9 million (see Note 4 of Notes to
Interim Consolidated Financial Statements). The
$81.3 million of cash and cash equivalents used by
operating activities included the following significant items:
(a) asbestos-related insurance recoveries of
$17.8 million, (b) the Companys share of
QALs net borrowings of $11.0 million in the second
and third quarters of 2003 that reduced the Companys cash
requirements to fund QAL, (c) benefit from decreases in
receivables and inventories of $20.0 million due to Valco
potline curtailment in excess of lost earnings, (d) a
foreign income tax payment related to prior periods of
$22.0 million and (e) end of service benefit payments
totaling approximately $12.8 million in connection with
Valco potline curtailments. The balance of the cash and cash
equivalents used in operating activities in 2003 (approximately
$95.3 million) resulted from a combination of adverse
market factors in the business segments in which the Company
operated including (a) primary aluminum prices that were
below long-term averages, (b) a weak demand for fabricated
metal products, particularly aerospace products, (c) higher
than average power, fuel oil and natural gas prices and
(d) significant expenditures in respect of retiree medical
and reorganization costs.

At October 31, 2004, the Company had cash
and cash equivalents of approximately $31.0 million and
estimated availability under the DIP Facilitys borrowing
base to be approximately $125.0 million. At
October 31, 2004, there were no outstanding borrowings
under the revolving credit facility and there were outstanding
letters of credit of approximately $30.9 million.

On October 28, 2004, the Company and the DIP
lenders completed an amendment to the DIP Facility. The
amendment was approved by the Court on October 28, 2004.
The major provisions of the amendment included: (1) a
financial covenant was reset based on current forecasts;
(2) approval of the sale of the Companys interest in
and related to QAL and formal approval of the sales of Alpart,
Gramercy/ KJBC and Valco that had been previously approved
through limited waivers that were set to expire on
October 31, 2004; (3) a reset of the availability of
the fixed asset subcomponent of the borrowing base to
$50.0 million; (4) reduction of the commitment amount
of the DIP Facility from $285.0 million to
$200.0 million; (5) reduction of the maximum letters
of credit amount from $125.0 million to
$100.0 million; and (6) a requirement for lender
approval in respect of any agreement for settlement or release
of intercompany claims except an agreement in form and substance
identical to the Intercompany Agreement.

The Company has previously disclosed that in
connection with the amendment and the completion of the
previously announced commodity asset sales, it expects that the
amount of borrowing base available under the DIP Facility would
be adequate to support the Companys liquidity requirements
through the remainder of the Cases. This belief is based on the
fact that it was the commodity assets that subjected the Company
to the most variability and exposure from both a price risk
basis as well as from an operating perspective. While there can
be no assurances, based on recent primary aluminum prices and
recent market conditions for fabricated aluminum products, the
Company currently expects availability under the DIP Facility to
remain near or above the $100.0 million range.

The DIP Facility is currently scheduled to expire
in February 2005. As discussed in Note 1 of Notes to
Interim Consolidated Financial Statements, the Company currently
believes it is unlikely that it will emerge

58



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from the Cases until sometime in the first half
of 2005. As such, it may be necessary for the Company to extend
the DIP Facility or make alternative financing arrangements.
While the Company believes that if necessary, it would be
successful in negotiating an extension to the DIP Facility or
adequate alternative financing arrangements, no assurances can
be given in this regard.


Disposition of Commodity-Related
Assets.In connection with the
previously disclosed plan to explore and, if appropriate,
dispose of the Companys commodity-related interests, the
Company has completed the disposition of its interests in and
related to: (a) the Tacoma, Washington smelter in February,
2003, (b) the Mead, Washington smelter in June 2004,
(c) Alpart in July 2004, (d) Gramercy/ KJBC in October
2004 and (e) Valco in October 2004. The only remaining
commodity assets which the Debtors currently anticipate selling
are the interests in and related to QAL, which are expected to
be sold in the first quarter of 2005. Completion of these
transactions represent a significant step towards the
Companys planned emergence from Chapter 11 primarily
as a fabricated products company. See Note 4 of Notes to
Interim Consolidated Financial Statements for details regarding
the individual dispositions.

Benefit (Legacy) Cost
Matters.The Company has previously
disclosed since the Filing Date that pension and retiree medical
obligations were significant factors that would have to be
addressed during the reorganization process.

The PBGC assumed responsibility for the
Companys Salaried Employees Retirement Plan in December
2003. During the third quarter of 2004, the PBGC assumed
responsibility for the Companys Inactive Pension Plan,
which covers certain former hourly employees at locations that
were sold or discontinued a number of years ago, and the
Companys Kaiser Aluminum Pension Plan, which covers active
and retired employees at certain locations who are represented
by the USWA. The Salaried Employees Retirement Plan, the
Inactive Pension Plan and the Kaiser Aluminum Pension Plan are
hereinafter collectively referred to as the Terminated
Plans. The PBGC assumptions of the Terminated Plans
resulted in the Companys recognizing non-cash pension
charges of approximately $121.2 million in the fourth
quarter of 2003 and approximately $155.5 million in the
third quarter of 2004. The amount of the charges recorded and
the expected liability to the PBGC currently recorded in the
Companys financial statements, have been determined by the
Company based on assumptions that are consistent with the GAAP
criteria for valuing ongoing plans, as more fully discussed in
Notes 9 of Notes to Consolidated Financial Statements in
the Companys Form 10-K for the year ended
December 31, 2003. The Company believes this represents a
reasonable interim estimation methodology, as there are
reasonable arguments that may be made that could result in the
final allowed claim amounts being either more or less than that
reflected in the financial statements.

However, in October 2004, the Company executed a
settlement agreement with the PBGC under which the Company and
the PBGC agreed, among other things, that: (a) the Company
will continue to sponsor the Companys remaining plans
(which primarily are in respect of hourly employees at
Fabricated Products facilities) and will satisfy the estimated
$4.4 million minimum funding contribution for these plans
after the settlement agreement is approved by the Court;
(b) the PBGC will have an allowed post-petition
administrative claim of $14.0 million, which is expected to
be paid upon the consummation of a plan of reorganization for
the Company or the consummation of a plan for KAAC, whichever
comes first and; (c) the PBGC will have allowed
pre-petition unsecured claims in respect of the Terminated Plans
in the amount of $616.0 million, which will be resolved in
a plan or plans of reorganization provided that the PBGCs
cash recovery from proceeds of the Companys sale of its
interests in and related to Alpart and QAL will be limited to
32% of the net proceeds distributable to holders of the
Companys Senior Notes, Sub Notes and the PBGC. The PBGC
settlement agreement is subject to Court approval. Court
hearings on the PBGC settlement agreement are expected to be
conducted in early 2005. Objections have been filed to the
settlement and no assurances can be provided as to the outcome.

The amount of pension liability related to the
Terminated Plans that was recorded in the consolidated balance
sheet at September 30, 2004 was approximately
$476.0 million based on the interim methodology described
above. This compares to the claims $630.0 million total
agreed to by the Company in the October 2004 settlement. The
Company has not recorded the full value of the PBGC settlement,
as given the contested nature of the settlement and the
requirement for Court approval, such settlement was not
determined to be

59



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##### 



probable, which is the criteria for
recognition under GAAP. If the PBGC settlement is approved, the
Company would be required to record a non-cash charge of
approximately $154.0 million.


In January 2004, the Company filed motions with
the Court to terminate or substantially modify postretirement
medical obligations for both salaried and certain hourly
employees and for a distress termination of substantially all
domestic hourly pension plans. The Company subsequently reached
agreements with the 1114 Committee and union representatives
that represent the vast majority of the Companys hourly
employees. The agreements provide for the termination of
existing salaried and hourly postretirement benefit plans, such
as medical, and the termination of substantially all existing
hourly pension plans. Under the agreements, salaried and hourly
retirees would be provided an opportunity for continued medical
coverage through COBRA or a proposed Voluntary Employee
Beneficiary Association (a VEBA) and active hourly
employees would be provided with an opportunity to participate
in one or more replacement pension plans and/or defined
contribution plans. The agreements with the 1114 Committee and
certain of the unions have been approved by the Court, but are
subject to certain conditions, including Court approval of the
Intercompany Agreement in a form acceptable to the Debtors and
the UCC.

As a replacement for the Companys current
postretirement benefit plans, the Company agreed to contribute
certain amounts to one or more VEBAs. Such contributions are to
include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An amount not to exceed $36.0 million and
    payable on emergence from the Chapter 11 proceedings so
    long as the Companys liquidity (i.e. cash plus borrowing
    availability) is at least $50.0 million after considering
    such payments. To the extent that less than the full
    $36.0 million is paid and the Companys interests in
    Anglesey are subsequently sold, a portion of such sales
    proceeds, in certain circumstances, will be used to pay the
    shortfall.                                                                                                                                                                                          
|
| |  | On an annual basis, 10% of the first
    $20.0 million of annual cash flow, as defined, plus 20% of
    annual cash flow, as defined, in excess of $20.0 million.
    Such annual payments shall not exceed $20.0 million and
    will also be limited (with no carryover to future years) to the
    extent that the payments do not cause the Companys
    liquidity to be less than $50.0 million. Advances of
    $3.1 million in June 2004 and $1.9 million per month
    thereafter until the Company emerges from the Cases. Any
    advances made pursuant to such agreement will constitute a
    credit toward the $36.0 million maximum contribution due
    upon emergence.

