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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------

To the Stockholders and the Board of Directors of Kaiser Aluminum Corporation:

We have audited the accompanying consolidated balance sheets of Kaiser Aluminum
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2000
and 1999, and the related statements of consolidated income (loss),
stockholders' equity and comprehensive income (loss) and cash flows for each of
the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kaiser Aluminum Corporation and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

ARTHUR ANDERSEN LLP

Houston, Texas
March 27, 2001

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------

                                                                                        December 31,
                                                                                 -------------------------
(In millions of dollars, except share amounts)                                        2000         1999
----------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
   Cash and cash equivalents                                                     $     23.4    $     21.2
   Receivables:
     Trade, less allowance for doubtful receivables of $5.8 and $5.9                  188.7         154.1
     Other                                                                            241.1         106.9
   Inventories                                                                        396.2         546.1
   Prepaid expenses and other current assets                                          162.7         145.6
                                                                                 -----------   -----------
     Total current assets                                                           1,012.1         973.9

Investments in and advances to unconsolidated affiliates                               77.8          96.9
Property, plant, and equipment - net                                                1,176.1       1,053.7
Deferred income taxes                                                                 454.2         440.0
Other assets                                                                          622.9         634.3
                                                                                 -----------   -----------
     Total                                                                       $  3,343.1    $  3,198.8
                                                                                 ===========   ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                              $    236.8    $    231.7
   Accrued interest                                                                    37.5          37.7
   Accrued salaries, wages, and related expenses                                      110.3          62.1
   Accrued postretirement medical benefit obligation - current portion                 58.0          51.5
   Other accrued liabilities                                                          288.9         168.8
   Payable to affiliates                                                               78.3          85.8
   Long-term debt - current portion                                                    31.6            .3
                                                                                 -----------   -----------

     Total current liabilities                                                        841.4         637.9

Long-term liabilities                                                                 703.7         727.1
Accrued postretirement medical benefit obligation                                     656.9         678.3
Long-term debt                                                                        957.8         972.5
Minority interests                                                                    101.1         117.7
Commitments and contingencies
Stockholders' equity:
   Common stock, par value $.01, authorized 125,000,000 shares; issued
     and outstanding 79,599,557 and 79,405,333 shares                                    .8            .8
   Additional capital                                                                 537.5         536.8
   Accumulated deficit                                                               (454.3)       (471.1)
   Accumulated other comprehensive income (loss)                                       (1.8)         (1.2)
                                                                                 -----------   -----------
     Total stockholders' equity                                                        82.2          65.3
                                                                                 -----------   -----------
     Total                                                                       $  3,343.1    $  3,198.8
                                                                                 ===========   ===========

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

STATEMENTS OF CONSOLIDATED INCOME (LOSS)
--------------------------------------------------------------------------------

                                                                               Year Ended December 31,
                                                                       ---------------------------------------
(In millions of dollars, except share amounts)                              2000          1999          1998
--------------------------------------------------------------------------------------------------------------
Net sales                                                              $  2,169.8    $  2,083.6    $  2,302.4
                                                                       -----------   -----------   -----------
Costs and expenses:
   Cost of products sold                                                  1,891.4       1,893.5       1,892.2
   Depreciation and amortization                                             76.9          89.5          99.1
   Selling, administrative, research and development, and general           104.1         105.4         115.5
   Labor settlement charge                                                   38.5           -             -
   Other non-recurring operating items, net                                 (80.4)         24.1         105.0
                                                                       -----------   -----------   -----------
     Total costs and expenses                                             2,030.5       2,112.5       2,211.8
                                                                       -----------   -----------   -----------

Operating income (loss)                                                     139.3         (28.9)         90.6

Other income (expense):
   Interest expense                                                        (109.6)       (110.1)       (110.0)
   Gain on involuntary conversion at Gramercy facility                      -              85.0           -
   Other - net                                                               (4.3)        (35.9)          3.5
                                                                       -----------   -----------   -----------

Income (loss) before income taxes and minority interests                     25.4         (89.9)        (15.9)

(Provision) benefit for income taxes                                        (11.6)         32.7         16.4

Minority interests                                                            3.0           3.1            .1
                                                                       -----------   -----------   -----------

Net income (loss)                                                      $     16.8    $    (54.1)   $       .6
                                                                       ===========   ===========   ===========
Earnings (loss) per share:
   Basic/Diluted                                                       $      .21    $     (.68)   $      .01
                                                                       ===========   ===========   ===========
Weighted average shares outstanding (000):
   Basic                                                                   79,520        79,336        79,115
                                                                       ===========   ===========   ===========

   Diluted                                                                 79,523        79,336        79,156
                                                                       ===========   ===========   ===========

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

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------------------------------------

(In millions of dollars)
--------------------------------------------------------------------------------

                                                                                                    Accumulated
                                                                                                          Other
                                                    Common       Additional     Accumulated       Comprehensive
                                                     Stock          Capital         Deficit       Income (Loss)       Total
                                            --------------  ---------------  --------------   ----------------- -----------
BALANCE, DECEMBER 31, 1997                  $          .8   $        533.8   $      (417.6)   $         -       $    117.0
   Net income/Comprehensive income                   -               -                  .6              -               .6
   Stock options exercised                           -                  .1            -                 -               .1
   Incentive plan accretion                          -                 1.5            -                 -              1.5
                                            --------------  ---------------  --------------   ----------------- -----------

