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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 June 30, 2005


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.)

27422 PORTOLA PARKWAY, SUITE 350,


FOOTHILL RANCH, CALIFORNIA 92610-2831


(Address of principal executive offices) (Zip Code)


(Registrants telephone number, including area code)


(949) 614-1740


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KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY
COMPANIES


(Debtor-in-Possession)




PART I  FINANCIAL INFORMATION




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

CONSOLIDATED BALANCE SHEETS


|                                                        |                                                |                                                                 |         |          |              |   |         |          |          |  
|------------------------------------------------------- | ---------------------------------------------- | --------------------------------------------------------------- | ------- | -------- | ------------ | - | ------- | -------- | -------- | -
|                                                        |                                                | June 30,                                                        |         |          | December 31, |  
|                                                        |                                                | 2005                                                            |         |          | 2004         |  
|                                                        |                                                |                                                                 |         |          |              |  
|                                                        |                                                | (Unaudited)                                                     |        
|                                                        |                                                | (In millions of dollars)                                        |        
|ASSETS                                                 
|Current assets:                                         |                                                |                                                                 |         |          |              |   |         |         
|                                                        | Cash and cash equivalents                      |                                                                 | $       | 54.3     |              |   | $       | 55.4     |         
|                                                        | Receivables:                                   |                                                                 |         |          |              |   |         |          |         
|                                                        |                                                | Trade, less allowance for doubtful receivables of $6.5 and $6.9 |         |          | 96.2         |   |         |          | 97.4     |  
|                                                        |                                                | Due from affiliate                                              |         |          | 7.3          |   |         |          | 8.0      |  
|                                                        |                                                | Other                                                           |         |          | 4.6          |   |         |          | 10.9     |  
|                                                        | Inventories                                    |                                                                 |         | 115.2    |              |   |         | 105.3    |         
|                                                        | Prepaid expenses and other current assets      |                                                                 |         | 14.3     |              |   |         | 19.6     |         
|                                                        | Discontinued operations current assets        |                                                                 |         | .5       |              |   |         | 30.6     |         
|                                                        |                                                |                                                                 |         |          |              |  
|                                                        |                                                | Total current assets                                            |         |          | 292.4        |   |         |          | 327.2    |  
|Investments in and advances to unconsolidated affiliate |                                                |                                                                 | 14.6    |          |              |   | 16.7    |         
|Property, plant, and equipment  net                    |                                                |                                                                 | 213.0   |          |              |   | 214.6   |         
|Restricted proceeds from sale of commodity interests    |                                                |                                                                 | 675.0   |          |              |   | 280.8   |         
|Personal injury-related insurance recoveries receivable |                                                |                                                                 | 966.1   |          |              |   | 967.0   |         
|Other assets                                            |                                                |                                                                 | 47.6    |          |              |   | 42.5    |         
|Discontinued operations long-term assets               |                                                |                                                                 |        |          |              |   | 38.9    |         
|                                                        |                                                |                                                                 |         |          |              |  
|                                                        |                                                | Total                                                           |         | $        | 2,208.7      |   |         | $        | 1,887.7  |  
|                                                        |                                                |                                                                 |         |          |              |  
|                                                       
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)         
|Liabilities not subject to compromise                  |                                                |                                                                 |         |          |              |   |         |         
|                                                        | Current liabilities:                           |                                                                 |         |          |              |   |         |          |         
|                                                        |                                                | Accounts payable                                                |         | $        | 47.6         |   |         | $        | 50.2     |  
|                                                        |                                                | Accrued interest                                                |         |          | .8           |   |         |          | .9       |  
|                                                        |                                                | Accrued salaries, wages, and related expenses                   |         |          | 52.0         |   |         |          | 48.9     |  
|                                                        |                                                | Other accrued liabilities                                       |         |          | 67.8         |   |         |          | 73.8     |  
|                                                        |                                                | Payable to affiliate                                            |         |          | 12.0         |   |         |          | 14.6     |  
|                                                        |                                                | Long-term debt  current portion                                |         |          | 1.2          |   |         |          | 1.2      |  
|                                                        |                                                | Discontinued operations current liabilities                    |         |          | 27.5         |   |         |          | 57.7     |  
|                                                        |                                                |                                                                 |         |          |              |  
|                                                        |                                                | Total current liabilities                                       |         |          | 208.9        |   |         |          | 247.3    |  
|                                                        | Long-term liabilities                          |                                                                 |         | 37.3     |              |   |         | 32.9     |         
|                                                        | Long-term debt                                 |                                                                 |         | 1.2      |              |   |         | 2.8      |         
|                                                        | Discontinued operations long-term liabilities |                                                                 |         | 26.4     |              |   |         | 26.4     |         
|                                                        |                                                |                                                                 |         |          |              |  
|                                                        |                                                |                                                                 | 273.8   |          |              |   | 309.4   |         
|Liabilities subject to compromise                       |                                                |                                                                 | 3,950.4 |          |              |   | 3,954.9 |         
|Commitments and contingencies                           |                                                |                                                                 |         |          |              |   |         |         
|Stockholders equity (deficit):                         |                                                |                                                                 |         |          |              |   |         |         
|                                                        | Preference stock                               |                                                                 |         | .7       |              |   |         | .7       |         
|                                                        | Common stock                                   |                                                                 |         | 15.4     |              |   |         | 15.4     |         
|                                                        | Additional capital                             |                                                                 |         | 255.6    |              |   |         | 2,452.8  |         
|                                                        | Accumulated deficit                            |                                                                 |         | (2,278.2 | )            |   |         | (2,648.3 | )       
|                                                        | Accumulated other comprehensive income (loss)  |                                                                 |         | (9.0     | )            |   |         | (5.5     | )       
|                                                        | Note receivable from parent                    |                                                                 |         |         |              |   |         | (2,191.7 | )       
|                                                        |                                                |                                                                 |         |          |              |  
|                                                        |                                                | Total stockholders equity (deficit)                            |         |          | (2,015.5     | ) |         |          | (2,376.6 | )
|                                                        |                                                |                                                                 |         |          |              |  
|                                                        |                                                | Total                                                           |         | $        | 2,208.7      |   |         | $        | 1,887.7  |  
|                                                        |                                                |                                                                 |         |          |              |  



1



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY
COMPANIES


(Debtor-in-Possession)


STATEMENTS OF CONSOLIDATED INCOME (LOSS)


|                                                     |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |       |       |   |       |       |       | 
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ----- | ----- | ---------------- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | 
|                                                     |                                                                                                                                              | Quarter Ended            |       |       | Six Months Ended |  
|                                                     |                                                                                                                                              | June 30,                 |       |       | June 30,         |  
|                                                     |                                                                                                                                              |                          |       |       |                  |  
|                                                     |                                                                                                                                              | 2005                     |       |       | 2004             |   |       | 2005  |       |   | 2004  |      
|                                                     |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |      
|                                                     |                                                                                                                                              | (Unaudited)              |      
|                                                     |                                                                                                                                              | (In millions of dollars) |      
|Net sales                                            |                                                                                                                                              | $                        | 262.9 |       |                  | $ | 230.1 |       |       | $ | 544.3 |       |       | $ | 440.3 |      
|                                                     |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |      
|Costs and expenses:                                  |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |       |       |   |       |      
|                                                     | Cost of products sold                                                                                                                        |                          |       | 234.1 |                  |   |       | 208.3 |       |   |       | 476.3 |       |   |       | 402.5 |      
|                                                     | Depreciation and amortization                                                                                                                |                          |       | 5.2   |                  |   |       | 5.5   |       |   |       | 10.1  |       |   |       | 11.0  |      
|                                                     | Selling, administrative, research and development, and general                                                                               |                          |       | 16.9  |                  |   |       | 20.7  |       |   |       | 34.6  |       |   |       | 41.4  |      
|                                                     | Other operating charges                                                                                                                      |                          |       |      |                  |   |       |      |       |   |       | 6.2   |       |   |       |      |      
|                                                     |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |      
|                                                     |                                                                                                                                              | Total costs and expenses |       |       | 256.2            |   |       |       | 234.5 |   |       |       | 527.2 |   |       |       | 454.9 | 
|                                                     |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |      
|Operating income (loss)                              |                                                                                                                                              |                          | 6.7   |       |                  |   | (4.4  | )     |       |   | 17.1  |       |       |   | (14.6 | )    
|Other income (expense):                              |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |       |       |   |       |      
|                                                     | Interest expense (excluding unrecorded contractual interest
    expense of $23.7 for both quarters and $47.4 for both six-month
    periods) |                          |       | (1.1  | )                |   |       | (2.1  | )     |   |       | (3.2  | )     |   |       | (4.1  | )    
|                                                     | Reorganization items                                                                                                                         |                          |       | (9.3  | )                |   |       | (10.3 | )     |   |       | (17.1 | )     |   |       | (18.9 | )    
|                                                     | Other  net                                                                                                                                  |                          |       | (.6   | )                |   |       | 4.3   |       |   |       | (1.0  | )     |   |       | 4.1   |      
|                                                     |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |      
|Loss before income taxes and discontinued operations |                                                                                                                                              |                          | (4.3  | )     |                  |   | (12.5 | )     |       |   | (4.2  | )     |       |   | (33.5 | )    
|Provision for income taxes                           |                                                                                                                                              |                          | (2.2  | )     |                  |   | (2.3  | )     |       |   | (4.6  | )     |       |   | (3.8  | )    
|                                                     |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |      
|Loss from continuing operations                      |                                                                                                                                              |                          | (6.5  | )     |                  |   | (14.8 | )     |       |   | (8.8  | )     |       |   | (37.3 | )    
|                                                     |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |      
|Discontinued operations:                             |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |       |       |   |       |      
|                                                     | Income (loss) from discontinued operations, net of income taxes,
    including minority interests                                            |                          |       | 2.7   |                  |   |       | 15.6  |       |   |       | 13.3  |       |   |       | (25.8 | )    
|                                                     | Gain from sale of commodity interests, net of income taxes of
    $8.5 in 2005                                                               |                          |       | 365.6 |                  |   |       | 23.4  |       |   |       | 365.6 |       |   |       | 23.4  |      
|                                                     |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |      
|Income (loss) from discontinued operations           |                                                                                                                                              |                          | 368.3 |       |                  |   | 39.0  |       |       |   | 378.9 |       |       |   | (2.4  | )    
|                                                     |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |      
|Net income (loss)                                    |                                                                                                                                              | $                        | 361.8 |       |                  | $ | 24.2  |       |       |   | 370.1 |       |       | $ | (39.7 | )    
|                                                     |                                                                                                                                              |                          |       |       |                  |   |       |       |       |   |       |      



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 Six Months Ended June 30, 2005


(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, 2004 |                                                                                                                                                                                       | $          | .7 |   |        | $ | 15.4 |            |  | $             | 2,452.8     |          |            | $      | (2,648.3 | )     |        | $ | (5.5 | )     |   | $ | (2,191.7 | )       |  | $ | (2,376.6 | )    
|                          | Net income                                                                                                                                                                            |            |    |  |        |   |      |           |  |               |             |         |            |        |          | 370.1 |        |   |      |      |   |   |          |        |  |   |          | 370.1 |  
|                          | Unrealized net decrease in value of derivative instruments
    arising during the period (including net decrease in value of
    $1.4 for the quarter ended June 30, 2005)            |            |    |  |        |   |      |           |  |               |             |         |            |        |          |      |        |   |      | (3.7  | ) |   |          |        |  |   |          | (3.7  | )
|                          | Reclassification adjustment for net realized losses on
    derivative instruments included in net income (including net
    realized loss of $.1 for the quarter ended June 30, 2005) |            |    |  |        |   |      |           |  |               |             |         |            |        |          |      |        |   |      | .2    |   |   |          |        |  |   |          | .2    |  
|                          |                                                                                                                                                                                       |            |    |   |        |   |      |            |  |               |             |          |            |        |          |       |        |   |      |       |  
|                          | Comprehensive income (loss)                                                                                                                                                           |            |    |  |        |   |      |           |  |               |             |         |            |        |          |      |        |   |      |      |   |   |          |        |  |   |          | 366.6 |  
|                          | Release of amount due from parent                                                                                                                                                     |            |    |  |        |   |      |           |  |               |             | (2,197.2 | )          |        |          |      |        |   |      |      |   |   |          | 2,191.7 |  |   |          | (5.5  | )
|                          |                                                                                                                                                                                       |            |    |   |        |   |      |            |  |               |             |          |            |        |          |       |        |   |      |       |  
|BALANCE, June 30, 2005    |                                                                                                                                                                                       | $          | .7 |   |        | $ | 15.4 |            |  | $             | 255.6       |          |            | $      | (2,278.2 | )     |        | $ | (9.0 | )     |   | $ |         |         |  | $ | (2,015.5 | )    
|                          |                                                                                                                                                                                       |            |    |   |        |   |      |            |  |               |             |          |            |        |          |       |        |   |      |       |  

For the Six Months Ended June 30, 2004


|                           |                                                                                                                                                                                       |            |    |   |        |   |      |            |  |               |             |   |            |        |          |       |        |   |        |       |  |   |          |   |  |   |          |       |  
|-------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- | -- | - | ------ | - | ---- | ---------- |  | ------------- | ----------- | - | ---------- | ------ | -------- | ----- | ------ | - | ------ | ----- |  | - | -------- | - |  | - | -------- | ----- | -
|                           |                                                                                                                                                                                       |            |    |   |        |   |      |            |  | 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                                                                                                                                                                              |            |    |  |        |   |      |           |  |               |             |  |            |        |          | (39.7 | )      |   |        |      |  |   |          |  |  |   |          | (39.7 | )
|                           | Unrealized net increase in value of derivative instruments
    arising during the period (including net decrease in value of
    $.5 for the quarter ended June 30, 2004)             |            |    |  |        |   |      |           |  |               |             |  |            |        |          |      |        |   |        | .8    |  |   |          |  |  |   |          | .8    |  
|                           | Reclassification adjustment for net realized losses on
    derivative instruments included in net loss (including net
    realized losses of $.3 for the quarter ended June 30, 2004) |            |    |  |        |   |      |           |  |               |             |  |            |        |          |      |        |   |        | .8    |  |   |          |  |  |   |          | .8    |  
|                           |                                                                                                                                                                                       |            |    |   |        |   |      |            |  |               |             |   |            |        |          |       |        |   |        |       | 
|                           | Comprehensive income (loss)                                                                                                                                                           |            |    |  |        |   |      |           |  |               |             |  |            |        |          |      |        |   |        |      |  |   |          |  |  |   |          | (38.1 | )
|                           |                                                                                                                                                                                       |            |    |   |        |   |      |            |  |               |             |   |            |        |          |       |        |   |        |       | 
|BALANCE, June 30, 2004     |                                                                                                                                                                                       | $          | .7 |   |        | $ | 15.4 |            |  | $             | 2,454.0     |   |            | $      | (1,941.4 | )     |        | $ | (106.3 | )     |  | $ | (2,191.7 | ) |  | $ | (1,769.3 | )    
|                           |                                                                                                                                                                                       |            |    |   |        |   |      |            |  |               |             |   |            |        |          |       |        |   |        |       | 



3



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY
COMPANIES


(Debtor-in-Possession)