On June 1, 2004, the Court approved an order
making the agreements regarding pension and postretirement
medical benefits effective on June 1, 2004 notwithstanding
that the Intercompany Agreement was not effective as of that
date. However, the Court order provided that if Debtor and the
UCC had not signed the Intercompany Agreement and filed a motion
seeking the approval of such agreement by June 30, 2004,
the UCC would have the right (but not the requirement) at any
time thereafter to direct the Debtors to terminate the USWA
agreement and other agreements to terminate postretirement
medical benefits 60 days from the date of the UCC notice.

In October 2004, the Company entered into an
amendment to the USWA agreement, to satisfy certain technical
requirements for the follow-on hourly pension plans discussed
above. The Company also agreed to pay an additional
$1.0 million to the VEBA at emergence. The amended
agreement is subject to Court approval. The Company currently
anticipates that the Court will approve the amended agreement in
November 2004.

While the Intercompany Agreement has been signed
and filed with the Court, because the USWA agreement can be
terminated by the USWA or the Company if the Intercompany
Agreement is not approved by the Court, or by the UCC under
certain conditions, the Company cannot conclude that termination
of the retiree medical program is probable.
Therefore, as discussed above, the Company continues to accrue
for costs under the retiree medical program and treat VEBA
contributions as a reduction of that liability.

Environmental
Matters.The Company has previously
disclosed that it is possible that its assessment of
environmental accruals could increase because it may be in the
interests of all stakeholders to agree to increased amounts to,
among other things, achieve a claim treatment that is favorable
and to expedite the reorganization process. The September 2003
multi-site settlement is one example of such a situation (see
Note 7 of Notes to Interim Financial Statement for a
discussion of the multi-site settlement). In the

60



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Companys Quarterly Report on From 10-Q for
the quarter ended June 30, 2004, the Company reported that
it was close to entering agreements with various parties
pursuant to which a substantial portion of the unresolved
environmental claims could be resolved for approximately
$25.0 million  $30.0 million. In the third
quarter of 2004, agreements with the affected parties were
reached and Court approval for such agreements was received.
During October 2004, the Company paid approximately
$27.3 million to resolve these liabilities. The amounts
paid approximated the amount of liabilities recorded and did not
result in any material net gain or loss.


Results of Operations

As an integrated aluminum producer, the Company
has historically used a portion of its bauxite, alumina, and
primary aluminum production for additional processing at certain
of its downstream facilities. However, as previously disclosed,
as a part of a plan of reorganization, the Company expects that
it will emerge from its Chapter 11 proceedings primarily as
a fabricated products company. Intersegment transfers are valued
at estimated market prices. The following table provides
selected operational and financial information on a consolidated
basis, after discontinued operations reclassifications with
respect to the Company for the quarter and nine month periods
ended September 30, 2004 and 2003. The following data
should be read in conjunction with the Companys interim
consolidated financial statements and the notes thereto
contained elsewhere herein. See Note 17 of Notes to
Consolidated Financial Statements in the Companys Annual
Report on Form 10-K for the year ended December 31,
2003, for further information regarding segments.

Interim results are not necessarily indicative of
those for a full year. Average realized prices for the
Companys Fabricated products segment are not presented in
the following table as such prices are subject to fluctuations
due to changes in product mix.

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SELECTED OPERATIONAL AND FINANCIAL
INFORMATION

|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |        |        |       |  
|--------------------------------- | ------------------------------------------------------------- | ---------------------------------------------------- | -------------------------------------- | ----------------- | ------ | ------ | --- | ----- | ----- | ----- | --- | ------ | ------ | ------ | --- | ------ | ------ | ----- | -
|                                  |                                                               |                                                      |                                        |                  
|                                  |                                                               | Quarter Ended                                        |                                        | Nine Months Ended
|                                  |                                                               | September 30,                                        |                                        | September 30,    
|                                  |                                                               |                                                      |                                        |                  
|                                  |                                                               | 2004                                                 |                                        | 2003              |        | 2004   |     | 2003 
|                                  |                                                               |                                                      |                                        |                   |        |        |     |      
|                                  |                                                               |                                                     
|                                  |                                                               | (Unaudited)                                         
|                                  |                                                               |                                                     
|                                  |                                                               | (In millions of dollars,                            
|                                  |                                                               | except shipments and prices)                        
|Fabricated Products:              |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  | Shipments (000 tons)                                          |                                                      |                                        | 51.4              |        |        |     | 41.5  |       |       |     | 151.4  |        |        |     | 125.1  |       
|                                  | Net Sales                                                     |                                                      | $                                      | 206.1             |        |        | $   | 145.4 |       |       | $   | 580.8  |        |        | $   | 443.4  |       
|                                  | Operating Income (Loss)                                       |                                                      | $                                      | 11.4              |        |        | $   | (5.5  | )     |       | $   | 13.9   |        |        | $   | (12.4  | )     
|Commodities, Corporate and Other: |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  | Shipments (000 tons)                                         |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |        |       
|                                  |                                                               | Primary Aluminum                                     |                                        |                   | 20.4   |        |     |       | 18.5  |       |     |        | 56.6   |        |     |        | 54.4   |      
|                                  |                                                               | Alumina                                              |                                        |                   | 186.8  |        |     |       | 176.5 |       |     |        | 557.9  |        |     |        | 544.4  |      
|                                  | Average Realized Third Party Sales Price:                     |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |        |       
|                                  |                                                               | Primary Aluminum (per pound)                         |                                        | $                 | .79    |        |     | $     | .65   |       |     | $      | .77    |        |     | $      | .64    |      
|                                  |                                                               | Alumina (per ton)                                    |                                        | $                 | 221    |        |     | $     | 175   |       |     | $      | 219    |        |     | $      | 173    |      
|                                  | Net Sales:                                                    |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |        |       
|                                  |                                                               | Primary Aluminum                                     |                                        | $                 | 35.6   |        |     | $     | 26.8  |       |     | $      | 96.1   |        |     | $      | 75.6   |      
|                                  |                                                               | Bauxite and Alumina                                  |                                        |                   | 40.0   |        |     |       | 30.4  |       |     |        | 115.5  |        |     |        | 92.8   |      
|                                  |                                                               | Commodities Marketing                                |                                        |                   | .1     |        |     |       | .5    |       |     |        | .3     |        |     |        | 1.4    |      
|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  |                                                               |                                                      | Total Commodities                      |                   | $      | 75.7   |     |       | $     | 57.7  |     |        | $      | 211.9  |     |        | $      | 169.8 |  
|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  | Operating Income (Loss):                                      |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |        |       
|                                  |                                                               | Primary Aluminum                                     |                                        | $                 | 5.2    |        |     | $     | 3.2   |       |     | $      | 15.7   |        |     | $      | .4     |      
|                                  |                                                               | Bauxite & Alumina                                    |                                        |                   | 9.2    |        |     |       | 3.4   |       |     |        | 27.9   |        |     |        | 16.1   |      
|                                  |                                                               | Commodities Marketing                                |                                        |                   | (1.8   | )      |     |       | .6    |       |     |        | (5.5   | )      |     |        | 2.6    |      
|                                  |                                                               | Corporate and Other                                  |                                        |                   | (21.4  | )      |     |       | (20.0 | )     |     |        | (53.3  | )      |     |        | (58.9  | )    
|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  |                                                               |                                                      | Total Commodities, Corporate and Other |                   | $      | (8.8   | )   |       | $     | (12.8 | )   |        | $      | (15.2  | )   |        | $      | (39.8 | )
|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|Combined:                         |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  | Net Sales                                                    |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |        |       
|                                  |                                                               | Fabricated Products                                  |                                        | $                 | 206.1  |        |     | $     | 145.4 |       |     | $      | 580.8  |        |     | $      | 443.4  |      
|                                  |                                                               | Commodities                                          |                                        |                   | 75.7   |        |     |       | 57.7  |       |     |        | 211.9  |        |     |        | 169.8  |      
|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  |                                                               |                                                      | Total Net Sales                        |                   | $      | 281.8  |     |       | $     | 203.1 |     |        | $      | 792.7  |     |        | $      | 613.2 |  
|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  | Operating Income (Loss)                                      |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |        |       
|                                  |                                                               | Fabricated Products                                  |                                        | $                 | 11.4   |        |     | $     | (5.5  | )     |     | $      | 13.9   |        |     | $      | (12.4  | )    
|                                  |                                                               | Commodities, Corporate and Other                     |                                        |                   | (8.8   | )      |     |       | (12.8 | )     |     |        | (15.2  | )      |     |        | (39.8  | )    
|                                  |                                                               | Eliminations                                         |                                        |                   | 1.2    |        |     |       | .4    |       |     |        | 8.2    |        |     |        | 1.4    |      
|                                  |                                                               | Other Operating (Charges) Benefits, Net
    (Note 9) |                                        |                   | (154.7 | )      |     |       | (15.0 | )     |     |        | (154.7 | )      |     |        | (4.7   | )    
|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  |                                                               |                                                      | Total Operating Loss                   |                   | $      | (150.9 | )   |       | $     | (32.9 | )   |        | $      | (147.8 | )   |        | $      | (55.5 | )
|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  |                                                               | Discontinued operations                              |                                        | $                 | 97.2   |        |     | $     | (39.7 | )     |     | $      | 82.3   |        |     | $      | (117.7 | )    
|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  | Net Loss                                                      |                                                      | $                                      | (69.4             | )      |        | $   | (88.6 | )     |       | $   | (109.1 | )      |        | $   | (215.0 | )     
|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  | Capital Expenditures                                          |                                                      | $                                      | 2.1               |        |        | $   | 8.1   |       |       | $   | 7.9    |        |        | $   | 27.3   |       
|                                  | Less discontinued operations reported separately
    (Note 2) |                                                      |                                        | (.2               | )      |        |     | (6.1  | )     |       |     | (3.4   | )      |        |     | (21.1  | )     
|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       
|                                  |                                                               | $                                                    | 1.9                                    |                   |        | $      | 2.0 |       |       | $     | 4.5 |        |        | $      | 6.2 |       
|                                  |                                                               |                                                      |                                        |                   |        |        |     |       |       |       |     |        |        |        |     |       

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Overview

The Companys operating results are
sensitive to changes in prices of alumina, primary aluminum, and
fabricated aluminum products, and also depend to a significant
degree on the volume and mix of all products sold and on the
Companys hedging strategies. Primary aluminum prices have
historically been subject to significant cyclical price
fluctuations. See Notes 2 and 8 of Notes to Interim
Consolidated Financial Statements for a discussion of the
Companys hedging activities.