BALANCE, DECEMBER 31, 1998                             .8            535.4          (417.0)             -            119.2

   Net income (loss)                                 -               -               (54.1)             -            (54.1)
   Minimum pension liability
     adjustment, net of tax                          -               -                -                   (1.2)       (1.2)
                                                                                                                -----------

     Comprehensive income (loss)                     -               -                -                 -            (55.3)
   Stock options exercised                           -                  .1            -                 -               .1
   Incentive plan accretion                          -                 1.3            -                 -              1.3
                                            --------------  ---------------  --------------   ----------------- -----------

BALANCE, DECEMBER 31, 1999                             .8            536.8          (471.1)               (1.2)       65.3

   Net income                                        -               -                16.8              -             16.8
   Minimum pension liability
     adjustment, net of tax                          -               -                -                    (.6)        (.6)
                                                                                                                -----------
     Comprehensive income                            -               -                -                 -             16.2
   Incentive plan accretion                          -                  .7            -                 -               .7
                                            --------------  ---------------  --------------   ----------------- -----------

BALANCE, DECEMBER 31, 2000                  $          .8   $        537.5   $      (454.3)   $           (1.8) $     82.2
                                            ==============  ===============  ==============   ================= ===========

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

STATEMENTS OF CONSOLIDATED CASH FLOWS
--------------------------------------------------------------------------------

                                                                                              Year Ended December 31,
                                                                                        -----------------------------------
(In millions of dollars)                                                                    2000        1999         1998
                                                                                        ----------   ---------   ----------
Cash flows from operating activities:
   Net income (loss)                                                                    $    16.8    $  (54.1)   $      .6
   Adjustments to reconcile net income to net cash (used) provided by operating
       activities:
       Depreciation and amortization (including deferred financing costs of $4.4,
         $4.3 and $3.9)                                                                      81.3        93.8        103.0
       Non-cash impairment charges (Notes 1 and 6)                                           63.3        19.1         45.0
       Gain on involuntary conversion at Gramercy facility                                   -          (85.0)         -
       Gains - real estate related (2000); sale of interests in AKW L.P. (1999)             (39.0)      (50.5)         -
       Non-cash benefit for income taxes                                                      -           -           (8.3)
       Equity in loss (income) of unconsolidated affiliates, net of distributions            13.1        (4.9)          .1
       Minority interests                                                                    (3.0)       (3.1)         (.1)
       (Increase) decrease in trade and other receivables                                  (168.8)       21.7         61.5
       Decrease (increase) in inventories                                                   125.8        (2.6)        24.8
       Decrease (increase) in prepaid expenses and other current assets                      20.8       (66.9)        30.1
       (Decrease) increase in accounts payable (associated with operating activities) and
         accrued interest                                                                   (29.7)       58.8         (3.2)
       Increase (decrease) in payable to affiliates and other accrued liabilities            68.9        19.6        (45.3)
       Decrease in accrued and deferred income taxes                                        (10.2)      (55.2)       (26.2)
       Net (used) provided by long-term assets and liabilities                              (69.4)       15.7        (23.9)
       Other                                                                                 14.7         4.3         12.6
                                                                                        ----------   ---------   ----------

         Net cash provided (used) by operating activities                                    84.6       (89.3)       170.7
                                                                                        ----------   ---------   ----------
Cash flows from investing activities:
   Capital expenditures, net of accounts payable of $34.6 in 2000                          (261.9)      (68.4)       (77.6)
   Gramercy-related property damage insurance recoveries                                    100.0          -            -
   Net proceeds from disposition of property and investments                                 66.9        74.8          6.7
   Other                                                                                       .2        (3.3)        (3.5)
                                                                                        ----------   ---------   ----------

         Net cash (used) provided by investing activities                                   (94.8)        3.1        (74.4)
                                                                                        ----------   ---------   ----------

Cash flows from financing activities:
   Borrowings under credit agreement, net                                                    20.0        10.4           -
   Repayments of long-term debt                                                              (4.4)        (.6)        (8.9)
   Redemption of minority interests' preference stocks                                       (2.8)       (1.6)        (8.7)
   Incurrence of financing costs                                                              (.4)         -           (.6)
   Capital stock issued                                                                      -             .1           .1
   Decrease in restricted cash, net                                                          -             .8          4.3
                                                                                        ----------   ---------   ----------

         Net cash provided (used) by financing activities                                    12.4         9.1        (13.8)
                                                                                        ----------   ---------   ----------

Net increase (decrease) in Cash and cash equivalents during the year                          2.2       (77.1)        82.5
Cash and cash equivalents at beginning of year                                               21.2        98.3         15.8
                                                                                        ----------   ---------   ----------

Cash and cash equivalents at end of year                                                $    23.4    $   21.2    $    98.3
                                                                                        ==========   =========   ==========

Supplemental disclosure of cash flow information:
   Interest paid, net of capitalized interest of $6.5, $3.4 and $3.0                    $   105.3    $  105.4    $   106.3
   Income taxes paid                                                                         19.6        24.1         16.8

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

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The consolidated financial statements include the
statements of Kaiser Aluminum Corporation ("Kaiser" or the "Company") and its
majority owned subsidiaries. The Company is a subsidiary of MAXXAM Inc.
("MAXXAM") and conducts its operations through its wholly-owned subsidiary,
Kaiser Aluminum & Chemical Corporation ("KACC"). KACC operates in all
principal aspects of the aluminum industry-the mining of bauxite (the major
aluminum bearing ore), the refining of bauxite into alumina (the intermediate
material), the production of primary aluminum, and the manufacture of fabricated
and semi-fabricated aluminum products. Kaiser's production levels of alumina,
before consideration of the Gramercy incident (see Note 2), and primary aluminum
exceed its internal processing needs, which allows it to be a major seller of
alumina and primary aluminum to domestic and international third parties (see
Note 14).