STATEMENTS OF CONSOLIDATED CASH FLOWS


|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |   |      |       |       |  
|----------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ---- | ------ | ------ | - | ---- | ----- | ----- | -
|                                                            |                                                                                                                                   | Six Months Ended                                                                                      |     
|                                                            |                                                                                                                                   | June 30,                                                                                              |     
|                                                            |                                                                                                                                   |                                                                                                       |     
|                                                            |                                                                                                                                   | 2005                                                                                                  |      |        | 2004   |  
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|                                                            |                                                                                                                                   | (Unaudited)                                                                                           |     
|                                                            |                                                                                                                                   | (In millions of                                                                                       |     
|                                                            |                                                                                                                                   | dollars)                                                                                              |     
|Cash flows from operating activities:                       |                                                                                                                                   |                                                                                                       |      |        |        |   |      |      
|                                                            | Net income (loss)                                                                                                                 |                                                                                                       | $    | 370.1  |        |   | $    | (39.7 | )    
|                                                            | Less net income (loss) from discontinued operations                                                                               |                                                                                                       |      | 378.9  |        |   |      | (2.4  | )    
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|                                                            | Net loss from continuing operations                                                                                               |                                                                                                       |      | (8.8   | )      |   |      | (37.3 | )    
|                                                            | Adjustments to reconcile net loss from continuing operations to
    net cash used by continuing operations:                       |                                                                                                       |      |        |        |   |      |       |      
|                                                            |                                                                                                                                   | Depreciation and amortization (including deferred financing
    costs of $2.6 and $2.1, respectively) |      |        | 12.7   |   |      |       | 13.1  |  
|                                                            |                                                                                                                                   | Equity in loss (income) of unconsolidated affiliate, net of
    distributions                         |      |        | 2.2    |   |      |       | (4.0  | )
|                                                            |                                                                                                                                   | Decrease (increase) in trade and other receivables                                                    |      |        | 2.0    |   |      |       | (13.1 | )
|                                                            |                                                                                                                                   | Increase in inventories                                                                               |      |        | (10.0  | ) |      |       | (19.5 | )
|                                                            |                                                                                                                                   | (Increase) decrease in prepaid expenses and other current assets                                      |      |        | (1.3   | ) |      |       | .7    |  
|                                                            |                                                                                                                                   | (Decrease) increase in accounts payable and accrued interest                                          |      |        | (5.2   | ) |      |       | 13.2  |  
|                                                            |                                                                                                                                   | Increase in other accrued liabilities                                                                 |      |        | 2.5    |   |      |       | .1    |  
|                                                            |                                                                                                                                   | (Decrease) increase in payable to affiliate                                                           |      |        | (2.8   | ) |      |       | .1    |  
|                                                            |                                                                                                                                   | Increase in accrued and deferred income taxes                                                         |      |        | .6     |   |      |       | 2.3   |  
|                                                            |                                                                                                                                   | Net cash impact of changes in long-term assets and liabilities                                        |      |        | (.4    | ) |      |       | (6.3  | )
|                                                            |                                                                                                                                   | Net cash provided by discontinued operations                                                          |      |        | 19.6   |   |      |       | 31.9  |  
|                                                            |                                                                                                                                   | Other                                                                                                 |      |        | .2     |   |      |       | .8    |  
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|                                                            |                                                                                                                                   | Net cash provided (used) by operating activities                                                      |      |        | 11.3   |   |      |       | (18.0 | )
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|Cash flows from investing activities:                       |                                                                                                                                   |                                                                                                       |      |        |        |   |      |      
|                                                            | Capital expenditures                                                                                                              |                                                                                                       |      | (8.6   | )      |   |      | (2.6  | )    
|                                                            | Net cash provided by discontinued operations: primarily proceeds
    from sale of QAL in 2005 and sale of Mead properties in 2004 |                                                                                                       |      | 401.4  |        |   |      | 10.9  |      
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|                                                            |                                                                                                                                   | Net cash provided by investing activities                                                             |      |        | 392.8  |   |      |       | 8.3   |  
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|Cash flows from financing activities:                       |                                                                                                                                   |                                                                                                       |      |        |        |   |      |      
|                                                            | Financing costs, primarily DIP Facility related                                                                                   |                                                                                                       |      | (3.6   | )      |   |      | (.2   | )    
|                                                            | Repayment of debt                                                                                                                 |                                                                                                       |      | (1.6   | )      |   |      |      |      
|                                                            | Increase in restricted cash                                                                                                       |                                                                                                       |      | (3.4   | )      |   |      |      |      
|                                                            | Net cash used by discontinued operations: primarily increase in
    restricted cash                                               |                                                                                                       |      | (396.6 | )      |   |      |      |      
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|                                                            |                                                                                                                                   | Net cash used by financing activities                                                                 |      |        | (405.2 | ) |      |       | (.2   | )
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|Net decrease in cash and cash equivalents during the period |                                                                                                                                   |                                                                                                       | (1.1 | )      |        |   | (9.9 | )    
|Cash and cash equivalents at beginning of period            |                                                                                                                                   |                                                                                                       | 55.4 |        |        |   | 35.5 |      
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|Cash and cash equivalents at end of period                  |                                                                                                                                   | $                                                                                                     | 54.3 |        |        | $ | 25.6 |      
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|Supplemental disclosure of cash flow information:           |                                                                                                                                   |                                                                                                       |      |        |        |   |      |      
|                                                            | Interest paid, net of capitalized interest of $.2 and $.1                                                                         |                                                                                                       | $    | .6     |        |   | $    | 2.1   |      
|                                                            | Less interest paid by discontinued operations                                                                                     |                                                                                                       |      |       |        |   |      | (.9   | )    
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|                                                            |                                                                                                                                   | $                                                                                                     | .6   |        |        | $ | 1.2  |      
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|                                                            | Income taxes paid                                                                                                                 |                                                                                                       | $    | 12.8   |        |   | $    | 4.4   |      
|                                                            | Less income taxes paid by discontinued operations                                                                                 |                                                                                                       |      | (10.4  | )      |   |      | (4.4  | )    
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  
|                                                            |                                                                                                                                   | $                                                                                                     | 2.4  |        |        | $ |     |      
|                                                            |                                                                                                                                   |                                                                                                       |      |        |        |  



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

Background.












5



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Case Administration.






6



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Commodity-related and Inactive Subsidiaries.




|                                             |  |   |                 | 
|-------------------------------------------- |  | - | --------------- | 
|Senior Notes and Senior Subordinated Notes   |  | $ | 390.7 to $421.8 | 
|PBGC                                         |  | $ | 187.6 to $198.5 | 
|State of Louisiana Solid Waste Revenue Bonds |  | $ | 0.0 to $8.0     | 



3 4 7 8 7 8


7



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




7 8 7 8 7 8


7 8


8



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








Entities Containing the Fabricated Products and Certain Other
Operations.






9



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All of the equity interests of existing stockholders of
    the Company would be cancelled without consideration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (b) All post-petition and secured claims would either be
    assumed by the emerging entity or paid at emergence (see
    Exit Cost discussion below);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (c) Pursuant to agreements reached with salaried and hourly
    retirees in early 2004, in consideration for the agreed
    cancellation of the retiree medical plan, as more fully
    discussed in Note 8, the Company is making certain fixed
    monthly payments into Voluntary Employee Beneficiary
    Associations (VEBAs) until emergence and has agreed
    thereafter to make certain variable annual VEBA contributions
    depending on the emerging entitys operating results and
    financial liquidity. In addition, upon emergence the VEBAs would
    receive a contribution of 66.9% of the new common stock of the
    emerged entity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | (d) The PBGC will receive a cash payment of $2.5 and 10.8%
    of the new common stock of the emerged entity in respect of its
    claims against KACOCL. In addition, as described in
    (f) below, the PBGC will receive shares of new common stock
    based on its direct claims against the Remaining Debtors (other
    than KACOCL) and its participation, indirectly through the
    KAAC/KFC Plan in claims of KFC against KACC , which the Company
    currently estimates will result in the PBGC receiving an
    additional 5.4% of the new common stock of the emerged entity
    (bringing the PBGCs total ownership percentage of the new
    entity to approximately 16.2%). The $2.5 cash payment discussed
    above is in addition to the cash amounts the Company has agreed
    to pay to the PBGC at or before emergence (see Note 8) and
    that the PBGC will receive from the Liquidating Subsidiaries
    under the Liquidating Plans.                                                                                                                                                                                                                                                                   
|
| | (e) Pursuant to an agreement reached in early 2005, all
    pending and future asbestos-related personal injury claims, all
    pending and future silica and coal tar pitch volatiles personal
    injury claims and all hearing loss claims would be resolved
    through the formation of one or more trusts to which all such
    claims would be directed by channeling injunctions that would
    permanently remove all liability for such claims from the
    Debtors. The trusts would be funded pursuant to statutory
    requirements and agreements with representatives of the affected
    parties, using (i) the Debtors insurance assets,
    (ii) $13.0 in cash from the Company, (iii) 100% of the
    equity in a Company subsidiary whose sole asset will be a piece
    of real property that produces modest rental income, and
    (iv) the new common stock of the emerged entity to be
    issued as per (f) below in respect of approximately $830.0
    of intercompany claims of KFC against the Company that are to be
    assigned to the trust, which the Company currently estimates
    will result in the trusts receiving approximately 6.4% of the
    new common stock of the emerged entity; and
|
| | (f) Other pre-petition general unsecured claims against the
    Remaining Debtors (other than KACOCL) are to receive
    approximately 22.3% of the new common stock of the emerging
    entity in the proportion that their allowed claim bears to the
    total amount of allowed claims. Claims that are expected to be
    within this group include (i) any claims of the Senior
    Notes, the Sub Notes and PBGC (other than the PBGCs claim
    against KACOCL), (ii) the approximate $830.0 of
    intercompany claims that will be assigned to the personal injury
    trust(s) referred to in (e) above, and (iii) all
    unsecured trade and other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

10



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | general unsecured claims, including approximately $276.0 of
    intercompany claims of KFC against the Company. However, holders
    of general unsecured claims not exceeding a specified small
    amount will receive a cash payment equal to approximately 2.7%
    of their agreed claim value in lieu of new common stock. In
    accordance with the contractual subordination provisions of the
    indenture governing the Sub Notes and terms of the settlement
    between the holders of the Senior Notes and the holders of the
    Revenue Bonds, the new common stock or cash that would otherwise
    be distributed to the holders of the Sub Notes in respect of
    their claims against the Debtors would instead be distributed to
    holders of the Senior Notes and the Revenue Bonds on a pro rata
    basis based on their relative allowed amounts of their claims.







Financial Statement Presentation. Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code,




11



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Financial Information.


Condensed Consolidating Balance Sheets


June 30, 2005


|                                                        |                                                |         |          |       |             |                |     |         |  |   |              |      |   |   |          |       | 
|------------------------------------------------------- | ---------------------------------------------- | ------- | -------- | ----- | ----------- | -------------- | --- | ------- |  | - | ------------ | ---- | - | - | -------- | ----- | 
|                                                        |                                                |         |          |       |             | Consolidation/ |     |         | 
|                                                        |                                                |         |          |       |             | Elimination    |     |         | 
|                                                        |                                                | Debtors |          |       | Non-Debtors |                |     | Entries |  |   | Consolidated |     
|                                                        |                                                |         |          |       |             |                |     |         |  |   |              |     
|Current assets                                          |                                                | $       | 289.7    |       |             | $              | 2.2 |         |  | $ |             |      |   | $ | 291.9    |      
|Discontinued operations current assets                 |                                                |         | .5       |       |             |                |    |         |  |   |             |      |   |   | .5       |      
|Investments in subsidiaries and affiliate               |                                                |         | 18.1     |       |             |                |    |         |  |   | (3.5         | )    |   |   | 14.6     |      
|Intercompany receivables (payables), net                |                                                |         | (4.4     | )     |             |                | 4.4 |         |  |   |             |      |   |   |         |      
|Property and equipment, net                             |                                                |         | 213.0    |       |             |                |    |         |  |   |             |      |   |   | 213.0    |      
|Restricted proceeds from sale of commodity interests    |                                                |         | 675.0    |       |             |                |    |         |  |   |             |      |   |   | 675.0    |      
|Personal injury-related insurance recoveries receivable |                                                |         | 966.1    |       |             |                |    |         |  |   |             |      |   |   | 966.1    |      
|Other assets                                            |                                                |         | 47.6     |       |             |                |    |         |  |   |             |      |   |   | 47.6     |      
|Discontinued operations long term assets               |                                                |         |         |       |             |                |    |         |  |   |             |      |   |   |         |      
|                                                        |                                                |         |          |       |             |                |     |         |  |   |              |     
|                                                        |                                                | $       | 2,205.6  |       |             | $              | 6.6 |         |  | $ | (3.5         | )    |   | $ | 2,208.7  |      
|                                                        |                                                |         |          |       |             |                |     |         |  |   |              |     
|Liabilities not subject to compromise                  |                                                |         |          |       |             |                |     |         |  |   |              |      |   |   |          |      
|                                                        | Current liabilities                            |         | $        | 179.5 |             |                | $   | 3.9     |  |   | $            | (2.0 | ) |   | $        | 181.4 | 
|                                                        | Discontinued operations current liabilities   |         |          | 27.5  |             |                |     |        |  |   |              |     |   |   |          | 27.5  | 
|                                                        | Long-term liabilities                          |         |          | 37.3  |             |                |     | 1.2     |  |   |              |     |   |   |          | 38.5  | 
|                                                        | Discontinued operations long-term liabilities |         |          | 26.4  |             |                |     |        |  |   |              |     |   |   |          | 26.4  | 
|Liabilities subject to compromise                       |                                                |         | 3,950.4  |       |             |                |    |         |  |   |             |      |   |   | 3,950.4  |      
|Stockholders equity (deficit)                          |                                                |         | (2,015.5 | )     |             |                | 1.5 |         |  |   | (1.5         | )    |   |   | (2,015.5 | )    
|                                                        |                                                |         |          |       |             |                |     |         |  |   |              |     
|                                                        |                                                | $       | 2,205.6  |       |             | $              | 6.6 |         |  | $ | (3.5         | )    |   | $ | 2,208.7  |      
|                                                        |                                                |         |          |       |             |                |     |         |  |   |              |     

12



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Balance Sheets


December 31, 2004


|                                                        |                                                |         |          |       |             |                |     |         |  |   |              |      |   |   |          |       | 
|------------------------------------------------------- | ---------------------------------------------- | ------- | -------- | ----- | ----------- | -------------- | --- | ------- |  | - | ------------ | ---- | - | - | -------- | ----- | 
|                                                        |                                                |         |          |       |             | Consolidation/ |     |         | 
|                                                        |                                                |         |          |       |             | Elimination    |     |         | 
|                                                        |                                                | Debtors |          |       | Non-Debtors |                |     | Entries |  |   | Consolidated |     
|                                                        |                                                |         |          |       |             |                |     |         |  |   |              |     
|Current assets                                          |                                                | $       | 294.5    |       |             | $              | 2.1 |         |  | $ |             |      |   | $ | 296.6    |      
|Discontinued operations current assets                 |                                                |         | 30.6     |       |             |                |    |         |  |   |             |      |   |   | 30.6     |      
|Investments in subsidiaries and affiliate               |                                                |         | 20.9     |       |             |                |    |         |  |   | (4.2         | )    |   |   | 16.7     |      
|Intercompany receivables (payables), net                |                                                |         | (4.5     | )     |             |                | 4.5 |         |  |   |             |      |   |   |         |      
|Property and equipment, net                             |                                                |         | 214.6    |       |             |                |    |         |  |   |             |      |   |   | 214.6    |      
|Restricted proceeds from sale of commodity interests    |                                                |         | 280.8    |       |             |                |    |         |  |   |             |      |   |   | 280.8    |      
|Personal injury-related insurance recoveries receivable |                                                |         | 967.0    |       |             |                |    |         |  |   |             |      |   |   | 967.0    |      
|Other assets                                            |                                                |         | 42.5     |       |             |                |    |         |  |   |             |      |   |   | 42.5     |      
|Discontinued operations long term assets               |                                                |         | 38.9     |       |             |                |    |         |  |   |             |      |   |   | 38.9     |      
|                                                        |                                                |         |          |       |             |                |     |         |  |   |              |     
|                                                        |                                                | $       | 1,885.3  |       |             | $              | 6.6 |         |  | $ | (4.2         | )    |   | $ | 1,887.7  |      
|                                                        |                                                |         |          |       |             |                |     |         |  |   |              |     
|Liabilities not subject to compromise                  |                                                |         |          |       |             |                |     |         |  |   |              |      |   |   |          |      
|                                                        | Current liabilities                            |         | $        | 188.4 |             |                | $   | 3.2     |  |   | $            | (2.0 | ) |   | $        | 189.6 | 
|                                                        | Discontinued operations current liabilities   |         |          | 57.7  |             |                |     |        |  |   |              |     |   |   |          | 57.7  | 
|                                                        | Long-term liabilities                          |         |          | 34.5  |             |                |     | 1.2     |  |   |              |     |   |   |          | 35.7  | 
|                                                        | Discontinued operations long-term liabilities |         |          | 26.4  |             |                |     |        |  |   |              |     |   |   |          | 26.4  | 
|Liabilities subject to compromise                       |                                                |         | 3,954.9  |       |             |                |    |         |  |   |             |      |   |   | 3,954.9  |      
|Stockholders equity (deficit)                          |                                                |         | (2,376.6 | )     |             |                | 2.2 |         |  |   | (2.2         | )    |   |   | (2,376.6 | )    
|                                                        |                                                |         |          |       |             |                |     |         |  |   |              |     
|                                                        |                                                | $       | 1,885.3  |       |             | $              | 6.6 |         |  | $ | (4.2         | )    |   | $ | 1,887.7  |      
|                                                        |                                                |         |          |       |             |                |     |         |  |   |              |     

Condensed Consolidating Statements of Income (Loss)


For the Quarter Ended June 30, 2005


|                                  |                              |         |       |       |             |   |     |                |  |   |              |   |  |   |       |       | 
|--------------------------------- | ---------------------------- | ------- | ----- | ----- | ----------- | - | --- | -------------- |  | - | ------------ | - |  | - | ----- | ----- | 
|                                  |                              |         |       |       |             |   |     | Consolidation/ | 
|                                  |                              |         |       |       |             |   |     | Elimination    | 
|                                  |                              | Debtors |       |       | Non-Debtors |   |     | Entries        |  |   | Consolidated |  
|                                  |                              |         |       |       |             |   |     |                |  |   |              |  
|Net sales                         |                              | $       | 262.9 |       |             | $ |    |                |  | $ |             |   |  | $ | 262.9 |      
|                                  |                              |         |       |       |             |   |     |                |  |   |              |  
|Costs and expenses               |                              |         |       |       |             |   |     |                |  |   |              |   |  |   |       |      
|                                  | Operating costs and expenses |         |       | 255.6 |             |   |     | .6             |  |   |              |  |  |   |       | 256.2 | 
|                                  | Other operating charges      |         |       |      |             |   |     |               |  |   |              |  |  |   |       |      | 
|                                  |                              |         |       |       |             |   |     |                |  |   |              |  
|                                  |                              |         | 255.6 |       |             |   | .6  |                |  |   |              |   |  |   | 256.2 |      
|                                  |                              |         |       |       |             |   |     |                |  |   |              |  
|Operating income (loss)           |                              |         | 7.3   |       |             |   | (.6 | )              |  |   |             |   |  |   | 6.7   |      
|Interest expense                  |                              |         | (1.1  | )     |             |   |    |                |  |   |             |   |  |   | (1.1  | )    
|All other income (expense), net   |                              |         | (10.0 | )     |             |   | .1  |                |  |   |             |   |  |   | (9.9  | )    
|Income tax and minority interests |                              |         | (2.2  | )     |             |   |    |                |  |   |             |   |  |   | (2.2  | )    
|Equity in income of subsidiaries  |                              |         | (.5   | )     |             |   |    |                |  |   | .5           |   |  |   |      |      
|                                  |                              |         |       |       |             |   |     |                |  |   |              |  
|Loss from continuing operations   |                              |         | (6.5  | )     |             |   | (.5 | )              |  |   | .5           |   |  |   | (6.5  | )    
|Discontinued operations           |                              |         | 368.3 |       |             |   |    |                |  |   |             |   |  |   | 368.3 |      
|                                  |                              |         |       |       |             |   |     |                |  |   |              |  
|Net income (loss)                 |                              | $       | 361.8 |       |             | $ | (.5 | )              |  | $ | .5           |   |  | $ | 361.8 |      
|                                  |                              |         |       |       |             |   |     |                |  |   |              |  