Changes in global, regional, or country-specific
economic conditions can have a significant impact on overall
demand for aluminum-intensive fabricated products in the
transportation, distribution, packaging, and other markets. Such
changes in demand can directly affect the Companys
earnings by impacting the overall volume and mix of such
products sold. To the extent that these end-use markets weaken,
demand can also diminish for what the Company sometimes refers
to as the upstream products: alumina and primary
aluminum.

During the nine months ended September 30,
2003, the average London Metal Exchange transaction price
(LME price) per pound of primary aluminum was
$.64 per pound. During the nine months ended
September 30, 2004, the average LME price was $.76 per
pound. The average LME price for primary aluminum for the week
ended October 29, 2004 was $.81 per pound.

Quarter and Nine Months Ended
September 30, 2004, Compared to Quarter and Nine Months
Ended September 30, 2003



| |        
| | -------
| | Summary

The Company reported a net loss of
$69.4 million for the quarter ended September 30,
2004, compared to a net loss of $88.6 million for the same
period in 2003. For the nine months ended September 30,
2004, the Company reported a net loss of $109.0 million
compared to a net loss of $215.0 million for the same
period in 2003.

Net sales in the third quarter of 2004 totaled
$281.8 million compared to $203.1 million in the third
quarter of 2003. Net sales for the nine-month period ended
September 30, 2004, totaled $792.7 million compared to
$613.2 million for the nine-month period ended
September 30, 2003.

Fabricated Products.Net sales of fabricated products increased by 42% during the
third quarter of 2004 as compared to the same period in 2003,
primarily due to a 24% increase in shipments and a 14% increase
in average realized prices. For the nine-month period ended
September 30, 2004, net sales of fabricated products
increased by approximately 31% as compared to the same period in
2003, primarily due to a 21% increase in shipments and a 8%
increase in average realized prices. Current period shipments
were higher than comparable 2003 period shipments as a result of
improving demand for fabricated aluminum products. The increases
in the average realized prices reflects increased product prices
due to increases in primary aluminum prices and improving
margins offset, in part, by changes in the mix of products sold.

Segment operating results (before other operating
charges (benefits) net) for the quarter and nine month
periods ended September 30, 2004, improved over the
comparable periods in 2003 primarily due to the improved market
conditions and improved cost performance offset, in part, by
modestly increased natural gas prices.

Segment operating results, discussed above, for
the quarter and nine month period ended September 30, 2003,
exclude a net gain of approximately $3.9 million from the
sale of equipment. (See Note 4 of Notes to Interim
Consolidated Financial Statements).

Primary Aluminum.After restating Mead and Valco-related activities to
discontinued operations, the activities of the
Primary Aluminum business unit consist essentially of the
Companys interests in and related to Anglesey. Third party
net sales of primary aluminum increased 33% for the third
quarter of 2004 as compared to the same period in 2003 primarily
as a result of a 22% increase in third party average realized
prices and a 10% increase in third party shipments. For the nine
month period ended September 30, 2004, third party net
sales increased 27% as compared to the same period in 2003 as a
result of a 20% increase in third party average realized prices
and a 4% increase in third party shipments. The increases in the
average realized prices were primarily due to the increases in
primary aluminum market prices. Shipments in the

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quarter and nine month period ended
September 30, 2004 were better than comparable prior year
period primarily due to the timing of shipments.


Segment operating results (before Other Operating
charges, net) for the quarter and nine month period ended
September 30, 2004, improved over the comparable periods in
2003 primarily due to the increases in prices and shipments
discussed above offset in part by higher production costs
resulting from adverse changes in the foreign exchange rates in
respect of the Companys interests in and related to QAL.

Segment operating results discussed above, for
the quarter and nine month periods ended September 30,
2003, exclude a pre-Filing Date claim of approximately
$3.2 million related to a restructured transmission
agreement. Segment operating results for the nine month period
ended September 30, 2003 also excludes a net gain of
approximately $9.5 million from the sale of the Tacoma
facility (see Note 4 of Notes to Interim Consolidated
Financial Statements).

Bauxite and Alumina.After restating Alpart and Gramercy/ KJBC-related activities to
discontinued operations, the activities of the
Bauxite and alumina business unit consist essentially of the
Companys interests in and related to QAL. Third party net
sales of alumina increased by 32% during the third quarter of
2004, as compared to the same period in 2003, primarily due to a
26% increase in third party average realized prices and a 6%
increase in third party shipments. For the nine month period
ended September 30, 2004, third party net sales of alumina
increased by approximately 24% as compared to the same period in
2003, primarily due to a 27% increase in third party average
realized prices and a 3% increase in third party shipments. The
increases in average realized prices were due to increases in
aluminum market prices to which the Companys third-party
aluminum sales contracts are linked. Shipments in the quarter
and nine month period ended September 30, 2004 were
different than the comparable 2003 periods due primarily to the
timing of shipments.

Segment operating results for the quarter and
nine month periods ended September 2004, were better than
comparable periods in 2003 primarily due to the increases in
prices and shipments discussed above.

Commodities
Marketing.Information regarding the
Commodity Marketing business unit has been restated as more
fully discussed in Note 2 of Notes to Interim Consolidated
Financial Statements to reclassifying the hedging activities
attributable to the interests in and related to Alpart,
Gramercy/ KJBC and Valco to discontinued operations. Net sales
for this segment represent net settlements with third-party
brokers. Operating income represents the combined effect of such
net settlements and any premium costs associated with maturing
options. The minimum and (maximum) price of the hedges in any
given period is primarily the result of the timing of the
execution of the hedges contract.

Segment operating results for the quarter and
nine month periods ended September 30, 2004, were worse
than the comparable periods in 2003 primarily due to
(a) hedging net gains from first quarter 2002 that were
being amortized over the original hedging periods as the
underlying purchases/sales occurred becoming fully amortized by
year end 2003 and (b) hedging premiums related to hedging
positions in respect of quarter and nine month periods in 2004
being higher than net hedging revenues realized.

Eliminations.Eliminations of Intersegment profit vary from period to period
depending on fluctuations in market prices as well as the amount
and timing of the affected segments production and sales.

Corporate and Other.Corporate operating expenses represent corporate general and
administrative expenses which are not allocated to the
Companys business segments. Corporate operating expenses
(before Other operating charges (benefits) net) in the quarter
ended September 30, 2004 were higher than in the comparable
periods in 2003 as increased retiree medical costs more than
offset lower pension costs resulting from the December 2003
termination of the salaried employees retirement plan and lower
payroll-related and other overhead costs. For the nine month
period ended September 30, 2004, Corporate operating costs
were lower than the comparable 2003 period as lower pension
costs and lower payroll-related and other overhead costs were
only partially offset by increased retiree medical costs.

Corporate operating results for the quarter and
nine month periods ended September 30, 2004, discussed
above, exclude pension charges of approximately
$155.5 million related to pension plans whose
responsibility was assumed by the PBGC in the third quarter of
2004. Corporate operating results for the quarter and nine month
periods ended September 30, 2003, exclude an environmental
multi-site settlement charge of $15.7 million.

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Corporate and other costs for the quarters ended
September 30, 2004 and 2003 include pension and other
post-retirement benefits of $15.9 million and
$9.3 million, respectively, and Corporate and other costs
for the nine month periods ended September 30, 2004 and
2003, include pension and other post-retirement benefits of
$33.9 million and $27.2 million, respectively. Once
the disposition of commodity interests is complete and the
Company emerges from the Cases, the Company expects a
substantial decline in Corporate and other costs.

Discontinued
Operations.Discontinued operations
includes the operating results for Alpart, Gramercy/ KJBC, Valco
and the Mead Facility and gain from the sale of the
Companys interest in and related to Alpart and the Mead
Facility, which were sold during the first nine months of 2004.