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

Investments in 50%-or-less-owned entities are accounted for primarily by the
equity method. Intercompany balances and transactions are eliminated.

Net sales and cost of products sold for 1999 and 1998 have been restated to
conform to a new accounting principle that requires freight charges ($39.3 in
1999 and $46.0 in 1998) to be included in cost of products sold.

Liquidity/Cash Resources. KACC has significant near-term debt maturities. KACC's
ability to make payments on and refinance its debt depends on its ability to
generate cash in the future. In addition to being impacted by power sales and
normal operating items, the Company's and KACC"s near-term liquidity and cash
flows will also be affected by the Gramercy incident, net payments for
asbestos-related liabilities and possible proceeds from asset dispositions. For
discussions of these matters, see Notes 2, 7, 8 and 12.

Recognition of Sales. Sales are recognized when title, ownership and risk of
loss pass to the buyer. No changes were required to the Company's revenue
recognition policy as a result of Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements", which become effective during 2000.

Earnings per Share. Basic earnings per share is computed by dividing the
weighted average number of common shares outstanding during the period,
including the weighted average impact of the shares of common stock issued
during the year from the date(s) of issuance.

Diluted earnings per share for the years ended December 31, 2000 and 1998
include the dilutive effect of outstanding stock options (3,000 shares and
41,000 shares, respectively). The impact of outstanding stock options was
excluded from the computation of diluted loss per share for the year ended
December 31, 1999, as its effect would have been antidilutive.

Cash and Cash Equivalents. The Company considers only those short-term, highly
liquid investments with original maturities of 90 days or less to be cash
equivalents.

Inventories. Substantially all product inventories are stated at last-in,
first-out ("LIFO") cost, not in excess of market value. Replacement cost is not
in excess of LIFO cost. Inventories at December 31, 2000, have been reduced by
LIFO inventory charges totaling $24.1 ($.6 in cost of products sold and $23.5 in
non-recurring operating items, net). The non-recurring LIFO charges result
primarily from the Washington smelters' curtailment ($4.5), the exit from the
can body stock product line ($11.1) and the delayed restart of the Gramercy
facility ($7.0). Other inventories, principally operating supplies and repair
and maintenance parts, are stated at the lower of average cost or market.
Inventory costs consist of material, labor, and manufacturing overhead,
including depreciation. Inventories consist of the following:

                                                                           December 31,
                                                                    --------------------------
                                                                          2000           1999
----------------------------------------------------------------------------------------------
Finished fabricated products                                        $      54.6     $    118.5
Primary aluminum and work in process                                      126.9          189.4
Bauxite and alumina                                                        88.6          124.1
Operating supplies and repair and maintenance parts                       126.1          114.1
                                                                    -----------     ----------
                                                                    $     396.2     $    546.1
                                                                    ===========     ==========

Depreciation. Depreciation is computed principally by the straight-line method
at rates based on the estimated useful lives of the various classes of assets.
The principal estimated useful lives of land improvements, buildings, and
machinery and equipment are 8 to 25 years, 15 to 45 years, and 10 to 22 years,
respectively.

Stock-Based Compensation. The Company applies the intrinsic value method to
account for a stock-based compensation plan whereby compensation cost is
recognized only to the extent that the quoted market price of the stock at the
measurement date exceeds the amount an employee must pay to acquire the stock.
No compensation cost has been recognized for this plan as the exercise price of
the stock options granted in 2000, 1999 and 1998 were at or above the market
price. The pro forma after-tax effect of the estimated fair value of the grants
would be to reduce net income in 2000 by $2.2, increase the net loss in 1999 by
$1.8 and reduce net income in 1998 by $1.5. The fair value of the 2000, 1999 and
1998 stock option grants were estimated using a Black-Scholes option pricing
model.

Other Income (Expense). Amounts included in other income (expense) in 2000, 1999
and 1998, other than interest expense and gain on involuntary conversion at the
Gramercy facility, included the following pre-tax gains (losses):

                                                                                          Year Ended December 31,
                                                                                -------------------------------------
                                                                                    2000          1999        1998
---------------------------------------------------------------------------------------------------------------------
Asbestos-related charges (Note 12)                                              $    (43.0)  $    (53.2)  $    (12.7)
Gain on sale of Pleasanton complex (Note 4)                                           22.0          -           -
Lease obligation adjustment (Note 12)                                                 17.0          -           -
Mark-to-market gains (losses) (Note 13)                                               11.0        (32.8)        -
Gain on sale of interests in AKW L.P. (Note 3)                                        -            50.5         -
Environmental cost insurance recoveries (Note 12)                                     -             -           12.0
All other, net                                                                       (11.3)         (.4)         4.2
                                                                                -----------  -----------  -----------
                                                                                $     (4.3)  $    (35.9)  $      3.5
                                                                                ===========  ===========  ===========

Deferred Financing Costs. Costs incurred to obtain debt financing are deferred
and amortized over the estimated term of the related borrowing. Such
amortization is included in Interest expense.