13



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statements of Income (Loss)


For the Quarter Ended June 30, 2004


|                                  |                              |         |       |       |             |                |       |         |  |   |              |   |  |   |       |       | 
|--------------------------------- | ---------------------------- | ------- | ----- | ----- | ----------- | -------------- | ----- | ------- |  | - | ------------ | - |  | - | ----- | ----- | 
|                                  |                              |         |       |       |             | Consolidation/ |       |         | 
|                                  |                              |         |       |       |             | Elimination    |       |         | 
|                                  |                              | Debtors |       |       | Non-Debtors |                |       | Entries |  |   | Consolidated |  
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  
|Net sales                         |                              | $       | 230.1 |       |             | $              |      |         |  | $ |             |   |  | $ | 230.1 |      
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  
|Costs and expenses               |                              |         |       |       |             |                |       |         |  |   |              |   |  |   |       |      
|                                  | Operating costs and expenses |         |       | 234.2 |             |                |       | .3      |  |   |              |  |  |   |       | 234.5 | 
|                                  | Other operating charges      |         |       |      |             |                |       |        |  |   |              |  |  |   |       |      | 
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  
|                                  |                              |         | 234.2 |       |             |                | .3    |         |  |   |             |   |  |   | 234.5 |      
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  
|Operating income (loss)           |                              |         | (4.1  | )     |             |                | (.3   | )       |  |   |             |   |  |   | (4.4  | )    
|Interest expense                  |                              |         | (2.1  | )     |             |                |      |         |  |   |             |   |  |   | (2.1  | )    
|All other income (expense), net   |                              |         | (9.0  | )     |             |                | .1    |         |  |   | 2.9          |   |  |   | (6.0  | )    
|Income tax and minority interests |                              |         | (2.3  | )     |             |                |      |         |  |   |             |   |  |   | (2.3  | )    
|Equity in income of subsidiaries  |                              |         | (17.4 | )     |             |                |      |         |  |   | 17.4         |   |  |   |      |      
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  
|Loss from continuing operations   |                              |         | (34.9 | )     |             |                | (.2   | )       |  |   | 20.3         |   |  |   | (14.8 | )    
|Discontinued operations           |                              |         | 59.1  |       |             |                | (20.1 | )       |  |   |             |   |  |   | 39.0  |      
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  
|Net income (loss)                 |                              | $       | 24.2  |       |             | $              | (20.3 | )       |  | $ | 20.3         |   |  | $ | 24.2  |      
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  

Condensed Consolidating Statements of Income (Loss)


For the Six Months Ended June 30, 2005


|                                  |                              |         |       |       |             |                |     |         |  |   |              |   |  |   |       |       | 
|--------------------------------- | ---------------------------- | ------- | ----- | ----- | ----------- | -------------- | --- | ------- |  | - | ------------ | - |  | - | ----- | ----- | 
|                                  |                              |         |       |       |             | Consolidation/ |     |         | 
|                                  |                              |         |       |       |             | Elimination    |     |         | 
|                                  |                              | Debtors |       |       | Non-Debtors |                |     | Entries |  |   | Consolidated |  
|                                  |                              |         |       |       |             |                |     |         |  |   |              |  
|Net sales                         |                              | $       | 544.3 |       |             | $              |    |         |  | $ |             |   |  | $ | 544.3 |      
|                                  |                              |         |       |       |             |                |     |         |  |   |              |  
|Costs and expenses               |                              |         |       |       |             |                |     |         |  |   |              |   |  |   |       |      
|                                  | Operating costs and expenses |         |       | 520.3 |             |                |     | .7      |  |   |              |  |  |   |       | 521.0 | 
|                                  | Other operating charges      |         |       | 6.2   |             |                |     |        |  |   |              |  |  |   |       | 6.2   | 
|                                  |                              |         |       |       |             |                |     |         |  |   |              |  
|                                  |                              |         | 526.5 |       |             |                | .7  |         |  |   |              |   |  |   | 527.2 |      
|                                  |                              |         |       |       |             |                |     |         |  |   |              |  
|Operating income (loss)           |                              |         | 17.8  |       |             |                | (.7 | )       |  |   |             |   |  |   | 17.1  |      
|Interest expense                  |                              |         | (3.2  | )     |             |                |    |         |  |   |             |   |  |   | (3.2  | )    
|All other income (expense), net   |                              |         | (18.2 | )     |             |                | .1  |         |  |   |             |   |  |   | (18.1 | )    
|Income tax and minority interests |                              |         | (4.6  | )     |             |                |    |         |  |   |             |   |  |   | (4.6  | )    
|Equity in income of subsidiaries  |                              |         | (.6   | )     |             |                |    |         |  |   | .6           |   |  |   |      |      
|                                  |                              |         |       |       |             |                |     |         |  |   |              |  
|Loss from continuing operations   |                              |         | (8.8  | )     |             |                | (.6 | )       |  |   | .6           |   |  |   | (8.8  | )    
|Discontinued operations           |                              |         | 378.9 |       |             |                |    |         |  |   |             |   |  |   | 378.9 |      
|                                  |                              |         |       |       |             |                |     |         |  |   |              |  
|Net income (loss)                 |                              | $       | 370.1 |       |             | $              | (.6 | )       |  | $ | .6           |   |  | $ | 370.1 |      
|                                  |                              |         |       |       |             |                |     |         |  |   |              |  

14



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statements of Income (Loss)


For the Six Months Ended June 30, 2004


|                                  |                              |         |       |       |             |                |       |         |  |   |              |   |  |   |       |       | 
|--------------------------------- | ---------------------------- | ------- | ----- | ----- | ----------- | -------------- | ----- | ------- |  | - | ------------ | - |  | - | ----- | ----- | 
|                                  |                              |         |       |       |             | Consolidation/ |       |         | 
|                                  |                              |         |       |       |             | Elimination    |       |         | 
|                                  |                              | Debtors |       |       | Non-Debtors |                |       | Entries |  |   | Consolidated |  
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  
|Net sales                         |                              | $       | 440.3 |       |             | $              |      |         |  | $ |             |   |  | $ | 440.3 |      
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  
|Costs and expenses               |                              |         |       |       |             |                |       |         |  |   |              |   |  |   |       |      
|                                  | Operating costs and expenses |         |       | 454.4 |             |                |       | .5      |  |   |              |  |  |   |       | 454.9 | 
|                                  | Other operating charges      |         |       |      |             |                |       |        |  |   |              |  |  |   |       |      | 
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  
|                                  |                              |         | 454.4 |       |             |                | .5    |         |  |   |             |   |  |   | 454.9 |      
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  
|Operating income (loss)           |                              |         | (14.1 | )     |             |                | (.5   | )       |  |   |             |   |  |   | (14.6 | )    
|Interest expense                  |                              |         | (4.1  | )     |             |                |      |         |  |   |             |   |  |   | (4.1  | )    
|All other income (expense), net   |                              |         | (20.7 | )     |             |                | .1    |         |  |   | 5.8          |   |  |   | (14.8 | )    
|Income tax and minority interests |                              |         | (3.8  | )     |             |                |      |         |  |   |             |   |  |   | (3.8  | )    
|Equity in income of subsidiaries  |                              |         | (52.4 | )     |             |                |      |         |  |   | 52.4         |   |  |   |      |      
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  
|Loss from continuing operations   |                              |         | (95.1 | )     |             |                | (.4   | )       |  |   | 58.2         |   |  |   | (37.3 | )    
|Discontinued operations           |                              |         | 55.4  |       |             |                | (57.8 | )       |  |   |             |   |  |   | (2.4  | )    
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  
|Net income (loss)                 |                              | $       | (39.7 | )     |             | $              | (58.2 | )       |  | $ | 58.2         |   |  | $ | (39.7 | )    
|                                  |                              |         |       |       |             |                |       |         |  |   |              |  

Condensed Consolidating Statements of Cash Flows


For the Six Months Ended June 30, 2005


|                                               |                         |         |        |        |             |                |     |         |   |              |   |   |  |   |        |        |  
|---------------------------------------------- | ----------------------- | ------- | ------ | ------ | ----------- | -------------- | --- | ------- | - | ------------ | - | - |  | - | ------ | ------ | -
|                                               |                         |         |        |        |             | Consolidation/ |     |        
|                                               |                         |         |        |        |             | Elimination    |     |        
|                                               |                         | Debtors |        |        | Non-Debtors |                |     | Entries |   | Consolidated |  
|                                               |                         |         |        |        |             |                |     |         |   |              |  
|Net cash provided (used) by:                   |                         |         |        |        |             |                |     |         |   |              |   |   |  |   |        |       
|Operating activities                          |                         |         |        |        |             |                |     |         |   |              |   |   |  |   |        |       
|                                               | Continuing operations   |         | $      | (8.0   | )           |                | $   | (.3     | ) |              | $ |  |  |   | $      | (8.3   | )
|                                               | Discontinued operations |         |        | 19.6   |             |                |     |        |   |              |   |  |  |   |        | 19.6   |  
|                                               |                         |         |        |        |             |                |     |         |   |              |   |  
|                                               |                         |         | 11.6   |        |             |                | (.3 | )       |   |              |  |   |  |   | 11.3   |       
|                                               |                         |         |        |        |             |                |     |         |   |              |   |  
|Investing activities                          |                         |         |        |        |             |                |     |         |   |              |   |   |  |   |        |       
|                                               | Continuing operations   |         |        | (8.6   | )           |                |     |        |   |              |   |  |  |   |        | (8.6   | )
|                                               | Discontinued operations |         |        | 401.4  |             |                |     |        |   |              |   |  |  |   |        | 401.4  |  
|                                               |                         |         |        |        |             |                |     |         |   |              |   |  
|                                               |                         |         | 392.8  |        |             |                |    |         |   |              |  |   |  |   | 392.8  |       
|                                               |                         |         |        |        |             |                |     |         |   |              |   |  
|Financing activities                          |                         |         |        |        |             |                |     |         |   |              |   |   |  |   |        |       
|                                               | Continuing operations   |         |        | (8.6   | )           |                |     |        |   |              |   |  |  |   |        | (8.6   | )
|                                               | Discontinued operations |         |        | (396.6 | )           |                |     |        |   |              |   |  |  |   |        | (396.6 | )
|                                               |                         |         |        |        |             |                |     |         |   |              |   |  
|                                               |                         |         | (405.2 | )      |             |                |    |         |   |              |  |   |  |   | (405.2 | )     
|                                               |                         |         |        |        |             |                |     |         |   |              |   |  
|Net decrease in cash and cash equivalents      |                         |         | (.8    | )      |             |                | (.3 | )       |   |              |  |   |  |   | (1.1   | )     
|Cash and cash equivalents, beginning of period |                         |         | 55.0   |        |             |                | .4  |         |   |              |  |   |  |   | 55.4   |       
|                                               |                         |         |        |        |             |                |     |         |   |              |   |  
|Cash and cash equivalents, end of period       |                         | $       | 54.2   |        |             | $              | .1  |         |   | $            |  |   |  | $ | 54.3   |       
|                                               |                         |         |        |        |             |                |     |         |   |              |   |  

15



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statements of Cash Flows


For the Six Months Ended June 30, 2004


|                                               |                         |         |       |       |             |                |      |         |   |              |   |   |  |   |       |       |  
|---------------------------------------------- | ----------------------- | ------- | ----- | ----- | ----------- | -------------- | ---- | ------- | - | ------------ | - | - |  | - | ----- | ----- | -
|                                               |                         |         |       |       |             | Consolidation/ |      |        
|                                               |                         |         |       |       |             | Elimination    |      |        
|                                               |                         | Debtors |       |       | Non-Debtors |                |      | Entries |   | Consolidated |  
|                                               |                         |         |       |       |             |                |      |         |   |              |  
|Net cash provided (used) by:                   |                         |         |       |       |             |                |      |         |   |              |   |   |  |   |       |      
|Operating activities                          |                         |         |       |       |             |                |      |         |   |              |   |   |  |   |       |      
|                                               | Continuing operations   |         | $     | (49.4 | )           |                | $    | (.5     | ) |              | $ |  |  |   | $     | (49.9 | )
|                                               | Discontinued operations |         |       | 28.5  |             |                |      | 3.4     |   |              |   |  |  |   |       | 31.9  |  
|                                               |                         |         |       |       |             |                |      |         |   |              |   |  
|                                               |                         |         | (20.9 | )     |             |                | 2.9  |         |   |              |  |   |  |   | (18.0 | )    
|                                               |                         |         |       |       |             |                |      |         |   |              |   |  
|Investing activities                          |                         |         |       |       |             |                |      |         |   |              |   |   |  |   |       |      
|                                               | Continuing operations   |         |       | (2.6  | )           |                |      |        |   |              |   |  |  |   |       | (2.6  | )
|                                               | Discontinued operations |         |       | 13.8  |             |                |      | (2.9    | ) |              |   |  |  |   |       | 10.9  |  
|                                               |                         |         |       |       |             |                |      |         |   |              |   |  
|                                               |                         |         | 11.2  |       |             |                | (2.9 | )       |   |              |  |   |  |   | 8.3   |      
|                                               |                         |         |       |       |             |                |      |         |   |              |   |  
|Financing activities                          |                         |         |       |       |             |                |      |         |   |              |   |   |  |   |       |      
|                                               | Continuing operations   |         |       | (.2   | )           |                |      |        |   |              |   |  |  |   |       | (.2   | )
|                                               | Discontinued operations |         |       |      |             |                |      |        |   |              |   |  |  |   |       |      |  
|                                               |                         |         |       |       |             |                |      |         |   |              |   |  
|                                               |                         |         | (.2   | )     |             |                |     |         |   |              |  |   |  |   | (.2   | )    
|                                               |                         |         |       |       |             |                |      |         |   |              |   |  
|Net decrease in cash and cash equivalents      |                         |         | (9.9  | )     |             |                |     |         |   |              |  |   |  |   | (9.9  | )    
|Cash and cash equivalents, beginning of period |                         |         | 35.4  |       |             |                | .1   |         |   |              |  |   |  |   | 35.5  |      
|                                               |                         |         |       |       |             |                |      |         |   |              |   |  
|Cash and cash equivalents, end of period       |                         | $       | 25.5  |       |             | $              | .1   |         |   | $            |  |   |  | $ | 25.6  |      
|                                               |                         |         |       |       |             |                |      |         |   |              |   |  

Classification of Liabilities as Liabilities Not
Subject to Compromise Versus Liabilities Subject to
Compromise.




16



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                            |  |          |         |  |              |   |         | 
|--------------------------------------------------------------------------- |  | -------- | ------- |  | ------------ | - | ------- | 
|                                                                            |  | June 30, |         |  | December 31, |  
|                                                                            |  | 2005     |         |  | 2004         |  
|                                                                            |  |          |         |  |              |  
|Accrued postretirement medical obligation (Note 8)                          |  | $        | 1,041.7 |  |              | $ | 1,042.1 | 
|Accrued asbestos and certain other personal injury liabilities
    (Note 9) |  |          | 1,115.0 |  |              |   | 1,115.0 | 
|Debt (Note 6)                                                               |  |          | 847.6   |  |              |   | 847.6   | 
|Accrued pension benefits (Note 8)                                           |  |          | 624.0   |  |              |   | 625.7   | 
|Unfair labor practice settlement (Note 9)                                   |  |          | 175.0   |  |              |   | 175.0   | 
|Accounts payable                                                            |  |          | 30.0    |  |              |   | 29.8    | 
|Accrued interest                                                            |  |          | 44.8    |  |              |   | 47.5    | 
|Accrued environmental liabilities (Note 9)                                  |  |          | 30.8    |  |              |   | 30.6    | 
|Other accrued liabilities(1)                                                |  |          | 41.5    |  |              |   | 41.6    | 
|                                                                            |  |          |         |  |              |  
|                                                                            |  | $        | 3,950.4 |  |              | $ | 3,954.9 | 
|                                                                            |  |          |         |  |              |  






|    |                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------
|(1) | Other accrued liabilities include hearing loss claims of $15.8
    at June 30, 2005 and December 31, 2004 (see
    Note 9).