Results for discontinued operations for the
quarter ended September 30, 2004 improved approximately
$137.0 million from the comparable period 2003.
Approximately $102.0 million of such improvement resulted
from the gain on the sale of the Companys interests in and
related to Alpart. The balance of the improvement primarily
resulted from approximately $11.0 million of improved
operating results at Alpart and $20.0 of improved operating
results at Gramercy/ KJBC. A substantial majority of the
improvement in results at Gramercy/ KJBC related to the
improvement in the average realized alumina prices. Alpart had
no operating results in the third quarter of 2004 as it was sold
on July 1, 2004, as compared to the third quarter of 2003
when Alpart experienced a loss of approximately
$11.0 million due to weak operating performance and lower
alumina prices.

Results for discontinued operations for the nine
month period ended September 30, 2004 improved
approximately $208.0 million over the comparable 2003
period. Approximately $90.0 million of such improvement
resulted from the approximate $102.0 million gain on the
sale of the Companys interests in and related to Alpart
and the $23.0 million gain on the sale of the Mead
Facility, offset by approximately $33.0 million of
impairment charges in respect of the Companys interests in
and related to Valco. The balance of the improvement primarily
resulted from approximately $50.0 million of improved
operating results at both Alpart and Gramercy/ KJBC, a
substantial majority of which was related to the improvement in
average realized alumina prices.

Liquidity and Capital Resources

As a result of the filing of the Cases, claims
against the Debtors for principal and accrued interest on
secured and unsecured indebtedness existing on the Filing Date
are stayed while the Debtors continue business operations as
debtors-in-possession, subject to the control and supervision of
the Court. See Note 1 of Notes to Interim Consolidated
Financial Statements for additional discussion of the Cases. At
this time, it is not possible to predict the effect of the Cases
on the businesses of the Debtors.

Operating
Activities.In the first nine months
of 2004, Fabricated products operating activities provided
$12.7 million of cash. This amount compares with the first
nine months of 2003 when Fabricated products operating
activities provided $15.5 million of cash. The reduction in
cash provided by Fabricated products in 2004 was primarily due
to increases in working capital associated with improving demand
for fabricated aluminum products and an increase in primary
aluminum prices offset by improved operating results. Cash
provided by Fabricated products operations in 2003 was largely
due to cost cutting initiatives which offset reduced product
prices and shipments. All of the foregoing exclude consideration
of pension and retiree cash payments made by the Company on
behalf of current and former employees of the Fabricated
products facilities. Such amounts are part of the
legacy costs that the Company internally categorizes
as a corporate cash outflow. As more fully discussed in Benefit
(Legacy) Cost Matters, the Company expects that substantially
all such benefits related to previously existing benefit plans
are likely to be cancelled as part of the reorganization process.

In the first nine months of 2004, Commodities and
Corporate operating activities used $20.1 million of cash.
This amount compares with the first nine months of 2003 when
Commodities and Corporate operating activities used
$96.8 million of cash, which amount includes the following
significant items: (a) asbestos-related insurance
recoveries of $17.8 million; (b) a foreign income tax
payment related to prior periods of $22.0 million; and
(c) end of service benefits payments totaling approximately
$12.8 million in connection with the Valco potline
curtailments. The reduction in net cash used by Commodities and
Corporate operating activities in 2004 over 2003 resulted
primarily from improved results in the Bauxite and alumina
segment

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(approximately $120.0 million) as a result
of the operating factors discussed above. This improvement was
partially offset by: (a) less cash generated by the Primary
aluminum segment (approximately $10.0 million), primarily
as a result of Valco being fully curtailed in the first nine
months of 2004 versus having had partial operations during the
first nine months of 2003; and (b) increased cash outflow
in the Corporate and other segment of approximately
$35.0 million attributable to higher hedging related costs,
reorganization costs and other miscellaneous costs.


Net cash used by Commodities and Corporate
operating activities in 2003 resulted from a combination of
adverse market factors, primarily in the commodities business
segments, including: (a) primary aluminum prices that were
below long-term averages, (b) higher than average fuel oil
and natural gas prices, and (c) significant expenditures in
respect of reorganization costs.

Investing
Activities.Total capital expenditures
for Fabricated products during the first nine months ended
September 30, 2004 were $4.5 million. Total capital
expenditures for Commodities (including Alpart, Gramercy/ KJBC
and Valco reported as discontinued operations) and Corporate
during the first nine months ended September 30, 2004 were
$3.4 million. The capital expenditures during the nine
months ended September 30, 2004 were made primarily to
improve production efficiency, reduce operating costs and expand
capacity at existing facilities.

Total capital expenditures for Fabricated
products are currently expected to be between $15.0 million
and $25.0 million per year in each of 2005 and 2006. The
level of capital expenditures may be adjusted from time to time
depending on the Companys price outlook for metal and
other products, the Companys ability to assure future cash
flows through the Companys financial position and other
factors.

Financing Activities and
Liquidity.On February 12, 2002,
the Company and Kaiser entered into the DIP Facility which
provides for a secured, revolving line of credit through the
earlier of February 13, 2005, the effective date of a plan
of reorganization or voluntary termination by the Company. In
March 2003, certain of the Additional Debtors were added as
co-guarantors and the DIP Facility lenders received super
priority status with respect to certain of the Additional
Debtors assets. The Company is able to borrow under the
DIP Facility by means of revolving credit advances and to issue
letters of credit (up to $100.0 million) in an aggregate
amount equal to the lesser of $200.0 million or a borrowing
base relating to eligible accounts receivable, eligible
inventory and eligible fixed assets reduced by certain reserves,
as defined in the DIP Facility agreement. The DIP Facility is
guaranteed by the Company and certain significant subsidiaries
of the Company. Interest on any outstanding borrowings will bear
a spread over either a base rate or LIBOR, at the Companys
option. In accordance with the Code and the DIP Facility, the
Company and Kaiser are not permitted to pay any dividends or
purchase any of their common and preference stock.

The DIP Facility requires the Company to comply
with certain covenants and places restrictions on the
Companys, Kaisers and the Companys
subsidiaries ability to, among other things, incur debt
and liens, make investments, pay dividends, sell assets,
undertake transactions with affiliates, make capital
expenditures, and enter into unrelated lines of business.

On October 28, 2004, the Company and the DIP
lenders completed an amendment to the DIP Facility. The
amendment was approved by the Court on October 28, 2004.
The major provisions of the amendment included: (1) a
financial covenant was reset based on current forecasts;
(2) approval of the sale of the Companys interest in
and related to QAL and formal approval of the sales of Alpart,
Gramercy/ KJBC and Valco that had been previously approved
through limited waivers that were set to expire on
October 31, 2004; (3) a reset of the availability of
the fixed asset subcomponent of the borrowing base to
$50.0 million; (4) reduction of the commitment amount
of the DIP Facility from $285.0 million to
$200.0 million; (5) reduction of the maximum letters
of credit amount to from $125.0 million to
$100.0 million; and (6) a requirement for lender
approval in respect of any agreement for settlement or release
of intercompany claims except an agreement in form and substance
identical to the Intercompany Agreement.

The Company has previously disclosed that in
connection with the amendment and the completion of the
previously announced commodity asset sales, it expects that the
amount of borrowing base available under the DIP Facility would
be adequate to support the Companys liquidity requirements
through the remainder of the Cases. This belief is based on the
fact that it was the commodity assets that subjected the Company
to the

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most variability and exposure from both a price
risk basis as well as from an operating perspective. While there
can be no assurances, based on recent primary aluminum prices
and recent market conditions for fabricated aluminum products,
the Company currently expects availability under the DIP
Facility to remain near or above the $100.0 million range.


The DIP Facility is currently scheduled to expire
in February 2005. As discussed in Note 1 of Notes to
Interim Consolidated Financial Statements, the Company currently
believes it is unlikely that it will emerge from the Cases until
sometime in the first half of 2005. As such, it may be necessary
for the Company to extend the DIP Facility or make alternative
financing arrangements. While the Company believes that if
necessary, it would be successful in negotiating an extension to
the DIP Facility or adequate alternative financing arrangements,
no assurances can be given in this regard.

The Company currently believes that the cash and
cash equivalents of $31.9 million at September 30,
2004, cash flows from operations, cash proceeds from the sale of
assets that are ultimately determined not to be an important
part of the reorganized entity and availability under the DIP
Facility or alternative financing arrangements will provide
sufficient liquidity to allow the Company to meet its
obligations during the pendency of the Cases. At
October 31, 2004, there were no outstanding borrowings
under the revolving credit facility and there were outstanding
letters of credit of approximately $30.9 million. As of
October 31, 2004, $125.0 million (of which
$69.1 million could be used for additional letters of
credit) was estimated to be available to the Company under the
DIP Facility.