Foreign Currency. The Company uses the United States dollar as the functional
currency for its foreign operations.

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

Most of KACC's hedging activities involve the use of option contracts (which
establish a maximum and/or minimum amount to be paid or received) and forward
sales contracts (which effectively fix or lock-in the amount KACC will pay or
receive). Option contracts typically require the payment of an up-front premium
in return for the right to lock-in a minimum or maximum price. Forward sales
contracts do not require an up-front payment and are settled by the receipt or
payment of the amount by which the price at the settlement date varies from the
contract price. Consistent with accounting guidelines in place through December
31, 2000, any interim fluctuations in option prices prior to the settlement date
were deferred until the settlement date of the underlying hedged transaction, at
which time they were reflected in net sales or cost of products sold (as
applicable) together with the related premium cost. No accounting recognition
was accorded to interim fluctuations in prices of forward sales contracts. Hedge
(deferral) accounting would have been terminated (resulting in the applicable
derivative positions being marked-to-market) if the level of underlying physical
transactions ever fell below the net exposure hedged. This did not occur in
1998, 1999 or 2000. Deferred gains or losses as of December 31, 2000, were
included in Prepaid expenses and other current assets and Other accrued
liabilities (see Note 13).

Beginning with the quarterly period ending March 31, 2001, the Company will
begin reporting derivative activities consistent with Statement of Financial
Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133, which has been adopted as of January 1, 2001,
requires companies to recognize all derivative instruments as assets or
liabilities in the balance sheet and to measure those instruments at fair value.
Under SFAS No. 133, the Company will be required to "mark-to-market" all of its
hedging positions at each period-end. This contrasts with guidance under
pre-2001 accounting principles which generally only required certain
"non-qualifying" hedging positions to be marked-to-market. Changes in the market
value of the Company's open hedging positions resulting from the mark-to-market
process will represent unrealized gains or losses. Such unrealized gains or
losses will change, based on prevailing market prices at each subsequent balance
sheet date, until the transaction date occurs. Under SFAS No. 133, these changes
will be reflected as an increase or reduction in stockholders' equity through
either other comprehensive income or net income, depending on the nature of the
hedging instrument used. To the extent that changes in market value of the
Company's hedging positions are initially recorded in other comprehensive
income, such changes will reverse out of other comprehensive income (net of any
fluctuations in other "open" positions) and will be reflected in net income when
the subsequent physical transactions occur. As of December 31, 2000, the amount
of the Company's other comprehensive income adjustments were not significant so
there was not a significant difference between net income and comprehensive
income. However, differences between comprehensive income and net income may
become significant in future periods as a result of SFAS No. 133. In general,
SFAS No. 133 will result in material fluctuations in comprehensive income, net
income and stockholders' equity in periods of price volatility, despite the fact
that the Company's cash flow and earnings will be "fixed" to the extent hedged.
This result is contrary to the intent of the Company's hedging program, which is
to "lock-in" a price (or range of prices) for products sold/used so that
earnings and cash flows are subject to reduced risk of volatility.

SFAS No. 133 requires that as of the date of the initial adoption, the
difference between the market value of derivative instruments recorded on the
Company's consolidated balance sheet and the previous carrying amount of those
derivatives be reported in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle. As
previously discussed, this impact will be reflected in the Company's first
quarter 2001 financial statements. The adoption of SFAS No. 133 will result in a
pre-tax benefit of $21.2 to other comprehensive income and an essentially
offsetting pre-tax charge of $18.9 to earnings, such that the net effect of the
adoption of SFAS No. 133 on stockholders' equity will be small. See Note 13 for
additional discussions regarding the Company's derivatives.

Fair Value of Financial Instruments. The Company estimates the fair value of its
outstanding indebtedness to be $798.3 and $970.5 as of December 31, 2000 and
1999, respectively, based on quoted market prices for KACC's 97/8% Senior Notes
due 2002 (the "97/8% Notes"), 12 3/4% Senior Subordinated Notes due 2003 (the
"12 3/4% Notes"), and 107/8% Senior Notes due 2006 (the "107/8% Notes"), and the
discounted future cash flows for all other indebtedness, using the current rate
for debt of similar maturities and terms. The Company believes that the carrying
amount of other financial instruments is a reasonable estimate of their fair
value, unless otherwise noted.

2.   INCIDENT AT GRAMERCY FACILITY

In July 1999, KACC's Gramercy, Louisiana alumina refinery was extensively
damaged by an explosion in the digestion area of the plant. A number of
employees were injured in the incident, several of them severely. In connection
with the settlement of the U.S. Mine Safety and Health Administration's ("MSHA")
investigation of the incident, KACC is paying a fine of $.5 but denied the
alleged violations. As a result of the incident, alumina production at the
facility was completely curtailed. Construction on the damaged part of the
facility began during the first quarter of 2000. Initial production at the plant
commenced during the middle of December 2000. The plant is expected to increase
production progressively to approximately 75% of its newly rated estimated
annual capacity of 1,250,000 tons by the end of March 2001. At February 28,
2001, the plant was operating at 70% of capacity. Based on current estimates,
construction at the facility is expected to be completed during the third
quarter of 2001.