Reorganization Items.


|                  |  |               |      |   |                |   |      |      |  |   |      |   |  |   |      |  
|----------------- |  | ------------- | ---- | - | -------------- | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                  |  | Quarter Ended |      |   | Six Months     |  
|                  |  | June 30,      |      |   | Ended June 30, |  
|                  |  |               |      |   |                |  
|                  |  | 2005          |      |   | 2004           |   |      | 2005 |  |   | 2004 |  
|                  |  |               |      |   |                |   |      |      |  |   |      |  
|Professional fees |  | $             | 12.5 |   |                | $ | 10.2 |      |  | $ | 20.5 |   |  | $ | 18.5 |  
|Interest income   |  |               | (.5  | ) |                |   |     |      |  |   | (.8  | ) |  |   | (.1  | )
|Other (Note 6)    |  |               | (2.7 | ) |                |   | .1   |      |  |   | (2.6 | ) |  |   | .5   |  
|                  |  |               |      |   |                |   |      |      |  |   |      |  
|                  |  | $             | 9.3  |   |                | $ | 10.3 |      |  | $ | 17.1 |   |  | $ | 18.9 |  
|                  |  |               |      |   |                |   |      |      |  |   |      |  



|   |                                           
|-- | ------------------------------------------
|2. | Summary of Significant Accounting Policies



17



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Going Concern.


Financial Statement
Presentation in Note 1


Principles of Consolidation.








Derivative Financial Instruments.




18



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


New Accounting Pronouncements. Accounting for
Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143


Accounting Changes and Error Corrections Accounting Changes Reporting Changes in Interim Financial Statements.


Reclassifications.




|   |            
|-- | -----------
|3. | Inventories



|                               |                                                      |          |       |      |              |   |       |      | 
|------------------------------ | ---------------------------------------------------- | -------- | ----- | ---- | ------------ | - | ----- | ---- | 
|                               |                                                      | June 30, |       |      | December 31, |  
|                               |                                                      | 2005     |       |      | 2004         |  
|                               |                                                      |          |       |      |              |  
|Fabricated products           |                                                      |          |       |      |              |   |       |     
|                               | Finished products                                    |          | $     | 25.4 |              |   | $     | 23.3 | 
|                               | Work in process                                      |          |       | 47.0 |              |   |       | 42.2 | 
|                               | Raw materials                                        |          |       | 30.7 |              |   |       | 27.9 | 
|                               | Operating supplies and repairs and maintenance parts |          |       | 12.0 |              |   |       | 11.8 | 
|                               |                                                      |          |       |      |              |  
|                               |                                                      |          | 115.1 |      |              |   | 105.2 |     
|Commodities  Primary aluminum |                                                      |          | .1    |      |              |   | .1    |     
|                               |                                                      |          |       |      |              |  
|                               |                                                      | $        | 115.2 |      |              | $ | 105.3 |     
|                               |                                                      |          |       |      |              |  



19



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                        
|-- | -----------------------
|4. | Discontinued Operations

Accounting for
the Impairment or Disposal of Long-Lived Assets








|                                    |  |               |      |         |                   |   |     |       |  |         |           |  |          |           |      |  |       |   |     |  |  |   |      | 
|----------------------------------- |  | ------------- | ---- | ------- | ----------------- | - | --- | ----- |  | ------- | --------- |  | -------- | --------- | ---- |  | ----- | - | --- |  |  | - | ---- | 
|                                    |  | June 30, 2005 |      |         | December 31, 2004 |  
|                                    |  |               |      |         |                   |  
|                                    |  |               |      | Primary |                   |   |     |       |  |         | Primary   |  |          |          
|                                    |  | Alumina       |      |         | Aluminum          |   |     |       |  | Alumina |           |  | Aluminum |           |      | 
|                                    |  | Interests     |      |         | Interests         |   |     | Total |  |         | Interests |  |          | Interests |      |  | Total |  
|                                    |  |               |      |         |                   |   |     |       |  |         |           |  |          |           |      |  |       |  
|Current assets                      |  | $             | .5   |         |                   | $ |    |       |  | $       | .5        |  |          | $         | 30.6 |  |       | $ |    |  |  | $ | 30.6 | 
|Investments in affiliates and other |  |               |     |         |                   |   |    |       |  |         |          |  |          |           | 38.9 |  |       |   |    |  |  |   | 38.9 | 
|                                    |  |               |      |         |                   |   |     |       |  |         |           |  |          |           |      |  |       |  
|                                    |  | $             | .5   |         |                   | $ |    |       |  | $       | .5        |  |          | $         | 69.5 |  |       | $ |    |  |  | $ | 69.5 | 
|                                    |  |               |      |         |                   |   |     |       |  |         |           |  |          |           |      |  |       |  
|Current liabilities                 |  | $             | 27.0 |         |                   | $ | .5  |       |  | $       | 27.5      |  |          | $         | 57.3 |  |       | $ | .4  |  |  | $ | 57.7 | 
|Liabilities subject to compromise   |  |               | 25.6 |         |                   |   | .8  |       |  |         | 26.4      |  |          |           | 25.6 |  |       |   | .8  |  |  |   | 26.4 | 
|                                    |  |               |      |         |                   |   |     |       |  |         |           |  |          |           |      |  |       |  
|                                    |  | $             | 52.6 |         |                   | $ | 1.3 |       |  | $       | 53.9      |  |          | $         | 82.9 |  |       | $ | 1.2 |  |  | $ | 84.1 | 
|                                    |  |               |      |         |                   |   |     |       |  |         |           |  |          |           |      |  |       |  

20



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                         |  |               |       |         |               |   |       |  |         |           |       |          |           |   |       |       |  |   |       |   |  |   |       | 
|-------------------------------------------------------- |  | ------------- | ----- | ------- | ------------- | - | ----- |  | ------- | --------- | ----- | -------- | --------- | - | ----- | ----- |  | - | ----- | - |  | - | ----- | 
|                                                         |  | Quarter Ended |       |         | Quarter Ended |  
|                                                         |  | June 30, 2005 |       |         | June 30, 2004 |  
|                                                         |  |               |       |         |               |  
|                                                         |  |               |       | Primary |               |   |       |  |         | Primary   |       |          |          
|                                                         |  | Alumina       |       |         | Aluminum      |   |       |  | Alumina |           |       | Aluminum |           |   |      
|                                                         |  | Interests     |       |         | Interests     |   | Total |  |         | Interests |       |          | Interests |   |       | Total | 
|                                                         |  |               |       |         |               |   |       |  |         |           |       |          |           |   |       |       | 
|Net sales                                                |  | $             |      |         |               | $ |      |  |         | $         |      |          |           | $ | 218.2 |       |  | $ |      |   |  | $ | 218.2 | 
|Operating income (loss)                                  |  |               | (.2   | )       |               |   |      |  |         |           | (.2   | )        |           |   | 31.5  |       |  |   | (10.6 | ) |  |   | 20.9  | 
|Gain on sale of commodity interests                      |  |               | 365.6 |         |               |   |      |  |         |           | 365.6 |          |           |   |      |       |  |   | 23.4  |   |  |   | 23.4  | 
|Income (loss) before income taxes and minority interests |  |               | 369.9 |         |               |   |      |  |         |           | 369.9 |          |           |   | 31.0  |       |  |   | 12.8  |   |  |   | 43.8  | 
|Net income (loss)                                        |  |               | 368.3 |         |               |   |      |  |         |           | 368.3 |          |           |   | 25.7  |       |  |   | 13.3  |   |  |   | 39.0  | 

|                                                         |  |                  |       |         |                  |   |       |  |         |           |       |          |           |   |       |       |  |   |       |   |  |   |       |  
|-------------------------------------------------------- |  | ---------------- | ----- | ------- | ---------------- | - | ----- |  | ------- | --------- | ----- | -------- | --------- | - | ----- | ----- |  | - | ----- | - |  | - | ----- | -
|                                                         |  | Six Months Ended |       |         | Six Months Ended |  
|                                                         |  | June 30, 2005    |       |         | June 30, 2004    |  
|                                                         |  |                  |       |         |                  |  
|                                                         |  |                  |       | Primary |                  |   |       |  |         | Primary   |       |          |          
|                                                         |  | Alumina          |       |         | Aluminum         |   |       |  | Alumina |           |       | Aluminum |           |   |      
|                                                         |  | Interests        |       |         | Interests        |   | Total |  |         | Interests |       |          | Interests |   |       | Total | 
|                                                         |  |                  |       |         |                  |   |       |  |         |           |       |          |           |   |       |       | 
|Net sales                                                |  | $                | 42.9  |         |                  | $ |      |  |         | $         | 42.9  |          |           | $ | 378.1 |       |  | $ |      |   |  | $ | 378.1 |  
|Operating income (loss)(1)                               |  |                  | 11.2  |         |                  |   |      |  |         |           | 11.2  |          |           |   | 41.5  |       |  |   | (58.4 | ) |  |   | (16.9 | )
|Gain on sale of commodity interests                      |  |                  | 365.6 |         |                  |   |      |  |         |           | 365.6 |          |           |   |      |       |  |   | 23.4  |   |  |   | 23.4  |  
|Income (loss) before income taxes and minority interests |  |                  | 383.1 |         |                  |   |      |  |         |           | 383.1 |          |           |   | 40.7  |       |  |   | (34.9 | ) |  |   | 5.8   |  
|Net income (loss)                                        |  |                  | 378.9 |         |                  |   |      |  |         |           | 378.9 |          |           |   | 31.6  |       |  |   | (34.0 | ) |  |   | (2.4  | )






|    |                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------
|(1) | Primary aluminum interests for the six months ended
    June 30, 2004 include Valco impairment charges of $33.0
    (Notes 3 and 5).





21



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                               
|-- | ------------------------------
|5. | Property, Plant, and Equipment



|                         |                                     |          |        |       |              |   |        |       | 
|------------------------ | ----------------------------------- | -------- | ------ | ----- | ------------ | - | ------ | ----- | 
|                         |                                     | June 30, |        |       | December 31, |  
|                         |                                     | 2005     |        |       | 2004         |  
|                         |                                     |          |        |       |              |  
|Land and improvements    |                                     | $        | 8.2    |       |              | $ | 8.2    |      
|Buildings                |                                     |          | 62.1   |       |              |   | 63.8   |      
|Machinery and equipment  |                                     |          | 460.5  |       |              |   | 459.8  |      
|Construction in progress |                                     |          | 13.8   |       |              |   | 6.1    |      
|                         |                                     |          |        |       |              |  
|                         |                                     |          | 544.6  |       |              |   | 537.9  |      
|Accumulated depreciation |                                     |          | (331.6 | )     |              |   | (323.3 | )    
|                         |                                     |          |        |       |              |  
|                         | Property, plant, and equipment, net |          | $      | 213.0 |              |   | $      | 214.6 | 
|                         |                                     |          |        |       |              |  



2005 




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In April 2005, the Company completed the sale of its interests
    in and related to QAL. Net cash proceeds from the sale total
    approximately $401.4. The buyer also assumed the Companys
    obligations in respect of approximately $60.0 of QAL debt (see
    Note 4). In connection with the completion of the sale, the
    Company also paid a termination fee of $11.0. After considering
    transaction costs (including the termination fee and a $7.7
    deferred charge associated with a back-up bid fee), the
    transaction resulted in a gain, net of estimated income tax of
    $8.5, of approximately $365.6. As described in Note 1, a
    substantial majority of the proceeds from the sale of the
    Companys interests in and related to QAL are being held in
    escrow for the benefit of KAACs creditors until the KAAC/
    KFC Plan is confirmed by the Court (see Note 1). In
    accordance with SFAS No. 144, balances and results of
    operations related to the Companys interests in and
    related to QAL have been reported as discontinued operations in
    the accompanying financial statements (see Note 4).

2004 




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, 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 and $3.3 of
    transaction-related costs. The balance of the proceeds are being
    held in escrow primarily for the benefit of certain creditors as
    outlined in the AJI/ KJC Plan. In accordance with
    SFAS No. 144, balances and results of operations
    related to the Companys interests in and related to Alpart
    have been reported as discontinued operations in the
    accompanying financial statements (see Note 4). A net
    benefit of approximately $1.6 was recorded in December 2004 in
    respect of the Alpart-related purchase price adjustments. Such
    amounts were collected during the second quarter of 2005.
|
| |  | 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. Such                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

22



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | adjustments were insignificant. The transaction was completed at
    an amount approximating its remaining book value (after
    impairment charges). A substantial portion of the proceeds were
    used to satisfy transaction related costs and obligations. As
    previously reported, the Company had determined that the fair
    values of its interests in and related to Gramercy/ KJBC was
    below the carrying values of the assets because all offers that
    had been received for such assets were substantially below the
    carrying values of the assets. Accordingly, in the fourth
    quarter of 2003, the Company adjusted the carrying value of its
    interests in and related to Gramercy/ KJBC to the estimated fair
    value, which resulted in a non-cash impairment charge of
    approximately $368.0. In accordance with SFAS No. 144,
    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 4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | During 2003, the Company and Valco participated in extensive
    negotiations with the Government of Ghana (GoG) and
    the Volta River Authority (VRA) regarding
    Valcos 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
    first quarter 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 (which amount was
    reflected in discontinued operations  see
    Note 4). As a result, at closing there was no material gain
    or loss on disposition. In accordance with
    SFAS No. 144, balances and results of operations
    related to the Companys interests in and related to Valco
    have been reported as discontinued operations in the
    accompanying financial statements (see Note 4).
|
| |  | 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 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. Through March 31, 2005,
    proceeds from the sale of the Mead Facility totaling $4.0 were
    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 was
    determined by the Court (see Note 6). In accordance with
    SFAS No. 144, the assets, liabilities and operating
    results of the Mead Facility have been reported as discontinued
    operations in the accompanying financial statements (see
    Note 4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

23



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |               
|-- | --------------
|6. | Long-Term Debt



|                           |                                                  |                                                                                             |       |       |              |   |       |       |        |  
|-------------------------- | ------------------------------------------------ | ------------------------------------------------------------------------------------------- | ----- | ----- | ------------ | - | ----- | ----- | ------ | -
|                           |                                                  | June 30,                                                                                    |       |       | December 31, |  
|                           |                                                  | 2005                                                                                        |       |       | 2004         |  
|                           |                                                  |                                                                                             |       |       |              |  
|Secured:                   |                                                  |                                                                                             |       |       |              |   |       |      
|                           | Post-Petition Credit Agreement                   |                                                                                             | $     |      |              |   | $     |      |       
|                           | 7.6% Solid Waste Disposal Revenue Bonds due 2027 |                                                                                             |       |      |              |   |       | 1.6   |       
|                           | Other borrowings (fixed rate)                    |                                                                                             |       | 2.4   |              |   |       | 2.4   |       
|Unsecured or Undersecured: |                                                  |                                                                                             |       |       |              |   |       |      
|                           | 97/8% Senior
    Notes due 2002, net             |                                                                                             |       | 172.8 |              |   |       | 172.8 |       
|                           | 107/8% Senior
    Notes due 2006, net            |                                                                                             |       | 225.0 |              |   |       | 225.0 |       
|                           | 123/4% Senior
    Subordinated Notes due 2003    |                                                                                             |       | 400.0 |              |   |       | 400.0 |       
|                           | 7.6% Solid Waste Disposal Revenue Bonds due 2027 |                                                                                             |       | 17.4  |              |   |       | 17.4  |       
|                           | Other borrowings (fixed and variable rates)      |                                                                                             |       | 32.4  |              |   |       | 32.4  |       
|                           |                                                  |                                                                                             |       |       |              |  
|Total                      |                                                  |                                                                                             | 850.0 |       |              |   | 851.6 |      
|Less  Current portion     |                                                  |                                                                                             | (1.2  | )     |              |   | (1.2  | )    
|                           |                                                  | Pre-Filing Date claims included in subject to compromise (i.e.
    unsecured debt) (Note 1) |       |       | (847.6       | ) |       |       | (847.6 | )
|                           |                                                  |                                                                                             |       |       |              |  
|Long-term debt             |                                                  | $                                                                                           | 1.2   |       |              | $ | 2.8   |      
|                           |                                                  |                                                                                             |       |       |              |  





| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Replaced the existing post-petition credit facility with a new
    $200.0 post-petition credit facility (the DIP
    Facility) and                                                                                                                                    
|
| |  | Included a commitment, upon the Debtors emergence from the
    Chapter 11 proceedings, for exit financing in the form of a
    $200.0 revolving credit facility (the Revolving Credit
    Facility) and a fully drawn term loan (the Term
    Loan) of up to $50.0.





24



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












7.6% Solid Waste Disposal Revenue Bonds.


25



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |             
|-- | ------------
|7. | Income Taxes









|   |                                     
|-- | ------------------------------------
|8. | Employee Benefit and Incentive Plans

Historical Pension and Other Postretirement Benefit
Plans.


Reorganization Efforts Affecting Pension and Post Retirement
Medical Obligations.




26



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)







Contingencies Regarding Settlement with the PBGC.