Critical Accounting Policies

Critical accounting policies are those that are
both very important to the portrayal of the Companys
financial condition and results, and require managements
most difficult, subjective, and/or complex judgments. Typically,
the circumstances that make these judgments difficult,
subjective and/or complex have to do with the need to make
estimates about the effect of matters that are inherently
uncertain. While the Company believes that all aspect of its
financial statements should be studied and understood in
assessing its current (and expected future) financial condition
and results, the Company believes that the accounting policies
that warrant additional attention include:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. The consolidated financial statements as
    of and for the quarter and nine month periods ending
    September 30, 2004 have been prepared on a going
    concern basis in accordance with AICPA Statement of
    Position 90-7, Financial Reporting by Entities in
    Reorganization Under the Bankruptcy Code,
    (SOP 90-7), and do not include possible impacts
    arising in respect of the Cases. The interim consolidated
    financial statements included elsewhere in this Report do not
    include any adjustments relating to the recoverability and
    classification of recorded asset amounts or the amount and
    classification of liabilities or the effect on existing
    stockholders equity that may result from any plans,
    arrangements or other actions arising from the Cases, or the
    possible inability of the Company to continue in existence.
    Adjustments necessitated by such plans, arrangements or other
    actions could materially change the interim consolidated
    financial statements included elsewhere in this Report. For
    example,



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. If the Company were to decide to sell
    certain assets not deemed a critical part of a reorganized
    Kaiser, such asset sales could result in gains or losses
    (depending on the asset sold) and such gains or losses could be
    significant. This is because, under generally accepted
    accounting principles (GAAP), assets to be held and
    used are evaluated for recoverability differently than assets to
    be sold or disposed of. Assets to be held and used are evaluated
    based on their expected undiscounted future net cash flows. So
    long as the Company reasonably expects that such undiscounted
    future net cash flows for each asset will exceed the recorded
    value of the asset being evaluated, no impairment is required.
    However, if plans to sell or dispose of an asset or group of
    assets meet a number of specific criteria, then, under GAAP,
    such assets should be considered held for sale/disposition and
    their recoverability should be evaluated, for each asset, based
    on expected consideration to be received upon disposition. Sales
    or dispositions at a particular time will be affected by, among
    other things, the existing industry and general economic
    circumstances as well as the Companys own circumstances,
    including whether or not assets will (or must) be sold on an
    accelerated or more extended timetable. Such circumstances may
    cause the expected value in a sale

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | or disposition scenario to differ materially from
    the realizable value over the normal operating life of assets,
    which would likely be evaluated on long-term industry trends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | As previously disclosed, while the Company had
    stated that it was considering the possibility of disposing of
    one or more of its commodity facilities, the Company, through
    the third quarter of 2003, still considered all of its commodity
    assets as held for use, as no definite decisions had
    been made regarding the disposition of such assets. However,
    based on additional negotiations with prospective buyers and
    discussions with key constituents, the Company concluded that
    dispositions of Gramercy/ KJBC and Valco were possible and,
    therefore, that recoverability should be considered differently
    as of December 31, 2003 and subsequent periods. As a result
    of the change in status, the Company recorded impairment charges
    of approximately $33.0 million in the first quarter of 2004
    and $368.0 million in the fourth quarter of 2003. The
    actual amount of gain or loss may differ from these amounts as a
    result of closing adjustments and other matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | b. Additional pre-Filing Date claims may be
    identified through the proof of claim reconciliation process and
    may arise in connection with actions taken by the Debtors in the
    Cases. For example, while the Debtors consider rejection of the
    Bonneville Power Administration (BPA) contract to
    have been in the Companys best long-term interests, such
    rejection may increase the amount of pre-Filing Date claims by
    approximately $75.0 million based on the BPAs proof
    of claim filed in connection with the Cases in respect of the
    contract rejection.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | c. As more fully discussed below, the amount
    of pre-Filing Date claims ultimately allowed by the Court in
    respect of contingent claims and benefit obligations may be
    materially different from the amounts reflected in the
    Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | While valuation of the Companys assets and
    pre-Filing Date claims at this stage of the Cases is subject to
    inherent uncertainties, the Company currently believes that it
    is likely that its liabilities will be found in the Cases to
    exceed the fair value of its assets. Therefore, the Company
    currently believes that, with limited exceptions, it is likely
    that substantially all pre-Filing Date claims will be paid at
    less than 100% of their face value and the equity interests of
    the Companys stockholders will be cancelled without
    consideration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Additionally, upon emergence from the Cases, the
    Company expects to apply fresh start accounting to
    its consolidated financial statements as required by
    SOP 90-7. Fresh start accounting is required if: (1) a
    debtors liabilities are determined to be in excess of its
    assets and (2) there will be a greater than 50% change in
    the equity ownership of the entity. As previously disclosed, the
    Company expects both such circumstances to apply. As such, upon
    emergence, the Company will restate its balance sheet to equal
    the reorganization value as determined in its plan of
    reorganization and approved by the Court. Additionally, items
    such as accumulated depreciation, accumulated deficit and
    accumulated other comprehensive income (loss) will be reset to
    zero. The Company will allocate the reorganization value to its
    individual assets and liabilities based on their estimated fair
    value at the emergence date. Typically such items as current
    liabilities, accounts receivable, and cash will be reflected at
    values similar to those reported prior to emergence. Items such
    as inventory, property, plant and equipment, long-term assets
    and long-term liabilities are more likely to be significantly
    adjusted from amounts previously reported. Because fresh start
    accounting will be adopted at emergence, and because of the
    significance of the pending and completed asset sales and
    liabilities subject to compromise (that will be relieved upon
    emergence), meaningful comparison between the current historical
    financial statements and the financial statements upon emergence
    may be to difficult to make.



| |                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. The Companys judgments and
    estimates with respect to commitments and contingencies, in
    particular: (a) future asbestos related costs and
    obligations as well as estimated insurance recoveries, and
    (b) possible liability in respect of claims of unfair labor
    practices (ULPs) which were not resolved as a part
    of the Companys September 2000 labor settlement.
|
| | Valuation of legal and other contingent claims is
    subject to a great deal of judgment and substantial uncertainty.
    Under GAAP, companies are required to accrue for contingent
    matters in their financial                                                                                                                                                                             