KACC has significant amounts of insurance coverage related to the Gramercy
incident. Deductibles and self-retention provisions under the insurance coverage
for the incident total $5.0, which amounts were charged to Other non-recurring
operating items, net in 1999 (Note 6). KACC's insurance coverage has five
separate components: property damage, clean-up and site preparation, business
interruption, liability and workers' compensation. The insurance coverage
components are discussed below.

Property Damage. KACC's insurance policies provide that KACC will be reimbursed
for the costs of repairing or rebuilding the damaged portion of the facility
using new materials of like kind and quality with no deduction for depreciation.
In 1999, based on discussions with the insurance carriers and their
representatives and third party engineering reports, KACC recorded a pretax gain
of $85.0, representing the difference between the minimum expected property
damage reimbursement amount of $100.0 and the net carrying value of the damaged
property of $15.0. The reimbursement amount was classified as a receivable in
Other assets at December 31, 1999. The full amount of the receivable was
collected in 2000. Additional recoveries are possible. See "Timing and Amount of
Additional Insurance Recoveries" below.

Clean-up and Site Preparation. The Gramercy facility incurred incremental costs
for clean-up and other activities during 1999 and 2000. These clean-up and site
preparation activities have been offset by accruals of approximately $24.0, of
which $10.0 were accrued in 2000, for estimated insurance recoveries.

Business Interruption. KACC's insurance policies provide for the reimbursement
of specified continuing expenses incurred during the interruption period plus
lost profits (or less expected losses) plus other expenses incurred as a result
of the incident. Operations at the Gramercy facility and a sister facility in
Jamaica, which supplies bauxite to Gramercy, will continue to incur operating
expenses until full production at the Gramercy facility is restored. Through
December 2000, KACC purchased alumina from third parties, in excess of the
amounts of alumina available from other KACC-owned facilities, to supply these
customers' needs as well as to meet intersegment requirements. The excess cost
of such open market purchases was substantially offset by insurance recoveries.
However, the insurers have alleged that certain sublimits within KACC's
insurance coverage have been reached, and, accordingly, any additional excess
purchase costs incurred in 2001 will be substantially unreimbursed. However, as
the facility is approaching 75% of its newly rated production capacity, any such
unreimbursed costs will be limited. The insurers have also asserted that no
additional business interruption amounts are due after November 30, 2000. After
considering all of the foregoing items, KACC recorded expected business
interruption insurance recoveries totaling $151.0, of which $110.0 was recorded
in the year ended December 31, 2000, as a reduction of Cost of products sold,
which amounts substantially offset actual expenses incurred during these
periods. Such business interruption insurance amounts represent estimates of
KACC's business interruption coverage based on discussions with the insurance
carriers and their representatives and are therefore subject to change. See
"Timing and Amount of Additional Insurance Recoveries" below.

Depreciation expense for the first six months of 1999 was approximately $6.0.
KACC suspended depreciation at the facility starting in July 1999 since
production had been completely curtailed. However, in accordance with an
agreement with KACC's insurers, during the second half of 2000, the Company
recorded a depreciation charge of $14.3, of which $1.5 was recorded in the
fourth quarter, representing the previously unrecorded depreciation related to
the undamaged portion of the facility for the period from July 1999 through
November 2000. However, this charge did not have any impact on the Company's
operating results as the Company has reflected (as a reduction of depreciation
expense) an equal and offsetting insurance receivable (incremental to the
amounts discussed in the preceding paragraph) since the insurers have agreed to
reimburse the Company this amount. Since production at the facility was
partially restored during December 2000, normal depreciation has commenced. Such
depreciation will exceed prior historical rates primarily due to the capital
costs on the newly constructed assets.

Liability. The incident has also resulted in more than ninety individual and
class action lawsuits being filed against KACC and others alleging, among other
things, property damage, business interruption losses by other businesses and
personal injury. The aggregate amount of damages sought in the lawsuits and
other claims cannot be determined at this time; however, KACC does not currently
believe the damages will exceed the amount of coverage under its liability
policies.

Workers' Compensation. While it is presently impossible to determine the
aggregate amount of claims that may be incurred, KACC currently believes that
any amount in excess of the coverage limitations will not have a material effect
on the Company's consolidated financial position or liquidity. However, it is
possible that as additional facts become available, additional charges may be
required and such charges could be material to the period in which they are
recorded.

Timing and Amount of Additional Insurance Recoveries. Through December 31, 2000,
the Company had recorded $289.3 of estimated insurance recoveries related to the
property damage, clean-up and site preparation and business interruption aspects
of the Gramercy incident and had collected $252.6 of such amounts. Through
February 2001, an additional $10.0 had been received with respect to the
estimated recoveries at year-end 2000 and an additional $7.0 is expected in
March 2001. The remaining balance of approximately $20.0 and any additional
amounts possibly due to KACC are not expected to be recovered until KACC and the
insurers resolve their differences. KACC and the insurers are currently
negotiating an arbitration agreement as a means of resolving their differences.
The Company anticipates that the remaining issues will not be resolved until
late 2001 or early 2002. KACC and the Company continue to believe that a minimum
of approximately $290.0 of insurance recoveries are probable, that additional
amounts are owed to KACC by the insurers, and that the likelihood of any refund
by KACC of amounts previously received from the insurers is remote. However, no
assurances can be given as to the ultimate outcome of this matter or its impact
on the Company's and KACC's near-term liquidity and results of operations.