27



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                        
| | ---------------------------------------
| | Components of Net Periodic Benefit Cost



|                                                 |                       |                        |     |    |                           |   |      |          |  |   |              |   |  |      |      |      |      |   |     |      |  |   |       |     |  |   |      |   |  |   |       |      | 
|------------------------------------------------ | --------------------- | ---------------------- | --- | -- | ------------------------- | - | ---- | -------- |  | - | ------------ | - |  | ---- | ---- | ---- | ---- | - | --- | ---- |  | - | ----- | --- |  | - | ---- | - |  | - | ----- | ---- | 
|                                                 |                       | Quarter Ended June 30, |     |    | Six Months Ended June 30, |  
|                                                 |                       |                        |     |    |                           |  
|                                                 |                       | Pension                |     |    | Medical/Life              |   |      | Pension  |  |   | Medical/Life |  
|                                                 |                       | Benefits               |     |    | Benefits                  |   |      | Benefits |  |   | Benefits     |  
|                                                 |                       |                        |     |    |                           |   |      |          |  |   |              |  
|                                                 |                       | 2005                   |     |    | 2004                      |   |      | 2005     |  |   | 2004         |   |  | 2005 |      |      | 2004 |   |     | 2005 |  |   | 2004  |    
|                                                 |                       |                        |     |    |                           |   |      |          |  |   |              |   |  |      |      |      |      |   |     |      |  |   |       |    
|Service cost                                     |                       | $                      | .2  |    |                           | $ | 1.6  |          |  | $ |             |   |  | $    | 1.7  |      |      | $ | .5  |      |  | $ | 3.1   |     |  | $ |     |   |  | $ | 3.5   |     
|Interest cost                                    |                       |                        | .3  |    |                           |   | 10.7 |          |  |   |             |   |  |      | 14.7 |      |      |   | .6  |      |  |   | 21.5  |     |  |   |     |   |  |   | 29.4  |     
|Expected return on plan assets                   |                       |                        | (.3 | )  |                           |   | (8.0 | )        |  |   |             |   |  |      |     |      |      |   | (.5 | )    |  |   | (16.1 | )   |  |   |     |   |  |   |      |     
|Amortization of prior service cost               |                       |                        | .1  |    |                           |   | .8   |          |  |   |             |   |  |      | (5.6 | )    |      |   | .1  |      |  |   | 1.7   |     |  |   |     |   |  |   | (11.0 | )   
|Amortization of net (gain) loss                  |                       |                        | .1  |    |                           |   | 1.8  |          |  |   |             |   |  |      | 6.3  |      |      |   | .1  |      |  |   | 3.6   |     |  |   |     |   |  |   | 12.4  |     
|                                                 |                       |                        |     |    |                           |   |      |          |  |   |              |   |  |      |      |      |      |   |     |      |  |   |       |    
|Net periodic benefit costs                       |                       |                        | .4  |    |                           |   | 6.9  |          |  |   |             |   |  |      | 17.1 |      |      |   | .8  |      |  |   | 13.8  |     |  |   |     |   |  |   | 34.3  |     
|Less discontinued operations reported separately |                       |                        |    |    |                           |   | (2.2 | )        |  |   |             |   |  |      | (3.9 | )    |      |   |    |      |  |   | (4.5  | )   |  |   |     |   |  |   | (8.9  | )   
|                                                 |                       |                        |     |    |                           |   |      |          |  |   |              |   |  |      |      |      |      |   |     |      |  |   |       |    
|                                                 | Defined benefit plans |                        |     | .4 |                           |   |      | 4.7      |  |   |              |  |  |      |      | 13.2 |      |   |     | .8   |  |   |       | 9.3 |  |   |      |  |  |   |       | 25.4 | 
|401K (pension)/ VEBA (medical)                   |                       |                        | 1.7 |    |                           |   |     |          |  |   | 5.7          |   |  |      |     |      |      |   | 3.4 |      |  |   |      |     |  |   | 12.4 |   |  |   |      |     
|                                                 |                       |                        |     |    |                           |   |      |          |  |   |              |   |  |      |      |      |      |   |     |      |  |   |       |    
|                                                 |                       | $                      | 2.1 |    |                           | $ | 4.7  |          |  | $ | 5.7          |   |  | $    | 13.2 |      |      | $ | 4.2 |      |  | $ | 9.3   |     |  | $ | 12.4 |   |  | $ | 25.4  |     
|                                                 |                       |                        |     |    |                           |   |      |          |  |   |              |   |  |      |      |      |      |   |     |      |  |   |       |    







| |                                          
| | -----------------------------------------
| | Description of Defined Contribution Plans





28



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




i.e.




| |          
| | ---------
| | Cash Flow

Domestic Plans.








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.
|
| |  | 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 will 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.                                                                                                                                                                                                                 





29



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Foreign Plans.




|   |                              
|-- | -----------------------------
|9. | Commitments and Contingencies

Impact of Reorganization Proceedings.


Commitments.




Environmental Contingencies.






30



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














Other Environmental Matters.


31



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Asbestos and Certain Other Personal Injury Claims.






|              |  |          |         |  |              |   |         | 
|------------- |  | -------- | ------- |  | ------------ | - | ------- | 
|              |  | June 30, |         |  | December 31, |  
|              |  | 2005     |         |  | 2004         |  
|              |  |          |         |  |              |  
|Liability     |  | $        | 1,115.0 |  |              | $ | 1,115.0 | 
|Receivable(1) |  |          | 966.1   |  |              |   | 967.0   | 
|              |  |          |         |  |              |  
|              |  | $        | 148.9   |  |              | $ | 148.0   | 
|              |  |          |         |  |              |  

|                                             |  |                  |    |  |           |   |        |  
|-------------------------------------------- |  | ---------------- | -- |  | --------- | - | ------ | -
|                                             |  | Six Months Ended |    |  | Inception |  
|                                             |  | June 30, 2005    |    |  | to Date   |  
|                                             |  |                  |    |  |           |  
|Payments made, including related legal costs |  | $                |   |  |           | $ | (355.7 | )
|Insurance recoveries(2)                      |  |                  | .9 |  |           |   | 267.1  |  
|                                             |  |                  |    |  |           |  
|                                             |  | $                | .9 |  |           | $ | (88.6  | )
|                                             |  |                  |    |  |           |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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. Amounts
    are stated in nominal dollars and not discounted to present
    value as the Company cannot currently project the actual timing
    of payments or insurance recoveries particularly in light of the
    expected treatment of such items in any plan of reorganization
    that is ultimately filed. The Company believes that, as of
    June 30, 2005, it had received all insurance recoveries
    that it is likely to collect in respect of asbestos-related
    costs paid. See Note 1.
|   
|(2) | Excludes certain amounts paid by insurers into escrow accounts
    (in respect of future settlements) more fully discussed below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



32



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










33



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Hearing Loss Claims.


34



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






Labor Matters.






Labor Agreement.


35



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Contingencies Regarding Settlement with the PBGC.




Other Contingencies.




|    |                                                                  
|--- | -----------------------------------------------------------------
|10. | Derivative Financial Instruments and Related Hedging
    Programs





36



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|           |                                 |        |  |                    |         |  |           |       |  |  |   |    | 
|---------- | ------------------------------- | ------ |  | ------------------ | ------- |  | --------- | ----- |  |  | - | -- | 
|           |                                 |        |  | Notional           |         |  |          
|           |                                 |        |  | Amount of          |         |  | Carrying/ |      
|           |                                 |        |  | Contracts          |         |  | Market    |      
|Commodity  |                                 | Period |  |                    | (mmlbs) |  |           | Value | 
|           |                                 |        |  |                    |         |  |           |       | 
|Aluminum  |                                 |        |  |                    |         |  |           |       |  |  |   |   
|           | Option sale contracts           |        |  | 1/06 through 12/11 |         |  |           | 105.9 |  |  | $ |   | 
|           | Fixed priced purchase contracts |        |  | 7/05 through 12/05 |         |  |           | 18.1  |  |  |   | .5 | 

|                  |                                 |        |  |                     |          |  |           |       |  |  |   |      |  
|----------------- | ------------------------------- | ------ |  | ------------------- | -------- |  | --------- | ----- |  |  | - | ---- | -
|                  |                                 |        |  | Notional            |          |  |          
|                  |                                 |        |  | Amount of           |          |  | Carrying/ |      
|                  |                                 |        |  | Contracts           |          |  | Market    |      
|Foreign Currency  |                                 | Period |  |                     | (mm GBP) |  |           | Value | 
|                  |                                 |        |  |                     |          |  |           |       | 
|Pounds Sterling  |                                 |        |  |                     |          |  |           |       |  |  |   |     
|                  | Option purchase contracts       |        |  | 10/05 through 12/06 |          |  |           | 52.5  |  |  | $ | .2   |  
|                  | Fixed priced purchase contracts |        |  | 7/05 through 12/06  |          |  |           | 63.0  |  |  |   | (1.5 | )





37



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                                                 
|--- | ------------------------------------------------
|11. | Other Operating Charges and Other Income Expense

Other Operating Charges.


Other Income (Expense).




|    |                               
|--- | ------------------------------
|12. | Key Employee Retention Program





|    |                                
|--- | -------------------------------
|13. | Pacific Northwest Power Matters



38



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                                          
|--- | -----------------------------------------
|14. | Segment and Geographical Area Information







39



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##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                 |                                   |               |       |       |                  |   |       |       |   |   |       |       |   |   |       |       |  
|-------------------------------- | --------------------------------- | ------------- | ----- | ----- | ---------------- | - | ----- | ----- | - | - | ----- | ----- | - | - | ----- | ----- | -
|                                 |                                   | Quarter Ended |       |       | Six Months Ended |  
|                                 |                                   | June 30,      |       |       | June 30,         |  
|                                 |                                   |               |       |       |                  |  
|                                 |                                   | 2005          |       |       | 2004             |   |       | 2005  |   |   | 2004  |      
|                                 |                                   |               |       |       |                  |   |       |       |   |   |       |      
|Net Sales:                       |                                   |               |       |       |                  |   |       |       |   |   |       |       |   |   |       |      
|                                 | Fabricated Products               |               | $     | 227.4 |                  |   | $     | 198.3 |   |   | $     | 471.8 |   |   | $     | 377.0 |  
|                                 | Primary Aluminum                  |               |       | 35.5  |                  |   |       | 31.8  |   |   |       | 72.5  |   |   |       | 63.3  |  
|                                 |                                   |               |       |       |                  |   |       |       |   |   |       |      
|                                 |                                   | $             | 262.9 |       |                  | $ | 230.1 |       |   | $ | 544.3 |       |   | $ | 440.3 |      
|                                 |                                   |               |       |       |                  |   |       |       |   |   |       |      
|Segment Operating Income (Loss): |                                   |               |       |       |                  |   |       |       |   |   |       |       |   |   |       |      
|                                 | Fabricated Products               |               | $     | 14.0  |                  |   | $     | 7.5   |   |   | $     | 38.2  |   |   | $     | 8.8   |  
|                                 | Primary Aluminum                  |               |       | 6.9   |                  |   |       | 4.4   |   |   |       | 11.7  |   |   |       | 8.5   |  
|                                 | Corporate and Other               |               |       | (14.2 | )                |   |       | (16.3 | ) |   |       | (26.6 | ) |   |       | (31.9 | )
|                                 | Other Operating Charges  Note 11 |               |       |      |                  |   |       |      |   |   |       | (6.2  | ) |   |       |      |  
|                                 |                                   |               |       |       |                  |   |       |       |   |   |       |      
|                                 |                                   | $             | 6.7   |       |                  | $ | (4.4  | )     |   | $ | 17.1  |       |   | $ | (14.6 | )    
|                                 |                                   |               |       |       |                  |   |       |       |   |   |       |      

|                                  |                     |          |     |     |                |   |     |      |  |   |      |     |  |   |      |      | 
|--------------------------------- | ------------------- | -------- | --- | --- | -------------- | - | --- | ---- |  | - | ---- | --- |  | - | ---- | ---- | 
|                                  |                     | Quarter  |     |     |               
|                                  |                     | Ended    |     |     | Six Months     |  
|                                  |                     | June 30, |     |     | Ended June 30, |  
|                                  |                     |          |     |     |                |  
|                                  |                     | 2005     |     |     | 2004           |   |     | 2005 |  |   | 2004 |    
|                                  |                     |          |     |     |                |   |     |      |  |   |      |    
|Depreciation and amortization:(1) |                     |          |     |     |                |   |     |      |  |   |      |     |  |   |      |     
|                                  | Fabricated Products |          | $   | 5.0 |                |   | $   | 5.3  |  |   | $    | 9.9 |  |   | $    | 10.7 | 
|                                  | Corporate and Other |          |     | .2  |                |   |     | .2   |  |   |      | .2  |  |   |      | .3   | 
|                                  |                     |          |     |     |                |   |     |      |  |   |      |    
|                                  |                     | $        | 5.2 |     |                | $ | 5.5 |      |  | $ | 10.1 |     |  | $ | 11.0 |     
|                                  |                     |          |     |     |                |   |     |      |  |   |      |    






|    |                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Depreciation and amortization expense excludes depreciation and
    amortization expense of discontinued operations of $5.6 and
    $11.7 for the quarter and six month periods ended June 30,
    2004, respectively.

40



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                      |                       |               |    |            |      |   |      |   |   |      |     |   |     |   |   |   |   | 
|--------------------- | --------------------- | ------------- | -- | ---------- | ---- | - | ---- | - | - | ---- | --- | - | --- | - | - | - | - | 
|                      |                       | Quarter       |    | Six Months
|                      |                       | Ended         |    | Ended     
|                      |                       | June 30,      |    | June 30,  
|                      |                       |               |    |           
|                      |                       | 2005          |    |            | 2004 |   | 2005 |   |   | 2004
|                      |                       |               |    |            |      |   |      |   |   |     
|Income taxes paid:(1) |                       |               |    |            |      |   |      |   |   |      |     |   |     |   |   |  
|                      | Fabricated Products  |               |    |            |      |   |      |   |   |      |     |   |     |   |   |   |  
|                      |                       | United States |    | $          |     |   |      | $ |  |      |     | $ |    |   |   | $ |  | 
|                      |                       | Canada        |    |            | .6   |   |      |   |  |      |     |   | 2.4 |   |   |   |  | 
|                      |                       |               |    |            |      |   |      |   |   |      |     |  
|                      |                       | $             | .6 |            |      | $ |     |   |   | $    | 2.4 |   |     | $ |  |  
|                      |                       |               |    |            |      |   |      |   |   |      |     |  






|    |                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Income taxes paid exclude foreign income tax paid by
    discontinued operations of $1.7 and $3.3 for the quarters ended
    June 30, 2005 and 2004, respectively, and $10.4 and $4.4
    for the six month periods ended June 30, 2005 and 2004,
    respectively.



|    |                           
|--- | --------------------------
|15. | Parent Company Receivables





|    |                                   
|--- | ----------------------------------
|16. | Supplemental Guarantor Information

7 8 7 8 3 4




41



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Balance Sheets


June 30, 2005


|                                                        |  |         |          |            |            |   |         |              |  |             |         |  |  |              |          |   |  |   |          |  
|------------------------------------------------------- |  | ------- | -------- | ---------- | ---------- | - | ------- | ------------ |  | ----------- | ------- |  |  | ------------ | -------- | - |  | - | -------- | -
|                                                        |  |         |          | Subsidiary |            |   | Other   |              |  | Eliminating |         |  | 
|                                                        |  | Company |          |            | Guarantors |   |         | Subsidiaries |  |             | Entries |  |  | Consolidated |         
|                                                        |  |         |          |            |            |   |         |              |  |             |         |  |  |              |         
|ASSETS                                                 
|Current assets                                          |  | $       | 229.9    |            |            | $ | 20.8    |              |  | $           | 41.2    |  |  | $            |         |   |  | $ | 291.9    |  
|Discontinued operations current assets                 |  |         |         |            |            |   | .5      |              |  |             |        |  |  |              |         |   |  |   | .5       |  
|Investments in subsidiaries                             |  |         | 1,409.8  |            |            |   |        |              |  |             |        |  |  |              | (1,409.8 | ) |  |   |         |  
|Intercompany advances receivable (payable)              |  |         | (670.8   | )          |            |   | 616.1   |              |  |             | 54.7    |  |  |              |         |   |  |   |         |  
|Investments in and advances to unconsolidated affiliate |  |         | 14.6     |            |            |   |        |              |  |             |        |  |  |              |         |   |  |   | 14.6     |  
|Property and equipment, net                             |  |         | 174.5    |            |            |   | 20.1    |              |  |             | 18.4    |  |  |              |         |   |  |   | 213.0    |  
|Deferred income taxes                                   |  |         | (41.6    | )          |            |   | 41.6    |              |  |             |        |  |  |              |         |   |  |   |         |  
|Restricted proceeds from sale of commodity interests    |  |         |         |            |            |   | 675.0   |              |  |             |        |  |  |              |         |   |  |   | 675.0    |  
|Personal injury-related insurance recoveries receivable |  |         | 966.1    |            |            |   |        |              |  |             |        |  |  |              |         |   |  |   | 966.1    |  
|Other assets                                            |  |         | 47.3     |            |            |   | .2      |              |  |             | .1      |  |  |              |         |   |  |   | 47.6     |  
|Discontinued operations long term assets               |  |         |         |            |            |   |        |              |  |             |        |  |  |              |         |   |  |   |         |  
|                                                        |  |         |          |            |            |   |         |              |  |             |         |  |  |              |         
|                                                        |  | $       | 2,129.8  |            |            | $ | 1,374.3 |              |  | $           | 114.4   |  |  | $            | (1,409.8 | ) |  | $ | 2,208.7  |  
|                                                        |  |         |          |            |            |   |         |              |  |             |         |  |  |              |         
|LIABILITIES AND STOCKHOLDERS EQUITY                   
|Current liabilities                                     |  | $       | 150.7    |            |            | $ | 7.7     |              |  | $           | 23.0    |  |  | $            |         |   |  | $ | 181.4    |  
|Discontinued operations current liabilities            |  |         | 13.6     |            |            |   | 13.5    |              |  |             | .4      |  |  |              |         |   |  |   | 27.5     |  
|Other long-term liabilities                             |  |         | 32.4     |            |            |   | 1.0     |              |  |             | 3.9     |  |  |              |         |   |  |   | 37.3     |  
|Long-term debt                                          |  |         | 1.2      |            |            |   |        |              |  |             |        |  |  |              |         |   |  |   | 1.2      |  
|Discontinued operations long-term liabilities          |  |         | 26.4     |            |            |   |        |              |  |             |        |  |  |              |         |   |  |   | 26.4     |  
|Liabilities subject to compromise                       |  |         | 3,921.0  |            |            |   | 15.7    |              |  |             | 13.7    |  |  |              |         |   |  |   | 3,950.4  |  
|Stockholders equity                                    |  |         | (2,015.5 | )          |            |   | 1,336.4 |              |  |             | 73.4    |  |  |              | (1,409.8 | ) |  |   | (2,015.5 | )
|                                                        |  |         |          |            |            |   |         |              |  |             |         |  |  |              |         
|                                                        |  | $       | 2,129.8  |            |            | $ | 1,374.3 |              |  | $           | 114.4   |  |  | $            | (1,409.8 | ) |  | $ | 2,208.7  |  
|                                                        |  |         |          |            |            |   |         |              |  |             |         |  |  |              |         