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | statements only if the amount of any potential
    loss is both probable and the amount (or a range) of
    possible loss is estimatable. In reaching a
    determination of the probability of an adverse ruling in respect
    of a matter, the Company typically consults outside experts.
    However, any such judgments reached regarding probability are
    subject to significant uncertainty. The Company may, in fact,
    obtain an adverse ruling in a matter that it did not consider a
    probable loss and which, therefore, was not accrued
    for in its financial statements. Additionally, facts and
    circumstances in respect of a matter can change causing key
    assumptions that were used in previous assessments of a matter
    to change. It is possible that amounts at risk in respect of one
    matter may be traded off against amounts under
    negotiations in a separate matter. Further, in estimating the
    amount of any loss, in many instances a single estimation of the
    loss may not be possible. Rather, the Company may only be able
    to estimate a range for possible losses. In such event, GAAP
    requires that a liability be established for at least the
    minimum end of the range.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | The Company has had two potentially material
    contingent obligations that are subject to significant
    uncertainty and variability in their outcome: (a) the
    United Steelworkers of Americas (USWA) ULP
    claim, and (b) the net obligation in respect of
    asbestos-related matters. Both of these matters are discussed in
    Note 7 of Notes to Interim Consolidated Financial
    Statements and it is important that you read this note.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | As more fully discussed in Note 7 of Notes
    to Interim Consolidated Financial Statements, we have not
    accrued any amount in our September 30, 2004 financial
    statements in respect of the USWA ULP matter. We did not accrue
    any amount in the past as we did not consider the loss to be
    probable. Our assessment had been that the possible
    range of loss in this matter was anywhere from zero to
    $250.0 million based on the proof of claims filed (and
    other information provided) by the National Labor Relations
    Board (NLRB) and USWA in connection with the
    Companys reorganization proceedings. While the Company
    continues to believe that the ULP charges were without merit,
    during January 2004, the Company agreed to allow a claim in
    favor of the USWA in the amount of the $175.0 million as a
    compromise and in return for the USWA agreeing to substantially
    reduce and/or eliminate certain benefit payments as more fully
    discussed in Note 9 of Notes to Consolidated Financial
    Statements in the Companys Annual Report on Form 10-K
    for the year ended December 31, 2003. As the agreement to
    settle this matter was contingent on NLRB and Court approval and
    ratification by union members, this amount was not reflected in
    the Companys consolidated financial statements at
    September 30, 2004. However, the charge and an offsetting
    liability associated with the settlement of this matter will be
    reflected in the Companys consolidated financial
    statements if and when the agreement with the USWA is ultimately
    approved by the Court.                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Also, as more fully discussed in Note 7 of
    Notes to Interim Consolidated Financial Statements, the Company
    is one of many defendants in personal injury claims by large
    number of persons who assert that their injuries were caused by,
    among other things, exposure to asbestos during their employment
    or association with the Company or by exposure to products
    containing asbestos last produced or sold by the Company more
    than 20 years ago. It is difficult to predict the number of
    claims that will ultimately be made against the Company or the
    settlement value of such claims. As of September 30, 2004,
    the Company had recorded an obligation for approximately
    $610.1 million in respect of pending and an estimate of
    possible future asbestos claims through 2011. The Company did
    not accrue for amounts past 2011 because the Company believed
    that significant uncertainty existed in trying to estimate any
    such amounts. However, it is possible that a different number of
    claims will be made through 2011 and that the settlement amounts
    during this period may differ and that this will cause the
    actual amounts to differ materially from the Companys
    estimate. Further, the Company expects that, during its
    reorganization process, an estimate will have to be made in
    respect of its exposure to asbestos-related claims after 2011
    and that such amounts could be substantial. Due to the Cases,
    holders of asbestos claims are stayed from continuing to
    prosecute pending litigation and from commencing new lawsuits
    against the Debtors. However, during the pendency of the Cases,
    the Company expects additional asbestos claims will be asserted
    as part of the claims process. A separate creditors
    committee representing the interests of the asbestos claimants,
    the ACC, has been appointed. The Debtors obligations with
    respect to present and future asbestos claims will be resolved
    pursuant to a plan of reorganization.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company believes that it has insurance
    coverage in respect of its asbestos-related exposures and that
    substantial recoveries in this regard are probable. At
    September 30, 2004, the Company had recorded a receivable
    for approximately $463.1 million in respect of expected
    insurance recoveries related to existing claims and the estimate
    future claims through 2011. However, the actual amount of
    insurance recoveries may differ from the amount recorded and the
    amount of such differences could be material. Further, depending
    on the amount of asbestos-related claims ultimately determined
    to exist (including those in the periods after 2011), it is
    possible that the amount of such claims could exceed the amount
    of additional insurance recoveries available.                                                                                                                                                                                                                                                                                                                                                                        
|
| | See Note 7 of Notes to Interim Consolidated
    Financial Statements for a more complete discussion of these
    matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | 3. The Companys judgments and
    estimates in respect of its employee benefit plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Pension and post-retirement medical obligations
    included in the consolidated balance sheet are based on
    assumptions that are subject to variation from year-to-year.
    Such variations can cause the Companys estimate of such
    obligations to vary significantly. Restructuring actions (such
    as the indefinite curtailment of the Mead smelter in January
    2003) can also have a significant impact on such amounts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | For pension obligations, the most significant
    assumptions used in determining the estimated year-end
    obligation are the assumed discount rate and long-term rate of
    return (LTRR) on pension assets. Since recorded
    pension obligations represent the present value of expected
    pension payments over the life of the plans, decreases in the
    discount rate (used to compute the present value of the
    payments) will cause the estimated obligations to increase.
    Conversely, an increase in the discount rate will cause the
    estimated present value of the obligations to decline. The LTRR
    on pension assets reflects the Companys assumption
    regarding what the amount of earnings will be on existing plan
    assets (before considering any future contributions to the
    plans). Increases in the assumed LTRR will cause the projected
    value of plan assets available to satisfy pension obligations to
    increase, yielding a reduced net pension obligation. A reduction
    in the LTRR reduces the amount of projected net assets available
    to satisfy pension obligations and, thus, causes the net pension
    obligation to increase.
|
| | For post-retirement obligations, the key
    assumptions used to estimate the year-end obligations are the
    discount rate and the assumptions regarding future medical costs
    increases. The discount rate affects the post-retirement
    obligations in a similar fashion to that described above for
    pension obligations. As the assumed rate of increase in medical
    costs goes up, so does the net projected obligation. Conversely,
    if the rate of increase is assumed to be smaller, the projected
    obligation will decline.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | As more fully discussed in Note 9 of Notes
    to Consolidated Financial Statements in the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 2003, certain of the Companys material
    pension and medical benefit plans are being (or have been)
    terminated as a part of the Companys reorganization
    efforts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | In preparing the Companys financial
    statements at September 30, 2004, the Company has reflected
    its obligations in respect of the Terminated Plans using
    assumptions consistent with those used in accordance with GAAP
    for ongoing plans. The Company believes that this represents a
    reasonable estimation methodology. The Company currently
    believes that there are arguments that it can make that the
    final allowed claim amounts should be less than that reflected
    in the financial statements. The Company also expects that
    certain constituents will assert that the value of their
    obligations is in excess of the amounts reflected in the
    financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | See Note 9 of Notes to Consolidated
    Financial Statements in the Companys Annual Report on
    Form 10-K for the year ended December 31, 2003, and
    Recent Events and Developments, Benefit (Legacy) Cost Matters
    above for information regarding the Companys pension and
    post-retirement obligations. Actual results may differ from the
    assumptions made in computing the estimated September 30,
    2004 obligations and such differences may be material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | 4. The Companys judgments and
    estimates in respect to environmental commitments and
    contingencies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company and Kaiser are subject to a number of
    environmental laws and regulations (environmental
    laws), to fines or penalties assessed for alleged breaches
    of the environmental laws, and to claims and litigation based
    upon such laws. The Company currently is subject to a number of
    claims under the Comprehensive Environmental Response,
    Compensation and Liability Act of 1980, as amended by the
    Superfund Amendments Reauthorization Act of 1986
    (CERCLA), and, along with certain other entities,
    has been named as a potentially responsible party for remedial
    costs at certain third-party sites listed on the National
    Priorities List under CERCLA.                                                                                                                                                                                                                                                                                                                                                       
|
| | Based on the Companys evaluation of these
    and other environmental matters, the Company has established
    environmental accruals, primarily related to potential solid
    waste disposal and soil and groundwater remediation matters.
    These environmental accruals represent the Companys
    estimate of costs reasonably expected to be incurred on a going
    concern basis in the ordinary course of business based on
    presently enacted laws and regulations, currently available
    facts, existing technology, and the Companys assessment of
    the likely remediation action to be taken. However, making
    estimates of possible environmental remediation costs is subject
    to inherent uncertainties. As additional facts are developed and
    definitive remediation plans and necessary regulatory approvals
    for implementation of remediation are established or alternative
    technologies are developed, changes in these and other factors
    may result in actual costs exceeding the current environmental
    accruals.
|
| | An example of how environmental accruals could
    change is provided by the multi-site agreement discussed in
    Note 7 of Notes to Interim Consolidated Financial
    Statements. Another example discussed in Note 7 of Notes to
    Interim Consolidated Financial Statements is the agreements
    ultimately reached with the parties and approved by the Court in
    October 2004 pursuant to which the Company resolved environment
    obligations in return for cash payments totaling approximately
    $27.3 million. As a means of expediting the reorganization
    process and to assure treatment of the claims under a plan of
    reorganization that is favorable to the Debtors and their
    stakeholders, it may be in the best interests of the
    stakeholders for the Company to agree to claim amounts in excess
    of previous accruals, which were based on an ordinary course,
    going concern basis.                                                                                                                                      

Contractual Obligations and Commercial
Commitments

The following summarizes the Companys
significant contractual obligations at September 30, 2004,
after discontinued operations reclassifications, (dollars in
millions):

|                                                   |  |       |      |                 |  |       |     |       |  |           |     |  |  |   |     |  |  |   |    | 
|-------------------------------------------------- |  | ----- | ---- | --------------- |  | ----- | --- | ----- |  | --------- | --- |  |  | - | --- |  |  | - | -- | 
|                                                   |  |       |      |                
|                                                   |  |       |      | Payments Due in
|                                                   |  |       |      |                
|                                                   |  |       |      | Less Than       |  | 2-3   |     | 4-5   |  | More Than
|Contractual Obligations                            |  | Total |      | 1 Year          |  | Years |     | Years |  | 5 Years  
|                                                   |  |       |      |                 |  |       |     |       |  |          
|Long-term debt, including capital lease of $2.4(a) |  | $     | 3.4  |                 |  | $     | 1.2 |       |  | $         | 1.4 |  |  | $ | .8  |  |  | $ |   | 
|Operating leases                                   |  |       | 15.5 |                 |  |       | 7.5 |       |  |           | 6.8 |  |  |   | .5  |  |  |   | .7 | 
|                                                   |  |       |      |                 |  |       |     |       |  |           |     |  |  |   |     |  |  |   |    | 
|Total cash contractual obligations                 |  | $     | 18.9 |                 |  | $     | 8.7 |       |  | $         | 8.2 |  |  | $ | 1.3 |  |  | $ | .7 | 
|                                                   |  |       |      |                 |  |       |     |       |  |           |     |  |  |   |     |  |  |   |    | 



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | See Note 5 of Notes to Interim Consolidated
    Financial Statements for information in respect of long-term
    debt. Long-term debt obligations exclude debt subject to
    compromise of approximately $848.2 million, which amounts
    will be dealt with in connection with a plan of reorganization.
    See Notes 1 and 5 of Notes to Interim Consolidated
    Financial Statements for additional information about debt
    subject to compromise.

The following paragraphs summarize the
Companys off-balance sheet arrangements.

The Company owns a 20% interest in QAL, which
owns one of the largest and most competitive alumina refineries
in the world, located in Queensland, Australia. QAL refines
bauxite into alumina, essentially on a cost basis, for the
account of its shareholders under long-term tolling contracts.
The Company currently sells its share of QALs production
to third parties. The shareholders, including the Company,
purchase bauxite from another QAL shareholder under long-term
purchase contracts. These tolling and purchase contracts are
scheduled to expire in 2008. Under the agreements, the Company
is unconditionally obligated to pay its proportional share of
debt, operating costs and certain other costs of QAL. The
Companys share of the

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aggregate minimum amount of future principal
payments as of September 30, 2004 is $60.0 million,
which will mature in varying amounts from 2005 to 2008. The
Companys share of QALs scheduled debt principal
repayment in July 2003 was funded with additional QAL
borrowings. The Companys share of payments, including
operating costs and certain other expenses under the agreements,
has generally ranged between $70 million and
$100 million per year over the past three years. However,
as discussed more fully in Notes 1 and 4 of Notes to
Interim Consolidated Financial Statements, the Company is
selling its interests in QAL. When the Companys interest
in QAL are sold, the Companys obligations in respect of
its share of the QAL debt will be assumed by the buyer. The
Company has agreements to supply alumina to and to purchase
aluminum from Anglesey, a 49.0%-owned aluminum smelter in
Holyhead, Wales.