Neither KACC nor the Company intend to record any additional insurance-related
recoveries in 2001 unless and until agreed to by the insurers or until the
arbitration process is completed. As such, the Company's and KACC's future
operating results will be adversely affected until all of the additional
costs/lost profits related to the Gramercy plant's start-up and return to full
production are eliminated or until any amounts related to 2001 ultimately
determined to be due to KACC through negotiation with the insurers or as a part
of the arbitration process are received.

Other. During the third quarter of 2000, KACC incurred approximately $11.5 of
normal recurring maintenance expenditures for the Gramercy facility (which
amounts were reflected in Other non-recurring operating items, net - see Note 6)
that otherwise would have been incurred in the ordinary course of business over
the next one to three years. The Company chose to incur these expenditures now
to avoid normal operational outages that otherwise would have occurred once the
facility resumes production.

3.   INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

Summary of combined financial information is provided below for unconsolidated
aluminum investments, most of which supply and process raw materials. The
investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey
Aluminium Limited ("Anglesey") (49.0% owned) and Kaiser Jamaica Bauxite Company
(49.0% owned). The equity in income (loss) before income taxes of such
operations is treated as a reduction (increase) in Cost of products sold. At
December 31, 2000 and 1999, KACC's net receivables from these affiliates were
not material.

KACC was a founding partner (during 2000) in MetalSpectrum, LLC, an independent
neutral online site to serve manufacturers, distributors and customers in the
specialty metals business. Since KACC's interest in MetalSpectrum is less than
10%, it is being accounted for on the cost basis.

On April 1, 1999, KACC sold its 50% interest in AKW L.P. ("AKW") to its partner
for $70.4, which resulted in the Company recognizing a net pre-tax gain of $50.5
(included in Other income (expense) - Note 1). The Company's equity in income of
AKW was $2.5 and $7.8 for the years ended December 31, 1999 and 1998,
respectively.

Summary of Combined Financial Position

                                                                                 December 31,
                                                                          --------------------------
                                                                                2000            1999
----------------------------------------------------------------------------------------------------
Current assets                                                            $    350.1      $    370.4
Long-term assets (primarily property, plant, and equipment, net)               327.3           344.1
                                                                          ----------      ----------
     Total assets                                                         $    677.4      $    714.5
                                                                          ==========      ==========
Current liabilities                                                       $    144.1      $    120.4
Long-term liabilities (primarily long-term debt)                               331.4           368.3
Stockholders' equity                                                           201.9           225.8
                                                                          ----------      ----------
     Total liabilities and stockholders' equity                           $    677.4      $    714.5
                                                                          ==========      ==========

Summary of Combined Operations

                                                                                              Year Ended December 31,
                                                                                        -----------------------------------
                                                                                          2000          1999         1998
---------------------------------------------------------------------------------------------------------------------------
Net sales                                                                               $ 602.9       $ 594.9      $ 659.2
Costs and expenses                                                                       (617.1)       (582.9)      (651.7)
Benefit (provision) for income taxes                                                       (4.5)           .8         (2.7)
                                                                                        --------      --------     --------
Net income (loss)                                                                       $ (18.7)      $  12.8      $   4.8
                                                                                        ========      ========     ========
Company's equity in income (loss)                                                       $  (4.8)      $   4.9      $   5.4
                                                                                        ========      ========     ========
Dividends received                                                                      $   8.3       $    -       $   5.5
                                                                                        ========      ========     ========

The Company's equity in income differs from the summary net income (loss) due to
varying percentage ownerships in the entities and equity method accounting
adjustments. Prior to December 31, 2000, KACC's investment in its unconsolidated
affiliates exceeded its equity in their net assets and such excess was being
amortized to Depreciation and amortization. At December 31, 2000, the excess
investment had been fully amortized. Such amortization was approximately $10.0
for each of the years ended December 31, 2000, 1999 and 1998.

The Company and its affiliates have interrelated operations. KACC provides some
of its affiliates with services such as management and engineering. Significant
activities with affiliates include the acquisition and processing of bauxite,
alumina, and primary aluminum. Purchases from these affiliates were $235.7,
$223.7 and $235.1, in the years ended December 31, 2000, 1999 and 1998,
respectively.