42



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Balance Sheets


December 31, 2004


|                                                        |  |         |          |            |            |   |         |              |  |             |         |   |  |              |          |   |  |   |          |  
|------------------------------------------------------- |  | ------- | -------- | ---------- | ---------- | - | ------- | ------------ |  | ----------- | ------- | - |  | ------------ | -------- | - |  | - | -------- | -
|                                                        |  |         |          | Subsidiary |            |   | Other   |              |  | Eliminating |         |   | 
|                                                        |  | Company |          |            | Guarantors |   |         | Subsidiaries |  |             | Entries |   |  | Consolidated |         
|                                                        |  |         |          |            |            |   |         |              |  |             |         |   |  |              |         
|ASSETS                                                 
|Current assets                                          |  | $       | 234.7    |            |            | $ | 18.8    |              |  | $           | 43.1    |   |  | $            |         |   |  | $ | 296.6    |  
|Discontinued operations current assets                 |  |         | .6       |            |            |   | 19.0    |              |  |             | 11.0    |   |  |              |         |   |  |   | 30.6     |  
|Investments in subsidiaries                             |  |         | 2,662.0  |            |            |   |        |              |  |             |        |   |  |              | (2,662.0 | ) |  |   |         |  
|Intercompany advances receivable (payable)              |  |         | (2,244.3 | )          |            |   | 590.4   |              |  |             | 1,653.9 |   |  |              |         |   |  |   |         |  
|Investments in and advances to unconsolidated affiliate |  |         | 16.7     |            |            |   |        |              |  |             |        |   |  |              |         |   |  |   | 16.7     |  
|Property and equipment, net                             |  |         | 176.0    |            |            |   | 20.1    |              |  |             | 18.5    |   |  |              |         |   |  |   | 214.6    |  
|Deferred income taxes                                   |  |         | (88.4    | )          |            |   | 41.5    |              |  |             | 46.9    |   |  |              |         |   |  |   |         |  
|Restricted proceeds from sale of commodity interests    |  |         | 4.0      |            |            |   | 271.8   |              |  |             | 5.0     |   |  |              |         |   |  |   | 280.8    |  
|Personal injury-related insurance recoveries receivable |  |         | 967.0    |            |            |   |        |              |  |             |        |   |  |              |         |   |  |   | 967.0    |  
|Other assets                                            |  |         | 42.2     |            |            |   | .2      |              |  |             | .1      |   |  |              |         |   |  |   | 42.5     |  
|Discontinued operations long term assets               |  |         |         |            |            |   | 38.9    |              |  |             |        |   |  |              |         |   |  |   | 38.9     |  
|                                                        |  |         |          |            |            |   |         |              |  |             |         |   |  |              |         
|                                                        |  | $       | 1,770.5  |            |            | $ | 1,000.7 |              |  | $           | 1,778.5 |   |  | $            | (2,662.0 | ) |  | $ | 1,887.7  |  
|                                                        |  |         |          |            |            |   |         |              |  |             |         |   |  |              |         
|LIABILITIES AND STOCKHOLDERS EQUITY                   
|Current liabilities                                     |  | $       | 159.9    |            |            | $ | 5.2     |              |  | $           | 24.5    |   |  | $            |         |   |  | $ | 189.6    |  
|Discontinued operations current liabilities            |  |         | 2.1      |            |            |   | 55.2    |              |  |             | .4      |   |  |              |         |   |  |   | 57.7     |  
|Other long-term liabilities                             |  |         | 32.9     |            |            |   | .9      |              |  |             | (.9     | ) |  |              |         |   |  |   | 32.9     |  
|Long-term debt                                          |  |         | 2.8      |            |            |   |        |              |  |             |        |   |  |              |         |   |  |   | 2.8      |  
|Discontinued operations long-term liabilities          |  |         | 26.4     |            |            |   |        |              |  |             |        |   |  |              |         |   |  |   | 26.4     |  
|Liabilities subject to compromise                       |  |         | 3,923.0  |            |            |   | 18.2    |              |  |             | 13.7    |   |  |              |         |   |  |   | 3,954.9  |  
|Stockholders equity                                    |  |         | (2,376.6 | )          |            |   | 921.2   |              |  |             | 1,740.8 |   |  |              | (2,662.0 | ) |  |   | (2,376.6 | )
|                                                        |  |         |          |            |            |   |         |              |  |             |         |   |  |              |         
|                                                        |  | $       | 1,770.5  |            |            | $ | 1,000.7 |              |  | $           | 1,778.5 |   |  | $            | (2,662.0 | ) |  | $ | 1,887.7  |  
|                                                        |  |         |          |            |            |   |         |              |  |             |         |   |  |              |         

43



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statements of Income (Loss)


For the Quarter Ended June 30, 2005


|                                           |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |        |       |   |   |       |       | 
|------------------------------------------ | ---------------------------- | ------- | ----- | ---------- | ---------- | - | ----- | ------------ |  | ----------- | ------- | ---- |  | ------------ | ------ | ----- | - | - | ----- | ----- | 
|                                           |                              |         |       | Subsidiary |            |   | Other |              |  | Eliminating |         |      | 
|                                           |                              | Company |       |            | Guarantors |   |       | Subsidiaries |  |             | Entries |      |  | Consolidated |       
|                                           |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |       
|Net sales                                  |                              | $       | 220.3 |            |            | $ | 11.3  |              |  | $           | 94.4    |      |  | $            | (63.1  | )     |   | $ | 262.9 |      
|Costs and expenses:                        |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |        |       |   |   |       |      
|                                           | Operating costs and expenses |         |       | 217.4      |            |   |       | 14.1         |  |             |         | 87.8 |  |              |        | (63.1 | ) |   |       | 256.2 | 
|                                           | Other operating charges      |         |       |           |            |   |       |             |  |             |         |     |  |              |        |      |   |   |       |      | 
|                                           |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |       
|Operating income (loss)                    |                              |         | 2.9   |            |            |   | (2.8  | )            |  |             | 6.6     |      |  |              |       |       |   |   | 6.7   |      
|Interest expense                           |                              |         | (1.1  | )          |            |   |      |              |  |             |        |      |  |              |       |       |   |   | (1.1  | )    
|Reorganization items                       |                              |         | (9.3  | )          |            |   |      |              |  |             |        |      |  |              |       |       |   |   | (9.3  | )    
|Other income (expense), net                |                              |         | (.7   | )          |            |   |      |              |  |             | .1      |      |  |              |       |       |   |   | (.6   | )    
|Provision for income taxes                 |                              |         | (1.3  | )          |            |   |      |              |  |             | (.9     | )    |  |              |       |       |   |   | (2.2  | )    
|Equity in income of subsidiaries           |                              |         | 374.5 |            |            |   |      |              |  |             |        |      |  |              | (374.5 | )     |   |   |      |      
|                                           |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |       
|Income (loss) from continuing operations   |                              |         | 365.0 |            |            |   | (2.8  | )            |  |             | 5.8     |      |  |              | (374.5 | )     |   |   | (6.5  | )    
|Income (loss) from discontinued operations |                              |         | (3.2  | )          |            |   | 371.5 |              |  |             |        |      |  |              |       |       |   |   | 368.3 |      
|                                           |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |       
|Net income (loss)                          |                              | $       | 361.8 |            |            | $ | 368.7 |              |  | $           | 5.8     |      |  | $            | (374.5 | )     |   | $ | 361.8 |      
|                                           |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |       

Condensed Consolidating Statements of Income (Loss)


For the Quarter Ended June 30, 2004


|                                           |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |       |       |   |   |       |       | 
|------------------------------------------ | ---------------------------- | ------- | ----- | ---------- | ---------- | - | ----- | ------------ |  | ----------- | ------- | ---- |  | ------------ | ----- | ----- | - | - | ----- | ----- | 
|                                           |                              |         |       | Subsidiary |            |   | Other |              |  | Eliminating |         |      | 
|                                           |                              | Company |       |            | Guarantors |   |       | Subsidiaries |  |             | Entries |      |  | Consolidated |      
|                                           |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |      
|Net sales                                  |                              | $       | 180.7 |            |            | $ | 9.9   |              |  | $           | 64.5    |      |  | $            | (25.0 | )     |   | $ | 230.1 |      
|Costs and expenses:                        |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |       |       |   |   |       |      
|                                           | Operating costs and expenses |         |       | 190.1      |            |   |       | 12.6         |  |             |         | 56.8 |  |              |       | (25.0 | ) |   |       | 234.5 | 
|                                           | Other operating charges, net |         |       |           |            |   |       |             |  |             |         |     |  |              |       |      |   |   |       |      | 
|                                           |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |      
|Operating income (loss)                    |                              |         | (9.4  | )          |            |   | (2.7  | )            |  |             | 7.7     |      |  |              |      |       |   |   | (4.4  | )    
|Interest expense                           |                              |         | (2.1  | )          |            |   |      |              |  |             |        |      |  |              |      |       |   |   | (2.1  | )    
|Reorganization items                       |                              |         | (10.3 | )          |            |   |      |              |  |             |        |      |  |              |      |       |   |   | (10.3 | )    
|Other income (expense), net                |                              |         | 4.8   |            |            |   |      |              |  |             | (.5     | )    |  |              |      |       |   |   | 4.3   |      
|Provision for income taxes                 |                              |         | (.8   | )          |            |   |      |              |  |             | (1.5    | )    |  |              |      |       |   |   | (2.3  | )    
|Equity in income (loss) of subsidiaries    |                              |         | 41.6  |            |            |   |      |              |  |             |        |      |  |              | (41.6 | )     |   |   |      |      
|                                           |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |      
|Income (loss) from continuing operations   |                              |         | 23.8  |            |            |   | (2.7  | )            |  |             | 5.7     |      |  |              | (41.6 | )     |   |   | (14.8 | )    
|Income (loss) from discontinued operations |                              |         | .4    |            |            |   | 34.0  |              |  |             | 4.6     |      |  |              |      |       |   |   | 39.0  |      
|                                           |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |      
|Net income (loss)                          |                              | $       | 24.2  |            |            | $ | 31.3  |              |  | $           | 10.3    |      |  | $            | (41.6 | )     |   | $ | 24.2  |      
|                                           |                              |         |       |            |            |   |       |              |  |             |         |      |  |              |      

44



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statements of Income (Loss)


For the Six Months Ended June 30, 2005


|                                           |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |        |        |   |   |       |       | 
|------------------------------------------ | ---------------------------- | ------- | ----- | ---------- | ---------- | - | ----- | ------------ |  | ----------- | ------- | ----- |  | ------------ | ------ | ------ | - | - | ----- | ----- | 
|                                           |                              |         |       | Subsidiary |            |   | Other |              |  | Eliminating |         |       | 
|                                           |                              | Company |       |            | Guarantors |   |       | Subsidiaries |  |             | Entries |       |  | Consolidated |       
|                                           |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |       
|Net sales                                  |                              | $       | 451.0 |            |            | $ | 22.3  |              |  | $           | 178.6   |       |  | $            | (107.6 | )      |   | $ | 544.3 |      
|Costs and expenses:                        |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |        |        |   |   |       |      
|                                           | Operating costs and expenses |         |       | 438.3      |            |   |       | 27.4         |  |             |         | 162.9 |  |              |        | (107.6 | ) |   |       | 521.0 | 
|                                           | Other operating charges      |         |       | 6.2        |            |   |       |             |  |             |         |      |  |              |        |       |   |   |       | 6.2   | 
|                                           |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |       
|Operating income (loss)                    |                              |         | 6.5   |            |            |   | (5.1  | )            |  |             | 15.7    |       |  |              |       |        |   |   | 17.1  |      
|Interest expense                           |                              |         | (3.2  | )          |            |   |      |              |  |             |        |       |  |              |       |        |   |   | (3.2  | )    
|Reorganization items                       |                              |         | (17.1 | )          |            |   |      |              |  |             |        |       |  |              |       |        |   |   | (17.1 | )    
|Other income (expense), net                |                              |         | (1.1  | )          |            |   |      |              |  |             | .1      |       |  |              |       |        |   |   | (1.0  | )    
|Provision for income taxes                 |                              |         | (2.4  | )          |            |   |      |              |  |             | (2.2    | )     |  |              |       |        |   |   | (4.6  | )    
|Equity in income of subsidiaries           |                              |         | 392.6 |            |            |   |      |              |  |             |        |       |  |              | (392.6 | )      |   |   |      |      
|                                           |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |       
|Income (loss) from continuing operations   |                              |         | 375.3 |            |            |   | (5.1  | )            |  |             | 13.6    |       |  |              | (392.6 | )      |   |   | (8.8  | )    
|Income (loss) from discontinued operations |                              |         | (5.2  | )          |            |   | 384.2 |              |  |             | (.1     | )     |  |              |       |        |   |   | 378.9 |      
|                                           |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |       
|Net income (loss)                          |                              | $       | 370.1 |            |            | $ | 379.1 |              |  | $           | 13.5    |       |  | $            | (392.6 | )      |   | $ | 370.1 |      
|                                           |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |       

Condensed Consolidating Statements of Income (Loss)


For the Six Months Ended June 30, 2004


|                                           |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |       |       |   |   |       |       | 
|------------------------------------------ | ---------------------------- | ------- | ----- | ---------- | ---------- | - | ----- | ------------ |  | ----------- | ------- | ----- |  | ------------ | ----- | ----- | - | - | ----- | ----- | 
|                                           |                              |         |       | Subsidiary |            |   | Other |              |  | Eliminating |         |       | 
|                                           |                              | Company |       |            | Guarantors |   |       | Subsidiaries |  |             | Entries |       |  | Consolidated |      
|                                           |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |      
|Net sales                                  |                              | $       | 348.4 |            |            | $ | 20.2  |              |  | $           | 133.6   |       |  | $            | (61.9 | )     |   | $ | 440.3 |      
|Costs and expenses:                        |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |       |       |   |   |       |      
|                                           | Operating costs and expenses |         |       | 370.9      |            |   |       | 25.6         |  |             |         | 120.3 |  |              |       | (61.9 | ) |   |       | 454.9 | 
|                                           | Other operating charges, net |         |       |           |            |   |       |             |  |             |         |      |  |              |       |      |   |   |       |      | 
|                                           |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |      
|Operating income (loss)                    |                              |         | (22.5 | )          |            |   | (5.4  | )            |  |             | 13.3    |       |  |              |      |       |   |   | (14.6 | )    
|Interest expense                           |                              |         | (4.1  | )          |            |   |      |              |  |             |        |       |  |              |      |       |   |   | (4.1  | )    
|Reorganization items                       |                              |         | (18.9 | )          |            |   |      |              |  |             |        |       |  |              |      |       |   |   | (18.9 | )    
|Other income (expense), net                |                              |         | 4.6   |            |            |   |      |              |  |             | (.5     | )     |  |              |      |       |   |   | 4.1   |      
|Provision for income taxes                 |                              |         | (1.6  | )          |            |   |      |              |  |             | (2.2    | )     |  |              |      |       |   |   | (3.8  | )    
|Equity in income (loss) of subsidiaries    |                              |         | 18.4  |            |            |   |      |              |  |             |        |       |  |              | (18.4 | )     |   |   |      |      
|                                           |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |      
|Income (loss) from continuing operations   |                              |         | (24.1 | )          |            |   | (5.4  | )            |  |             | 10.6    |       |  |              | (18.4 | )     |   |   | (37.3 | )    
|Income (loss) from discontinued operations |                              |         | (15.6 | )          |            |   | 39.8  |              |  |             | (26.6   | )     |  |              |      |       |   |   | (2.4  | )    
|                                           |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |      
|Net income (loss)                          |                              | $       | (39.7 | )          |            | $ | 34.4  |              |  | $           | (16.0   | )     |  | $            | (18.4 | )     |   | $ | (39.7 | )    
|                                           |                              |         |       |            |            |   |       |              |  |             |         |       |  |              |      