As of September 30, 2004, outstanding
letters of credit under the DIP Facility were approximately
$30.4 million, substantially all of which expire within the
next twelve months. The letters of credit relate primarily to
environmental, insurance and other activities.

Upon emergence from Chapter 11 proceedings,
the Company anticipates that it will provide a form of defined
contribution pension plan in respect of its salaried employees.
Any such plans ultimately adopted will be subject to a number of
approvals. The Company currently estimates that the total annual
cash cost of such plans would be less than $5.0 million
and, if approved, would likely be required to be funded
commencing some time in 2005.

Pursuant to the terms of the USWA agreement (see
Note 7 of Notes to Interim Consolidated Financial
Statements), the Company will be required to make annual
contributions into the Steelworkers Pension Trust on the basis
of one dollar per USWA employee per hour worked. In addition,
the Company will institute a defined contribution pension plan
for active USWA employees. The Company contributions to the plan
will range from eight hundred dollars to twenty-four hundred
dollars per employee per year, depending on age. In addition, in
connection with the settlement with the PBGC, the Company will
continue to sponsor specific pension plans at four of the
Companys locations and will satisfy the estimated
$4.4 million minimum funding standard when the settlement
agreement is approved by the Court. The Company currently
estimates that contributions to all such plans will range from
$3.0 million to $6.0 million per year.

As a replacement for the Companys current
postretirement benefit plans, the Company agreed to contribute
certain amounts to one or more VEBAs. Such contributions are to
include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | An amount not to exceed $36.0 million and
    payable on emergence from the Chapter 11 proceedings so
    long as the Companys liquidity (i.e. cash plus borrowing
    availability) is at least $50.0 million after considering
    such payments. To the extent that less than the full
    $36.0 million is paid and the Companys interests in
    Anglesey are subsequently sold, a portion of such sales
    proceeds, in certain circumstances, will be used to pay the
    shortfall.
|
| |  | On an annual basis, 10% of the first
    $20.0 million of annual cash flow, as defined, plus 20% of
    annual cash flow, as defined, in excess of $20.0 million.
    Such annual payments shall not exceed $20.0 million and
    will also be limited (with no carryover to future years) to the
    extent that the payments do not cause the Companys
    liquidity to be less than $50.0 million.                                                                                        
|
| |  | Advances of $3.1 million in June 2004 and
    $1.9 million per month thereafter until the Company emerges
    from the Cases. Any advances made pursuant to such agreement
    will constitute a credit toward the $36.0 million maximum
    contribution due upon emergence.                                                                                                                                                                                                                 

On June 1, 2004, the Court approved an order
making the agreements regarding pension and postretirement
medical benefits effective on June 1, 2004 notwithstanding
that the Intercompany Agreement was not effective as of that
date. In October 2004, the Company entered into an amendment to
USWA agreement, which is subject to Court approval. As provided
in the amendment, the Company will be required to pay an
additional annual contribution of $1.0 million. The amended
agreement is expected to be approved by the Court in November
2004. However, the USWA, the Company and the UCC retain the
right to terminate the agreement if the Intercompany Agreement
is not approved by the Court.

In connection with the sale of the Gramercy
facility and KJBC, the Company indemnified the buyer against
losses suffered by the buyer that result from any breaches of
certain seller representations and

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warranties up to $5.0 million which amount
has been recorded in Other accrued liabilities in the
accompanying financial statements. The indemnity expires in
October 2006.


In November 2004, the Company entered into an
agreement to sell its interest in and related to QAL. Gross
proceeds from the sale are expected to be approximately
$401.0 million, subject to various working capital
adjustments and the assumption of the Companys obligations
in respect of approximately $60.0 million of QAL debt. The
vast majority of the value realized in respect of the
Companys interests in and related to QAL is likely to be
for the benefit of holders by the Senior Notes, the Sub Notes
and PBGC. The agreement was approved by the Court on
November 8, 2004 and is expected to close in the first
quarter of 2005, but is subject to a number of approvals
including from QALs lenders and the Australian government.

At emergence from Chapter 11, the Company
will have to pay or otherwise provide for a material amount of
claims. Such claims include accrued but unpaid professional
fees, priority tax and environmental claims, secured claims, and
certain post-petition obligations (collectively, Exit
Costs). The Company currently estimates that its Exit
Costs will be in the range of $60.0 million to
$80.0 million. The Company expects to fund such Exit Costs
using the proceeds to be received under the proposed
Intercompany Agreement together with existing cash resources and
available liquidity under an exit financing facility that will
replace the current Post-Petition Credit Agreement (see
Note 5 of Notes to Interim Consolidated Financial
Statements). Given the material portion of the Exit Costs
represented by the expected Intercompany Agreement payments,
such payments are a critical element for the Companys
successful emergence from the Cases. If the proposed
Intercompany Agreement were not ultimately approved by the Court
or otherwise put into effect or a reasonable alternative were
not negotiated, it is unlikely that the Company or its other
debtor subsidiaries will be able to emerge from Chapter 11.
Management believes it will be able to successfully resolve any
issues that may arise in respect of the proposed Intercompany
Agreement or be able to negotiate a reasonable alternative.
However, no assurances can be given in this regard. An exit
financing facility to replace the current Post-Petition Credit
Agreement is also critical for the Companys successful
emergence from the Cases.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

The Companys operating results are
sensitive to changes in the prices of alumina, primary aluminum,
and fabricated aluminum products, and also depend to a
significant degree upon the volume and mix of all products sold.
As discussed more fully in Notes 2 and 8 of Notes to
Interim Consolidated Financial Statements, the Company
historically has utilized hedging transactions to lock-in a
specified price or range of prices for certain products which it
sells or consumes in its production process and to mitigate the
Companys exposure to changes in foreign currency exchange
rates. However, because the agreements underlying the
Companys hedging positions provided that the
counterparties to the hedging contracts could liquidate the
Companys hedging positions if the Company filed for
reorganization, the Company chose to liquidate these positions
in advance of the initial Filing Date. The Company has only
completed limited hedging activities since the Filing Date (see
below). The Company anticipates that, subject to prevailing
economic conditions, it may enter into additional hedging
transactions with respect to primary aluminum prices and foreign
currency values to protect the interests of its constituents.
However, no assurance can be given as to when or if the Company
will enter into such additional hedging activities.

Sensitivity

Alumina and Primary
Aluminum.The Company has historically
been exposed to commodity price risks and opportunities in
respect of alumina and primary aluminum production in excess of
internal requirements that has been sold in domestic and
international markets. The Companys hedging transactions
have been intended to provide price risk management in respect
of the net exposure of earnings resulting from
(i) anticipated sales of alumina, primary aluminum and
fabricated aluminum products, less (ii) expected purchases
of certain items, such as aluminum scrap, rolling ingot, and
bauxite, whose prices fluctuate with the price of primary
aluminum. As of September 30, 2004, the Company had options
covering substantially all of the Companys net hedgeable
volume for the fourth quarter of 2004 (at a strike price of
approximately $1.75 per pound).

After considering completed sales of Alpart,
Gramercy/ KJBC and Valco and assuming that the Companys
interests in QAL are sold (and that Anglesey remains a part of
the emerging entity), the Company

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would no longer be a net seller of alumina and
aluminum. Rather, net sales of primary aluminum by Anglesey
(reduced partially by the equivalent primary aluminum impact of
its alumina requirements) would only offset a portion of the
primary aluminum requirements of the fabricated products
business. As such, the emerging entity would be a net consumer
of primary aluminum. However, the Companys pricing of
fabricated aluminum products is generally intended to lock-in a
conversion margin (representing the value added from the
fabrication process(es)) and to pass metal price risk on to its
customers. While the fabricated aluminum products business does
from time to time, enter into fixed price arrangements (that
include the primary aluminum price component), in such
instances, the Company may use third party hedging instruments
to eliminate price exposure or may consider the related metal
price risk as being offset by (as a notional (internal) hedge)
primary aluminum to be produced at Anglesey. At
September 30, 2004, the fabricated products business held
contracts for the delivery of fabricated aluminum products that
have the effect of fixing or capping the metal price component
of those contracts during the last quarter of 2004 and for the
period 2005 - 2008 totaling approximately (in 000 pounds of
primary aluminum): 2004: 34,000, 2005: 84,000, 2006: 35,000,
2007: 34,000, and 2008: 10,000.


Foreign Currency.The Company enters into forward exchange contracts to hedge
material cash commitments for foreign currencies. The
Companys primary foreign exchange exposure is related to
the Companys Australian Dollar (A$) commitments in respect
of activities associated with QAL. The Company estimates that,
before consideration of any hedging activities, a US $0.01
increase (decrease) in the value of the A$ results in an
approximate $1.5 million (decrease) increase in the
Companys annual pre-tax operating income.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures.An evaluation of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures was performed as of the end
of the period covered by this Report under the supervision and
with the participation of the Companys management,
including the Chief Executive Officer and Chief Financial
Officer. Based on that evaluation, the Companys
management, including the Chief Executive Officer and Chief
Financial Officer, concluded that the Companys disclosure
controls and procedures were effective.

Changes in Internal
Control.There have been no
significant changes in the Companys internal controls or
in other factors that could significantly affect internal
controls subsequent to the date of their evaluation.
Additionally, no changes in the Companys internal controls
over financial reporting have occurred during the Companys
most recently completed quarter that have materially affected,
or are reasonably likely to materially affect, the
Companys internal controls over financial reporting.