4.   PROPERTY, PLANT, AND EQUIPMENT

The major classes of property, plant, and equipment are as follows:

                                                            December 31,
                                                     --------------------------
                                                         2000            1999
-------------------------------------------------------------------------------
Land and improvements                                $   130.7       $   166.1
Buildings                                                197.2           230.0
Machinery and equipment                                1,702.8         1,519.7
Construction in progress                                 130.3            67.7
                                                     ----------      ----------
                                                       2,161.0         1,983.5
Accumulated depreciation                                (984.9)         (929.8)
                                                     ----------      ----------
     Property, plant, and equipment, net             $ 1,176.1       $ 1,053.7
                                                     ==========      ==========

KACC evaluated the recoverability of the approximate $200.0 carrying value of
its Washington smelters, as a result of the change in the economic environment
of the Pacific Northwest associated with the reduced power availability and
higher power costs for KACC's Washington smelters under the terms of the new
contract with the Bonneville Power Administration ("BPA") starting in October
2001 (see Note 7). The Company determined that the expected future undiscounted
cash flows of the Washington smelters were below their carrying value.
Accordingly, during the fourth quarter of 2000, KACC adjusted the carrying value
of its Washington smelting assets to their estimated fair value, which resulted
in a non-cash impairment charge of approximately $33.0 (which amount was
reflected in Other non-recurring operating items, net - see Note 6). The
estimated fair value was based on anticipated future cash flows discounted at a
rate commensurate with the risk involved.

During September 2000, KACC sold its Pleasanton, California, office complex
because the complex had become surplus to the Company's needs. Net proceeds from
the sale were approximately $51.6 and resulted in a net pre-tax gain of $22.0
(included in Other income (expense) - see Note 1).

In May 2000, KACC acquired the assets of a drawn tube aluminum fabricating
operation in Chandler, Arizona. Total consideration for the acquisition was
$16.1, consisting of cash payments of $15.1 and assumed current liabilities of
$1.0. The purchase price was allocated to the assets acquired based on their
estimated fair values, of which approximately $1.1 was allocated to property,
plant and equipment and $2.8 was allocated to receivables, inventory and prepaid
expenses. The excess of the purchase price over the fair value of the assets
acquired (goodwill) was approximately $12.2 and is being amortized on a
straight- line basis over 20 years. Total revenues for the Chandler facility
were approximately $13.8 for the year ended December 31, 1999 (unaudited).

During the quarter ended March 31, 2000, KACC, in the ordinary course of
business, sold certain non-operating properties for total proceeds of
approximately $12.0. The sale did not have a material impact on the Company's
operating results for the year ended December 31, 2000.

In February 2000, KACC completed the sale of the Micromill assets and technology
for a nominal payment at closing and possible future payments based on
subsequent performance and profitability of the Micromill technology. The sale
did not have a material impact on the Company's 2000 operating results. As a
result of the changes in strategic course in the further development and
deployment of KACC's Micromill technology , the carrying value of the Micromill
assets was reduced by recording impairment charges of $19.1 and $45.0 in 1999
and 1998, respectively (see Note 6).

5.   LABOR DISPUTE, SETTLEMENT AND RELATED COSTS

As previously reported, prior to the settlement of the labor dispute discussed
below, KACC was operating five of its U.S. facilities with salaried employees
and other employees as a result of the September 30, 1998, strike by the United
Steelworkers of America ("USWA") and the subsequent "lock-out" by KACC in
January 1999. The labor dispute was settled in September 2000. A significant
portion of the issues were settled through direct negotiations between KACC and
the USWA and the remaining issues were settled pursuant to an agreed-upon
arbitration process. Under the terms of the settlement, USWA members generally
returned to the affected plants during October 2000. The new labor contract,
which expires in September 2005, provides for a 2.6% average annual increase in
the overall wage and benefit packages, results in the reduction of at least 540
hourly jobs at the five facilities (from approximately 2,800 on September 30,
1998), allows KACC greater flexibility in using outside contractors and provides
for productivity gains by allowing KACC to utilize the knowledge obtained during
the labor dispute without many of the work-rule restrictions that were a part of
the previous labor contract. The Company has recorded a one-time pre-tax charge
of $38.5 in its results of operations for the year ended December 31, 2000, to
reflect the incremental, non-recurring impacts of the labor settlement,
including severance and other contractual obligations for non-returning workers.
At December 31, 2000, the total remaining liability associated with the labor
settlement charge was $16.3. It is anticipated that substantially all remaining
costs will be incurred during 2001 or early 2002. See Note 14 for the allocation
of the labor settlement charge by business unit.

During the period of the strike and subsequent lock-out, the Company continued
to accrue certain benefits (such as pension and other postretirement benefit
costs/liabilities) for the USWA members, which accruals were based on the terms
of the previous USWA contract. The difference between the amounts accrued for
the returning workers and the amounts agreed to in the settlement with the USWA
resulted in an approximate $33.6 increase in KACC's accumulated pension
obligation and an approximate $33.4 decrease in KACC's accumulated other
postretirement benefit obligations. In accordance with generally accepted
accounting principles, these amounts will be amortized to expense over the
employees' expected remaining years of service.

On March l, 2001, in connection with the USWA settlement agreement, KACC
redeemed all of its Cumulative (1985 Series A) and Cumulative (1985 Series B)
Preference Stock. See Note 11.