45



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statements of Cash Flows


For the Six Months Ended June 30. 2005


|                                                                           |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |   |   |  |   |        |        |  
|-------------------------------------------------------------------------- | ----------------------- | ------- | ----- | ---------- | ---------- | - | ------ | ------------ | - | ----------- | ------- | ---- | ------------ | - | - | - |  | - | ------ | ------ | -
|                                                                           |                         |         |       | Subsidiary |            |   | Other  |              |   | Eliminating |         |     
|                                                                           |                         | Company |       |            | Guarantors |   |        | Subsidiaries |   |             | Entries |      | Consolidated |  
|                                                                           |                         |         |       |            |            |   |        |              |   |             |         |      |              |  
|Net cash provided (used) by:                                               |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |   |   |  |   |        |       
|Operating activities                                                      |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |   |   |  |   |        |       
|                                                                           | Continuing operations   |         | $     | (35.5      | )          |   | $      | 16.8         |   |             | $       | 10.4 |              |   | $ |  |  |   | $      | (8.3   | )
|                                                                           | Discontinued operations |         |       | .1         |            |   |        | 8.6          |   |             |         | 10.9 |              |   |   |   |  |   |        | 19.6   |  
|                                                                           |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |  
|                                                                           |                         |         | (35.4 | )          |            |   | 25.4   |              |   |             | 21.3    |      |              |   |   |   |  |   | 11.3   |       
|                                                                           |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |  
|Investing activities                                                       |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |   |   |  |   |        |       
|                                                                           | Continuing operations   |         |       | (6.9       | )          |   |        | (.9          | ) |             |         | (.8  | )            |   |   |  |  |   |        | (8.6   | )
|                                                                           | Discontinued operations |         |       |           |            |   |        | 401.4        |   |             |         |     |              |   |   |  |  |   |        | 401.4  |  
|                                                                           |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |  
|                                                                           |                         |         | (6.9  | )          |            |   | 400.5  |              |   |             | (.8     | )    |              |   |  |   |  |   | 392.8  |       
|                                                                           |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |  
|Financing activities                                                      |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |   |   |  |   |        |       
|                                                                           | Continued operations    |         |       | (8.6       | )          |   |        |             |   |             |         |     |              |   |   |  |  |   |        | (8.6   | )
|                                                                           | Discontinued operations |         |       | 4.0        |            |   |        | (401.6       | ) |             |         | 1.0  |              |   |   |  |  |   |        | (396.6 | )
|                                                                           |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |  
|                                                                           |                         |         | (4.6  | )          |            |   | (401.6 | )            |   |             | 1.0     |      |              |   |  |   |  |   | (405.2 | )     
|                                                                           |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |  
|Intercompany activity                                                      |                         |         | 46.2  |            |            |   | (24.3  | )            |   |             | (21.9   | )    |              |   |  |   |  |   |       |       
|                                                                           |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |  
|Net (decrease) increase in cash and cash equivalents during the
    period |                         |         | (.7   | )          |            |   |       |              |   |             | (.4     | )    |              |   |  |   |  |   | (1.1   | )     
|Cash and cash equivalents at beginning of period                           |                         |         | 54.0  |            |            |   |       |              |   |             | 1.4     |      |              |   |  |   |  |   | 55.4   |       
|                                                                           |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |  
|Cash and cash equivalents at end of period                                 |                         | $       | 53.3  |            |            | $ |       |              |   | $           | 1.0     |      |              | $ |  |   |  | $ | 54.3   |       
|                                                                           |                         |         |       |            |            |   |        |              |   |             |         |      |              |   |  






|    |                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------
|(1) | Discontinued operations financing activities relate to
    (increase)/decrease in restricted cash amounts

46



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Condensed Consolidating Statements of Cash Flows


For the Six Months Ended June 30. 2004


|                                                                           |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |   |   |  |   |       |       |  
|-------------------------------------------------------------------------- | ----------------------- | ------- | ----- | ---------- | ---------- | - | ----- | ------------ | - | ----------- | ------- | ---- | ------------ | - | - | - |  | - | ----- | ----- | -
|                                                                           |                         |         |       | Subsidiary |            |   | Other |              |   | Eliminating |         |     
|                                                                           |                         | Company |       |            | Guarantors |   |       | Subsidiaries |   |             | Entries |      | Consolidated |  
|                                                                           |                         |         |       |            |            |   |       |              |   |             |         |      |              |  
|Net cash provided (used) by:                                               |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |   |   |  |   |       |      
|Operating activities                                                      |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |   |   |  |   |       |      
|                                                                           | Continuing operations   |         | $     | (75.1      | )          |   | $     | (.8          | ) |             | $       | 26.0 |              |   | $ |  |  |   | $     | (49.9 | )
|                                                                           | Discontinued operations |         |       | 8.2        |            |   |       | 15.0         |   |             |         | 8.7  |              |   |   |   |  |   |       | 31.9  |  
|                                                                           |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |  
|                                                                           |                         |         | (66.9 | )          |            |   | 14.2  |              |   |             | 34.7    |      |              |   |   |   |  |   | (18.0 | )    
|                                                                           |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |  
|Investing activities                                                      |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |   |   |  |   |       |      
|                                                                           | Continuing operations   |         |       | (2.1       | )          |   |       | (.1          | ) |             |         | (.4  | )            |   |   |  |  |   |       | (2.6  | )
|                                                                           | Discontinued operations |         |       | 13.8       |            |   |       |             |   |             |         | (2.9 | )            |   |   |  |  |   |       | 10.9  |  
|                                                                           |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |  
|                                                                           |                         |         | 11.7  |            |            |   | (.1   | )            |   |             | (3.3    | )    |              |   |  |   |  |   | 8.3   |      
|                                                                           |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |  
|Financing activities                                                      |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |   |   |  |   |       |      
|                                                                           | Continued operations    |         |       | (.2        | )          |   |       |             |   |             |         |     |              |   |   |  |  |   |       | (.2   | )
|                                                                           | Discontinued operations |         |       |           |            |   |       |             |   |             |         |     |              |   |   |  |  |   |       |      |  
|                                                                           |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |  
|                                                                           |                         |         | (.2   | )          |            |   |      |              |   |             |        |      |              |   |  |   |  |   | (.2   | )    
|                                                                           |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |  
|Intercompany activity                                                      |                         |         | 45.3  |            |            |   | (14.1 | )            |   |             | (31.2   | )    |              |   |  |   |  |   |      |      
|                                                                           |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |  
|Net (decrease) increase in cash and cash equivalents during the
    period |                         |         | (10.1 | )          |            |   |      |              |   |             | .2      |      |              |   |  |   |  |   | (9.9  | )    
|Cash and cash equivalents at beginning of period                           |                         |         | 34.7  |            |            |   |      |              |   |             | .8      |      |              |   |  |   |  |   | 35.5  |      
|                                                                           |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |  
|Cash and cash equivalents at end of period                                 |                         | $       | 24.6  |            |            | $ |      |              |   | $           | 1.0     |      |              | $ |  |   |  | $ | 25.6  |      
|                                                                           |                         |         |       |            |            |   |       |              |   |             |         |      |              |   |  






|    |                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------
|(1) | Discontinued operations financing activities relate to
    (increase)/decrease in restricted cash amounts



| |                                                           
| | ----------------------------------------------------------
| | Notes To Condensed Consolidating Financial
    Information

Impact of Cases


Income Taxes


47



---



##### 



KAISER ALUMINUM & CHEMICAL CORPORATION AND
SUBSIDIARY COMPANIES


(Debtor-in-Possession)


NOTES TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Foreign Currency


Debt Covenants and Restrictions


48



---



##### 





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





Reorganization Proceedings


Background.




Case Administration.


49



---



##### 





Commodity-related and Inactive Subsidiaries.




|                                             |  |   |                 | 
|-------------------------------------------- |  | - | --------------- | 
|Senior Notes and Senior Subordinated Notes   |  | $ | 390.7 to $421.8 | 
|PBGC                                         |  | $ | 187.6 to $198.5 | 
|State of Louisiana Solid Waste Revenue Bonds |  | $ | 0.0 to $8.0     | 



50



---



##### 



3 4 7 8 7 8


7 8 7 8 7 8


7 8


51



---



##### 









Entities Containing the Fabricated Products and Certain Other
Operations.






52



---



##### 









| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All of the equity interests of existing stockholders of
    the Company would be cancelled without consideration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | (b) All post-petition and secured claims would either be
    assumed by the emerging entity or paid at emergence (see
    Exit Cost discussion below);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (c) Pursuant to agreements reached with salaried and hourly
    retirees in early 2004, in consideration for the agreed
    cancellation of the retiree medical plan, as more fully
    discussed in Note 8 of Notes to Interim Consolidated
    Financial Statements, the Company is making certain fixed
    monthly payments into Voluntary Employee Beneficiary
    Associations (VEBAs) until emergence and has agreed
    thereafter to make certain variable annual VEBA contributions
    depending on the emerging entitys operating results and
    financial liquidity. In addition, upon emergence the VEBAs would
    receive a contribution of 66.9% of the new common stock of the
    emerged entity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (d) The PBGC will receive a cash payment of
    $2.5 million and 10.8% of the new common stock of the
    emerged entity in respect of its claims against KACOCL. In
    addition, as described in (f) below, the PBGC will receive
    shares of new common stock based on its direct claims against
    the Remaining Debtors (other than KACOCL) and its participation,
    indirectly through the KAAC/ KFC Plan in claims of KFC against
    the Company, which the Company currently estimates will result
    in the PBGC receiving an additional 5.4% of the new common stock
    of the emerged entity (bringing the PBGCs total ownership
    percentage of the new entity to approximately 16.2%). The
    $2.5 million cash payment discussed above is in addition to
    the cash amounts the Company has agreed to pay to the PBGC at or
    before emergence (see Note 8 of Notes to Interim
    Consolidated Financial Statements) and that the PBGC will
    receive from the Liquidating Subsidiaries under the Liquidating
    Plans.                                                                                                                                                                                                  
|
| | (e) Pursuant to an agreement reached in early 2005, all
    pending and future asbestos-related personal injury claims, all
    pending and future silica and coal tar pitch volatiles personal
    injury claims and all hearing loss claims would be resolved
    through the formation of one or more trusts to which all such
    claims would be directed by channeling injunctions that would
    permanently remove all liability for such claims from the
    Debtors. The trusts would be funded pursuant to statutory
    requirements and agreements with representatives of the affected
    parties, using (i) the Debtors insurance assets,
    (ii) $13.0 million in cash from the Company,
    (iii) 100% of the equity in a Company subsidiary whose sole
    asset will be a piece of real property that produces modest
    rental income, and (iv) the new common stock of the emerged
    entity to be issued as per (f) below in respect of
    approximately $830.0 million of intercompany claims of KFC
    against the Company that are to be assigned to the trust, which
    the Company currently estimates will result in the trusts
    receiving approximately 6.4% of the new common stock of the
    emerged entity; and
|
| | (f) Other pre-petition general unsecured claims against the
    Remaining Debtors (other than KACOCL) are to receive
    approximately 22.3% of the new common stock of the emerging
    entity in the proportion that their allowed claim bears to the
    total amount of allowed claims. Claims that are expected to be
    within this group include (i) any claims of the Senior
    Notes, the Sub Notes and PBGC (other than the PBGCs claim
    against KACOCL), (ii) the approximate $830.0 of
    intercompany claims that will be assigned to the personal injury
    trust(s) referred to in (e) above, and (iii) all
    unsecured trade and other general unsecured claims, including
    approximately $276.0 million of intercompany claims of KFC
    against                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

53



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##### 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the Company. However, holders of general unsecured claims not
    exceeding a specified small amount will receive a cash payment
    equal to approximately 2.7% of their agreed claim value in lieu
    of new common stock. In accordance with the contractual
    subordination provisions of the indenture governing the Sub
    Notes and terms of the settlement between the holders of the
    Senior Notes and the holders of the Revenue Bonds, the new
    common stock or cash that would otherwise be distributed to the
    holders of the Sub Notes in respect of their claims against the
    Debtors would instead be distributed to holders of the Senior
    Notes and the Revenue Bonds on a pro rata basis based on their
    relative allowed amounts of their claims.







Recent Events and Developments


New Credit Arrangement.




| |   |                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Replaced the existing post-petition credit facility with a new
    $200.0 million post-petition credit facility (the DIP
    Facility) and                                                                                                                                            
|
| |  | Included a commitment, upon the Debtors emergence from the
    Chapter 11 proceedings, for exit financing in the form of a
    $200.0 million revolving credit facility (the
    Revolving Credit Facility) and a fully drawn term
    loan (the Term Loan) of up to $50.0 million.



54



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Disposition of Commodity-Related Assets.


Significant Charges Associated with the Reorganization
Process.




| |   |                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Charges related to the sale of commodity interests. These items
    are classified as discontinued operations in the
    accompanying financial statements. See Note 4 of Notes to
    Interim Consolidated Financial Statements for additional
    discussion of these items and amounts.                                                                           
|
| |  | Significant charges related to the termination of certain of the
    Companys previous pension and retiree medical plans and
    other agreements reached with the PBGC, the United Steelworkers
    of America (USWA) and certain other labor unions.
    These items are discussed in Note 8 and Note 9 of
    Notes to Interim Consolidated Financial Statements.
|
| |  | Certain environmental charges associated with various
    settlements and transactions. See Note 9 of Notes to
    Interim Consolidated Financial Statements.                                                                                                                                                                                                          



Possible Asbestos-Related Legislation.


Labor Agreement.


55



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##### 





Environmental Matters.


Results of Operations




56



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##### 





|                                                         |                            |                               |       |       |                  |   |       |       |       |   |       |       |       |   |       |       |       |  
|-------------------------------------------------------- | -------------------------- | ----------------------------- | ----- | ----- | ---------------- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | -
|                                                         |                            | Quarter Ended                 |       |       | Six Months Ended |  
|                                                         |                            | June 30,                      |       |       | June 30,         |  
|                                                         |                            |                               |       |       |                  |  
|                                                         |                            | 2005                          |       |       | 2004             |   |       | 2005  |       |   | 2004  |      
|                                                         |                            |                               |       |       |                  |   |       |       |       |   |       |      
|                                                         |                            | (Unaudited)                   |      
|                                                         |                            | (In millions of dollars,      |      
|                                                         |                            | except shipments and prices)  |      
|Shipments (mm lbs):                                      |                            |                               |       |       |                  |   |       |       |       |   |       |       |       |   |       |      
|                                                         | Fabricated Products        |                               |       | 118.1 |                  |   |       | 114.6 |       |   |       | 244.5 |       |   |       | 223.1 |      
|                                                         | Primary Aluminum           |                               |       | 38.5  |                  |   |       | 38.4  |       |   |       | 76.9  |       |   |       | 77.2  |      
|                                                         |                            |                               |       |       |                  |   |       |       |       |   |       |      
|                                                         |                            |                               | 156.6 |       |                  |   | 153.0 |       |       |   | 321.4 |       |       |   | 300.3 |      
|                                                         |                            |                               |       |       |                  |   |       |       |       |   |       |      
|Average Realized Third Party Sales Price (per pound):    |                            |                               |       |       |                  |   |       |       |       |   |       |       |       |   |       |      
|                                                         | Fabricated Products(1)     |                               | $     | 1.93  |                  |   | $     | 1.73  |       |   | $     | 1.93  |       |   | $     | 1.69  |      
|                                                         | Primary Aluminum(2)        |                               | $     | .92   |                  |   | $     | .83   |       |   | $     | .94   |       |   | $     | .82   |      
|Net Sales:                                               |                            |                               |       |       |                  |   |       |       |       |   |       |       |       |   |       |      
|                                                         | Fabricated Products        |                               | $     | 227.4 |                  |   | $     | 198.3 |       |   | $     | 471.8 |       |   | $     | 377.0 |      
|                                                         | Primary Aluminum           |                               |       | 35.5  |                  |   |       | 31.8  |       |   |       | 72.5  |       |   |       | 63.3  |      
|                                                         |                            |                               |       |       |                  |   |       |       |       |   |       |      
|                                                         |                            | Total Net Sales               |       | $     | 262.9            |   |       | $     | 230.1 |   |       | $     | 544.3 |   |       | $     | 440.3 |  
|                                                         |                            |                               |       |       |                  |   |       |       |       |   |       |      
|Segment Operating Income (Loss):(3)                      |                            |                               |       |       |                  |   |       |       |       |   |       |       |       |   |       |      
|                                                         | Fabricated Products        |                               | $     | 14.0  |                  |   | $     | 7.5   |       |   | $     | 38.2  |       |   | $     | 8.8   |      
|                                                         | Primary Aluminum           |                               |       | 6.9   |                  |   |       | 4.4   |       |   |       | 11.7  |       |   |       | 8.5   |      
|                                                         | Corporate and Other        |                               |       | (14.2 | )                |   |       | (16.3 | )     |   |       | (26.6 | )     |   |       | (31.9 | )    
|                                                         | Other Operating Charges(4) |                               |       |      |                  |   |       |      |       |   |       | (6.2  | )     |   |       |      |      
|                                                         |                            |                               |       |       |                  |   |       |       |       |   |       |      
|                                                         |                            | Total Operating Income (Loss) |       | $     | 6.7              |   |       | $     | (4.4  | ) |       | $     | 17.1  |   |       | $     | (14.6 | )
|                                                         |                            |                               |       |       |                  |   |       |       |       |   |       |      
|Discontinued Operations                                  |                            | $                             | 368.3 |       |                  | $ | 39.0  |       |       | $ | 378.9 |       |       | $ | (2.4  | )    
|                                                         |                            |                               |       |       |                  |   |       |       |       |   |       |      
|Net Income (Loss)                                        |                            | $                             | 361.8 |       |                  | $ | 24.2  |       |       | $ | 370.1 |       |       | $ | (39.7 | )    
|                                                         |                            |                               |       |       |                  |   |       |       |       |   |       |      
|Capital Expenditures (excluding discontinued operations) |                            | $                             | 4.8   |       |                  | $ | 1.0   |       |       | $ | 8.6   |       |       | $ | 2.6   |      
|                                                         |                            |                               |       |       |                  |   |       |       |       |   |       |      






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Average realized prices for the Companys Fabricated
    products business unit are subject to fluctuations due to
    changes in product mix as well as underlying primary aluminum
    prices and are not necessarily indicative of changes in
    underlying profitability. See Part I, Item 1.
    Business  Business Operations in the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | Average realized prices for the Companys Primary aluminum
    business unit exclude hedging revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(3) | The Company changed its segment presentation in 2004 to
    eliminate the Eliminations segment as the primary
    purpose for such segment was to eliminate intercompany profit on
    sales by the Primary aluminum and Bauxite and alumina business
    units substantially all of which are now considered Discontinued
    operations. Eliminations not representing Discontinued
    operations are now included in segment results. Operating
    results for the Primary aluminum business unit in quarter and
    six month periods ended June 30, 2004 are after the
    elimination of $.5 and $.7, respectively. Also, see Part I,
    Item 1. Business  Business
    Operations in the Companys Annual Report on
    From 10-K for the year ended December 31, 2004 for a
    discussion of changes to the Primary aluminum business unit.