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PART II  OTHER
INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

Reference is made to Part I, Item 3.
LEGAL PROCEEDINGS in the Companys Annual
Report on Form 10-K for the year ended December 31,
2003 for information concerning material legal proceedings with
respect to the Company.

Environmental
Settlements.The Company has
previously disclosed that is possible that its assessment of
environmental accruals could increase because it may be in the
interests of all stakeholders to agree to increased amounts to,
among other things, achieve a claim treatment that is favorable
and to expedite the reorganization process.

In the Companys Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004, the
Company reported that it was close to entering agreements with
various parties pursuant to which a substantial portion of the
unresolved environmental claims could be resolved for
approximately $25.0 million - $30.0 million. In
the third quarter of 2004, agreements with the affected parties
were reached and Court approval for such agreements was
received. During October 2004, the Company has paid
approximately $27.3 million to resolve these liabilities.
The amounts paid approximated the amount of liabilities recorded
and did not result in any material net gain or loss.

Other Environmental
Matters.During April 2004, the
Company was served with a subpoena for documents and has been
notified by Federal authorities that they are investigating
certain environmental compliance issues with respect of the
Companys Trentwood facility in the State of Washington.
The Company is undertaking its own internal investigation of the
matter through specially retained counsel to ensure that it has
all relevant facts regarding Trentwoods compliance with
applicable environmental laws. The Company believes it is in
compliance with all applicable environmental laws and
requirements at the Trentwood facility and intends to defend any
claims or charges, if any should result, vigorously. The Company
cannot assess what, if any, impacts this matter may have on the
Companys financial statements.

Other Personal Injury
Claims.The Company has received other
personal injury claims related to noise induced hearing loss
(approximately 2,900 claims) and exposure to silica and coal tar
pitch volatiles (approximately 3,900 claims and 300 claims,
respectively). The Company believes that all such claims are
pre-petition claims that will be resolved by the Cases. The
Company cannot presently determine the impact or value of these
claims. However, the Company currently expects that all such
claims will be transferred, along with certain rights against
certain corresponding insurance policies, to a separate trust
along with (similar to) the settled hearing loss cases, whether
or not such claims are settled prior to the Companys
emergence from the Cases.






|        |         
|------- | --------
|Item 6. | Exhibits

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1          |  | Purchase Agreement, dated as of May 17,
    2004, among Kaiser Aluminum & Chemical Corporation
    (KACC), Kaiser Bauxite Company (KBC),
    Gramercy Alumina LLC and St. Ann Bauxite Limited (incorporated
    by reference to Exhibit 2.01 to the Report on
    Form 8-K, dated as of September 30, 2004, filed by
    Kaiser Aluminum Corporation (KAC), File
    No. 1-9447).
|        | 2  | .2          |  | Purchase Agreement, dated as of October 29,
    2004, between KACC, and the Government of Ghana (incorporated by
    reference to Exhibit 2.1 to the Report on Form 8-K,
    dated as of October 29, 2004, filed by KAC, File
    No. 1-9447).                                                                                                                                         
|        | *2 | .3          |  | Purchase Agreement, dated as of
    September 22, 2004, between KACC, Kaiser Alumina Australia
    Corporation (KAAC) and Comalco Aluminium Limited.                                                                                                                                                                                                                                 
|        | *2 | .4          |  | Agreement to Submit Qualified Bid for QAL, dated
    as of September 22, 2004, between KACC, KAAC and Glencore
    AG.                                                                                                                                                                                                                                                                 
|        | *2 | .5          |  | Purchase Agreement, dated as of October 28,
    2004, among KACC, KAAC and Alumina & Bauxite Company
    Ltd.                                                                                                                                                                                                                                                                          

75



---



##### 



|        |     |             |  |                                                                                                                                                                                                                                                                 
|------- | --- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | *4  | .1          |  | Waiver Letter with Respect to Post-Petition
    Credit Agreement dated September 29, 2004, amending the
    Post-Petition Credit Agreement dated February 12, 2002,
    among KACC, KAC, certain financial institutions and Bank of
    America, N.A., as Agent.
|        | *4  | .2          |  | Seventh Amendment to Post-Petition Credit
    Agreement dated October 28, 2004, amending the
    Post-Petition Credit Agreement dated February 12, 2002,
    among KACC, KAC, certain financial institutions and Bank of
    America, N.A., as Agent.           
|        | *10 | .1          |  | Amended Employment Agreement, dated
    October 1, 2004, between KACC and Edward F. Houff.                                                                                                                                                                      
|        | *10 | .2          |  | Settlement and Release Agreement dated as of
    October 5, 2004 by and among the Debtors and the
    Creditors Committee.                                                                                                                                     
|        | *10 | .3          |  | Settlement Agreement dated October 14, 2004,
    between KACC and the Pension Benefit Guaranty Corporation.                                                                                                                                                     
|        | *31 | .1          |  | Certification of Jack A. Hockema pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                 
|        | *31 | .2          |  | Certification of Kerry A. Shiba pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                  
|        | *32 | .1          |  | Certification of Jack A. Hockema pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                 
|        | *32 | .2          |  | Certification of Kerry A. Shiba pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                  



---



|  |                                                                                                                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Filed herewith. Schedules are omitted from the
    agreements filed as Exhibits 2.1 through 2.5; however, the
    Company will furnish supplementally a copy of any omitted
    schedule to the Securities and Exchange Commission upon request.

76



---



##### 






SIGNATURE

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized, who have signed this report on behalf of the
registrant as the principal financial officer and principal
accounting officer of the registrant, respectively.



| |                                       
| | --------------------------------------
| | KAISER ALUMINUM & CHEMICAL CORPORATION



| |     |                   
| | --- | ------------------
| | By: | /s/ KERRY A. SHIBA

| |                                               
| | ----------------------------------------------
| |                                               
| | Kerry A. Shiba                                
| | Vice President and Chief Financial
    Officer
| | (Principal Financial Officer)                 
|
| | KAISER ALUMINUM & CHEMICAL CORPORATION        



| |     |                     
| | --- | --------------------
| | By: | /s/ DANIEL D. MADDOX

| |                               
| | ------------------------------
| |                               
| | Daniel D. Maddox              
| | Vice President and Controller 
| | (Principal Accounting Officer)

Dated: November 12, 2004

77



---



##### 






EXHIBIT INDEX

|        |     |             |  |                                                                                                                                                                                                                                                                                                          
|------- | --- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 2   | .1          |  | Purchase Agreement, dated as of May 17,
    2004, among KACC, KBC, Gramercy Alumina LLC and St. Ann Bauxite
    Limited (incorporated by reference to Exhibit 2.01 to the
    Report on Form 8-K, dated as of September 30, 2004,
    filed by Kaiser Aluminum Corporation (KAC), File
    No. 1-9447).
|        | 2   | .2          |  | Purchase Agreement, dated as of October 29,
    2004, between KACC, and the Government of Ghana (incorporated by
    reference to Exhibit 2.1 to the Report on Form 8-K,
    dated as of October 29, 2004, filed by KAC, File
    No. 1-9447).                                                           
|        | *2  | .3          |  | Purchase Agreement, dated as of
    September 22, 2004, between KACC, Kaiser Alumina Australia
    Corporation (KAAC) and Comalco Aluminium Limited.                                                                                                                                                   
|        | *2  | .4          |  | Agreement to Submit Qualified Bid for QAL, dated
    as of September 22, 2004, between KACC, KAAC and Glencore
    AG.                                                                                                                                                                                   
|        | *2  | .5          |  | Purchase Agreement, dated as of October 28,
    2004, among KACC, KAAC and Alumina & Bauxite Company
    Ltd.                                                                                                                                                                                            
|        | *4  | .1          |  | Waiver Letter with Respect to Post-Petition
    Credit Agreement dated September 29, 2004, amending the
    Post-Petition Credit Agreement dated February 12, 2002,
    among KACC, KAC, certain financial institutions and Bank of
    America, N.A., as Agent.                                         
|        | *4  | .2          |  | Seventh Amendment to Post-Petition Credit
    Agreement dated October   , 2004, amending the
    Post-Petition Credit Agreement dated February 12, 2002,
    among KACC, KAC, certain financial institutions and Bank of
    America, N.A., as Agent.                                                    
|        | *10 | .1          |  | Amended Employment Agreement, dated
    October 1, 2004, between KACC and Edward F. Houff.                                                                                                                                                                                                               
|        | *10 | .2          |  | Settlement and Release Agreement dated as of
    October 5, 2004 by and among the Debtors and the
    Creditors Committee.                                                                                                                                                                              
|        | *10 | .3          |  | Settlement Agreement dated October 14, 2004,
    between KACC and the Pension Benefit Guaranty Corporation.                                                                                                                                                                                              
|        | *31 | .1          |  | Certification of Jack A. Hockema pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                          
|        | *31 | .2          |  | Certification of Kerry A. Shiba pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                           
|        | *32 | .1          |  | Certification of Jack A. Hockema pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                          
|        | *32 | .2          |  | Certification of Kerry A. Shiba pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                           



---



|  |                                                                                                                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Filed herewith. Schedules are omitted from the
    agreements filed as Exhibits 2.1 through 2.5; however, the
    Company will furnish supplementally a copy of any omitted
    schedule to the Securities and Exchange Commission upon request.