57



---



##### 





|    |                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | See Note 11 of Notes to Interim Consolidated Financial
    Statements for a discussion of the components of Other operating
    charges and the business segment to which the items relate.

Overview










| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Quarter and Six Months Ended June 30, 2005 Compared
    to Quarter and Six Months 
     Ended June 30, 2004

Summary.




Fabricated Aluminum Products.




58



---



##### 





Primary aluminum.




Corporate and Other.






Discontinued Operations.


59



---



##### 







Liquidity and Capital Resources




Operating Activities.








Investing Activities.


60



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##### 







Financing Activities and Liquidity.




| |   |                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Replaced the existing post-petition credit facility with a new
    $200.0 million DIP Facility and                                                                                                                
|
| |  | Included a commitment, upon the Debtors emergence from the
    Chapter 11 proceedings, for exit financing in the form of a
    $200.0 million Revolving Credit Facility and a Term Loan of
    up to $50.0 million.













61



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New Accounting Pronouncements




Critical Accounting Policies






| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. The interim consolidated financial statements as of and
    for the quarter and six month periods ended June 30, 2005
    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, 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
    certain 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 consolidated financial
    statements included elsewhere in this Report. For example,



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. 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 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 commodities interests, 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

62



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 its interests in and related to Alpart, 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.
|
| | 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 be
    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 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 difficult to
    make.
|
| | 2. The Companys judgments and estimates with respect
    to commitments and contingencies, in particular: (a) future
    personal injury 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 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

63



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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 assuming that there is no other amount which is more
    likely to occur.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | During the period 2002-2005, the Company has had two potentially
    material contingent obligations that were/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 personal injury-related matters. Both of these
    matters are discussed in Note 9 of Notes to Interim
    Consolidated Financial Statements and it is important that you
    read this note.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | As more fully discussed in Note 9 of Notes to Interim
    Consolidated Financial Statements, we accrued an amount in the
    fourth quarter of 2004 in respect of the USWA ULP matter. We did
    not accrue any amount prior to the fourth quarter of 2004 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 and Kaiser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 Interim Consolidated Financial
    Statements. However, this settlement was not recorded at that
    time as it was still subject to Court approval. The settlement
    was ultimately approved by the Court in February 2005 and, as a
    result of the contingency being removed with respect to this
    item (which arose prior to the December 31, 2004 balance
    sheet date), a non-cash charge of $175.0 million was
    reflected in the Companys consolidated financial
    statements at December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | Also, as more fully discussed in Note 9 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, or as a result of, 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. The Company has also
    previously disclosed that certain other personal injury claims
    had been filed in respect of alleged pre-Filing Date exposure to
    silica and coal tar pitch volatiles. Due to the Cases, existing
    lawsuits in respect of all such personal injury claims are
    stayed and new lawsuits cannot be commenced against the Company
    or Kaiser. It is difficult to predict the number of claims that
    will ultimately be made against the Company or the settlement
    value of such claims. Our June 30, 2005, balance sheet
    includes a liability for estimated asbestos-related costs of
    $1,115.0 million, which represents the Companys
    estimate of the minimum end of a range of costs. The upper end
    of the Companys estimate of costs is approximately
    $2,400.0 million and the Company is aware that certain
    constituents have asserted that they believe that actual costs
    may exceed the top end of the Companys estimated range, by
    perhaps a material amount. As a part of any plan of
    reorganization it is likely that an estimation of the
    Companys entire asbestos-related liability may occur. Any
    such estimation will likely result from negotiations between the
    Company and key creditor constituencies or an estimation process
    overseen by the Court. It is possible that any resulting
    estimate of the Companys asbestos-related liability
    resulting from either process could exceed, perhaps
    significantly, the liability amounts reflected in the
    Companys consolidated financial statements.
|
| | We believe the Company has insurance coverage for a substantial
    portion of such asbestos-related costs. Accordingly, our
    June 30, 2005 balance sheet includes a long-term receivable
    for estimated insurance recoveries of $967.0 million. We
    believe that recovery of this amount is probable and additional
    amounts may be recoverable in the future if additional liability
    is ultimately determined to exist. However, we cannot assure you
    that all such amounts will be collected. The timing and amount
    of future recoveries from the Companys insurance carriers
    will depend on the pendency of the Cases and on the resolution
    of disputes regarding coverage under the applicable insurance
    policies. Over the past several years, the Company has received
    a number of rulings in respect of insurance related litigation
    that it                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | believes supports the amount reflected on the balance sheet. The
    trial court may hear additional issues from time to time.
    Further, depending on the amount of asbestos-related claims
    ultimately determined to exist, it is possible that the amount
    of such claims could exceed the amount of additional insurance
    recoveries available. Additionally, the Company continues to
    discuss terms for possible settlements with certain insurers
    that would establish payment obligations of the insurers to the
    personal injury trusts discussed more fully in Note 1 of
    Notes to Interim Consolidated Financial Statements. Given
    uncertainties about the timing of the insurance-related cash
    flows (as well as the related liability amounts) such amounts,
    as previously disclosed have been recorded in nominal terms.
    Settlement amounts may be different from the face amount of the
    policies, which are stated in nominal terms. Settlement amounts
    may be affected by, among other things, the present value of
    possible cash receipts versus the potential obligation of the
    insurers to pay over time, which could impact the amount of
    receivables recorded.
|
| | Any adjustments ultimately deemed to be required as a result of
    the reevaluation of the Companys asbestos-related
    liabilities or estimated insurance recoveries could have a
    material impact on the Companys future financial
    statements. However, under an agreed term sheet, all of the
    Companys personal injury  related obligations
    together with the benefits of its insurance policies and certain
    other consideration are to be transferred into one or more
    trusts at emergence.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | See Note 9 of Notes to 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) 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 8 of Notes to Consolidated
    Financial Statements, certain charges have been recorded in 2003
    and 2004 in respect of changes in the Companys pension and
    post-retirement benefit plans. The PBGC has assumed
    responsibility for the three largest of the Companys
    pension plans. Initially, the Company reflected the effects of
    these terminations based on the accounting methodologies for
    continuing plans. This resulted in charges of approximately
    $121.0 million in 2003 and another $155.0 million in
    2004. This methodology was used to record these effects because
    there were arguments that the ultimate amount of liability could
    be higher or lower than that resulting from following GAAP for
    continuing plans, but the ultimate outcome was unknown.
    Ultimately, in order to advance the Cases, our negotiations with
    the PBGC resulted in the Company ultimately agreeing to a
    settlement amount that                                                                                                                                                                                                                           

65



---



##### 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | exceeded the recorded liability by approximately
    $154.0 million. The settlement was contingent on Court
    approval. While Court approval was received in January 2005, a
    charge was reflected in the fourth quarter of 2004 for this
    settlement as the pension obligations to which the charge
    related existed at December 31, 2004. Pursuant to the
    agreement with the PBGC, the Company will continue to sponsor
    the Companys remaining pension plans. In addition, as
    previously disclosed, the Companys post-retirement medical
    plans were terminated during 2004 and were replaced with medical
    coverage through COBRA or the VEBAs. However, definitive, final
    termination of the previous post-retirement benefit plan was
    contingent on Court approval of the Intercompany Agreement,
    which was ultimately received in February 2005. As a result of
    the removal of the contingency, the Company reflected an
    approximately $312.5 million charge associated with the
    termination of the plan at December 31, 2004 as the
    liability for this existed at the balance sheet date. The amount
    of the charge relates to amounts previously deferred under GAAP
    for continuing plans.
|
| | As more fully discussed in Note 9 of Notes to Interim
    Consolidated Financial Statements, it is possible that certain
    remaining defined benefit pension plans could be terminated. If
    this were to happen, additional settlement charges in the range
    of $6.0 million to $7.0 million could be recorded,
    despite the fact that any such terminations would not be
    expected to have any adverse cash consequences to the Company or
    Kaiser.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | While the amounts involved with the new/remaining plans are
    substantially less than the amounts in respect of the terminated
    plans (and thus subject to a lesser amount of expected
    volatility in amounts) they are, nonetheless, subject to the
    same sorts of changes and any such changes could be material to
    continuing operations. See Note 8 of Notes to Consolidated
    Financial Statements regarding the Companys pension and
    post-retirement obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | 4. The Companys judgments and estimates in respect to
    environmental commitments and contingencies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | The Company is subject to a number of environmental laws and
    regulations, to fines or penalties assessed for alleged breaches
    of such laws and regulations, and to claims and litigation based
    upon such laws and regulations. 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 9 of
    Notes to Interim Consolidated Financial Statements. Another
    example discussed in Note 9 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 certain 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.                                                                                                                                                                                                                                                                                                                    

66



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##### 



Contractual Obligations and Commercial Commitments




|                                                  |  |       |     |                 |        |   |     |       |  |     |       |  |           |         |     |  |  |   |    | 
|------------------------------------------------- |  | ----- | --- | --------------- | ------ | - | --- | ----- |  | --- | ----- |  | --------- | ------- | --- |  |  | - | -- | 
|                                                  |  |       |     | 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 $.8(a) |  | $     | 2.4 |                 |        | $ | 1.2 |       |  | $   | 1.2   |  |           | $       |    |  |  | $ |   | 
|Operating leases                                  |  |       | 6.8 |                 |        |   | 2.1 |       |  |     | 3.0   |  |           |         | 1.4 |  |  |   | .3 | 
|                                                  |  |       |     |                 |        |   |     |       |  |     |       |  |           |         |    
|Total cash contractual obligations                |  | $     | 9.2 |                 |        | $ | 3.3 |       |  | $   | 4.2   |  |           | $       | 1.4 |  |  | $ | .3 | 
|                                                  |  |       |     |                 |        |   |     |       |  |     |       |  |           |         |    






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | See Note 6 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 $847.6 million, which amounts will be dealt
    with in connection with a plan of reorganization. See
    Notes 1 and 6 of Notes to Interim Consolidated Financial
    Statements for additional information about debt subject to
    compromise.

















| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
    will 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.                                                                                     

67



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##### 





| |   |                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.













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



Sensitivity


Primary Aluminum.




68



---



##### 









Foreign Currency.




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

Evaluation of Disclosure Controls and Procedures.


Changes in Internal Control.


PART II  OTHER INFORMATION




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



Reorganization Proceedings




Other Environmental Matters




69



---



##### 





Asbestos and Certain Other Personal Injury Claims






Asbestos and Certain Other Personal Injury Claims


Hearing Loss Claims


Hearing Loss Claims




|        |                  
|------- | -----------------
|Item 5. | Other Information





70



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##### 









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

|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | --- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 2   | .1          |  | Purchase Agreement, dated as of September 22, 2004, between
    Kaiser Aluminum & Chemical Corporation
    (KACC), Kaiser Alumina Australia Corporation
    (KAAC) and Comalco Aluminium Limited (incorporated
    by reference to Exhibit 2.3 to the Report on Form 10-Q
    for the quarterly period ended September 30, 2004, filed by
    KAC, File No. 1-9447).                                                                                                                                                
|        | 2   | .2          |  | Agreement to Submit Qualified Bid for QAL, dated as of
    September 22, 2004, between KACC, KAAC and Glencore AG
    (incorporated by reference to Exhibit 2.4 to the Report on
    Form 10-Q for the quarterly period ended September 30,
    2004, filed by KAC, File No. 1-9447).                                                                                                                                                                                                                                   
|        | 2   | .3          |  | Purchase Agreement, dated as of October 28, 2004, among
    KACC, KAAC and Alumina & Bauxite Company Ltd.
    (incorporated by reference to Exhibit 2.5 to the Report on
    Form 10-Q for the quarterly period ended September 30,
    2004, filed by KAC, File No. 1-9447).                                                                                                                                                                                                                                           
|        | 4   | .1          |  | Secured Super-Priority Debtor-In-Possession Revolving Credit and
    Guaranty Agreement Among KAC, KACC and certain of their
    subsidiaries, as Borrowers, and certain Subsidiaries of KAC and
    KACC, as Guarantors, and certain financial institutions and JP
    Morgan Chase Bank, National Association, as Administrative
    Agent, dated as of February 11, 2005 (incorporated by
    reference to Exhibit 99.1 to Report on Form 8-K, dated
    as of February 11, 2005, filed by KAC, File
    No. 1-9447).
|        | *10 | .1          |  | Non Exclusive Consulting Agreement between KACC and Edward F.
    Houff dated August 15, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | *10 | .2          |  | Release Agreement between KACC and Edward F. Houff dated
    August 15, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | *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.                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 99  | .1          |  | Joint Plan of Reorganization for Kaiser Aluminum Corporation,
    Kaiser Aluminum & Chemical Corporation and Certain of
    Their Debtor Affiliates (incorporated by reference to
    Exhibit 99.2 to Report on Form 8-K, dated as of
    June 29, 2005, filed by KAC, File No. 1-9447).                                                                                                                                                                                                                                
|        | 99  | .2          |  | Disclosure Statement Pursuant to Section 1125 of the
    Bankruptcy Code for the Joint Plan of Reorganization for Kaiser
    Aluminum Corporation, Kaiser Aluminum & Chemical
    Corporation and Certain of Their Debtor Affiliates (incorporated
    by reference to Exhibit 99.3 to Report on Form 8-K,
    dated as of June 29, 2005, filed by KAC, File
    No. 1-9447).                                                                                                                                           






|  |                
|- | ---------------
|* | Filed herewith.

71



---



##### 



SIGNATURES






| |                                           
| | ------------------------------------------
| | Kaiser Aluminum & Chemical Corporation    
|
| | /s/ Kerry A. Shiba                        
| |                                           
| | Kerry A. Shiba                            
| | Vice President and Chief Financial Officer
| | (Principal Financial Officer)             
|
| | /s/ Daniel D. Maddox                      
| |                                           
| | Daniel D. Maddox                          
| | Vice President and Controller             
| | (Principal Accounting Officer)            



72



---



##### 



INDEX TO EXHIBITS


|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | --- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 2   | .1          |  | Purchase Agreement, dated as of September 22, 2004, between
    Kaiser Aluminum & Chemical Corporation
    (KACC), Kaiser Alumina Australia Corporation
    (KAAC) and Comalco Aluminium Limited (incorporated
    by reference to Exhibit 2.3 to the Report on Form 10-Q
    for the quarterly period ended September 30, 2004, filed by
    KAC, File No. 1-9447).                                                                                                                                                
|        | 2   | .2          |  | Agreement to Submit Qualified Bid for QAL, dated as of
    September 22, 2004, between KACC, KAAC and Glencore AG
    (incorporated by reference to Exhibit 2.4 to the Report on
    Form 10-Q for the quarterly period ended September 30,
    2004, filed by KAC, File No. 1-9447).                                                                                                                                                                                                                                   
|        | 2   | .3          |  | Purchase Agreement, dated as of October 28, 2004, among
    KACC, KAAC and Alumina & Bauxite Company Ltd.
    (incorporated by reference to Exhibit 2.5 to the Report on
    Form 10-Q for the quarterly period ended September 30,
    2004, filed by KAC, File No. 1-9447).                                                                                                                                                                                                                                           
|        | 4   | .1          |  | Secured Super-Priority Debtor-In-Possession Revolving Credit and
    Guaranty Agreement Among KAC, KACC and certain of their
    subsidiaries, as Borrowers, and certain Subsidiaries of KAC and
    KACC, as Guarantors, and certain financial institutions and JP
    Morgan Chase Bank, National Association, as Administrative
    Agent, dated as of February 11, 2005 (incorporated by
    reference to Exhibit 99.1 to Report on Form 8-K, dated
    as of February 11, 2005, filed by KAC, File
    No. 1-9447).
|        | *10 | .1          |  | Non Exclusive Consulting Agreement between KACC and Edward F.
    Houff dated August 15, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | *10 | .2          |  | Release Agreement between KACC and Edward F. Houff dated
    August 15, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | *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.                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 99  | .1          |  | Joint Plan of Reorganization for Kaiser Aluminum Corporation,
    Kaiser Aluminum & Chemical Corporation and Certain of
    Their Debtor Affiliates (incorporated by reference to
    Exhibit 99.2 to Report on Form 8-K, dated as of
    June 29, 2005, filed by KAC, File No. 1-9447).                                                                                                                                                                                                                                
|        | 99  | .2          |  | Disclosure Statement Pursuant to Section 1125 of the
    Bankruptcy Code for the Joint Plan of Reorganization for Kaiser
    Aluminum Corporation, Kaiser Aluminum & Chemical
    Corporation and Certain of Their Debtor Affiliates (incorporated
    by reference to Exhibit 99.3 to Report on Form 8-K,
    dated as of June 29, 2005, filed by KAC, File
    No. 1-9447).                                                                                                                                           






|  |                
|- | ---------------
|* | Filed herewith.