6.   NON-RECURRING OPERATING ITEMS, NET (OTHER THAN LABOR SETTLEMENT)

The income (loss) impact associated with non-recurring operating items, net,
other than the labor settlement charge, for 2000, 1999 and 1998 was as follows:

                                                                                      Year Ended December 31,
                                                                             ----------------------------------------
                                                    Business Segment                2000          1999         1998
---------------------------------------------------------------------------------------------------------------------
Net gains from power sales (Note 7)              Primary Aluminum            $     159.5   $     -        $    -
Impairment charge - Washington
     smelters  (Note 4)                          Primary Aluminum                  (33.0)        -             -
Gramercy related items:
     Incremental maintenance (Note 2)            Bauxite & Alumina             (11.5)        -             -
     Insurance deductibles, etc. (Note 2)        Bauxite & Alumina            -               (4.0)        -
                                                 Corporate                        -               (1.0)        -
     LIFO inventory charge (Note 1)              Bauxite & Alumina              (7.0)        -             -
Impairment charges associated with
     product line exits                          Flat-Rolled Products              (12.6)        -             -
                                                 Engineered Products                (5.6)        -             -
Restructuring charges                            Bauxite & Alumina               (.8)        -             -
                                                 Primary Aluminum                   (3.1)        -             -
                                                 Corporate                          (5.5)        -             -
Micromill impairment (Note 4)                    Micromill                        -              (19.1)       (45.0)
Incremental strike-related costs                 Bauxite & Alumina            -              -            (11.0)
                                                 Primary Aluminum                 -              -            (29.0)
                                                 Flat-Rolled Products             -              -            (16.0)
                                                 Engineered Products              -              -             (4.0)
                                                                             ------------  ------------   ----------
                                                                             $      80.4   $     (24.1)   $  (105.0)
                                                                             ============  ============   ==========

The $12.6 impairment charge reflected by KACC's Flat-Rolled products segment in
2000 includes a $11.1 LIFO inventory charge (see Note 1), of which $3.6 was
recorded in the fourth quarter of 2000, and a $1.5 charge to reduce the carrying
value of certain assets to their estimated net realizable value as a result of
the segment's decision to exit the can body stock product line. The $5.6
impairment charge recorded by KACC's Engineered products segment in 2000
includes a $.9 LIFO inventory charge (all in the fourth quarter of 2000) and a
$4.7 charge to reduce the carrying value of certain machining facilities and
assets, which are no longer required as a result of the segment's decision to
exit a marginal product line, to their estimated net realizable value.

The restructuring charges recorded by KACC's Primary aluminum segment in 2000
represent employee benefit and other costs for approximately 50 job eliminations
reflecting a reduced emphasis on technology sales and reduced salaried employee
requirements at KACC's Tacoma facility, given its current curtailment. The
Corporate portion of the restructuring charges in 2000 represent employee
benefit and other costs associated with the consolidation or elimination of
certain corporate staff functions. The Corporate restructuring initiatives in
2000 involve a group of approximately 50 employees. As of December 31, 2000, the
total remaining liability associated with both restructuring efforts was $2.8.
It is anticipated that all remaining costs will be incurred during 2001.

The incremental strike-related costs in 1998 reflect the adverse impact on the
Company's profitability due to the USWA strike in September 1998.

7.   PACIFIC NORTHWEST POWER SALES AND OPERATING LEVEL

Power Sales. In response to the unprecedented high market prices for power in
the Pacific Northwest, KACC temporarily curtailed the primary aluminum
production at the Tacoma and Mead, Washington smelters during the second half of
2000 and sold a portion of the power that it had under contract through
September 30, 2001. As a result of the curtailments, KACC avoided the need to
purchase power on a variable market price basis and will receive cash proceeds
sufficient to more than offset the cash impact of the potline curtailments over
the period for which the power was sold. To implement the curtailment, KACC
temporarily curtailed the two and one-half operating potlines at its Tacoma
smelter and two and one-half out of a total of eight potlines at its Mead
smelter in June 2000 and temporarily curtailed the remaining Mead potlines
during the fourth quarter of 2000. One-half of a potline at the Tacoma smelter
was already curtailed. The Company recorded net pre-tax gains of approximately
$159.5 in 2000, of which $103.2 was recorded in the fourth quarter, as a result
of these power sales. The net gain amounts were composed of gross proceeds of
$207.8, of which $88.0 (included in Receivables - other at December 31, 2000)
was received through February 28, 2001. The gross proceeds were offset by
employee-related expenses, incremental excess power costs, a non- cash LIFO
inventory charge and other fixed commitments, which amounts are expected to be
paid through September 2001. The resulting net gains have been reflected in
Other non-recurring operating items, net (see Note 6).

As previously announced, in a series of transactions completed during the first
quarter of 2001, KACC agreed to sell a substantial majority of the remaining
power that it had under contract through September 2001. These power sales,
before consideration of any applicable non-energy costs (which have yet to be
determined), are expected to result in pre-tax gains of approximately $260.0 in
the first quarter of 2001. Approximately one-half of the net proceeds are
expected to be received in late March 2001, with the balance being received
periodically through October 2001. Based on the forward price for power
experienced during the first quarter of 2001, the value of the remaining power
that KACC has under contract that can be sold is estimated to be between $20.0
and $40.0.

Future Power Supply. During October 2000, KACC signed a new power contract with
the BPA under which the BPA will provide KACC's operations in the State of
Washington with power during the period October 2001 through September 2006. The
contract will provide KACC with sufficient power to fully operate KACC's
Trentwood facility as well as approximately 40% of the combined capacity of
KACC's Mead and Tacoma aluminum smelting operations. Power costs under the new
contract are expected to exceed the cost of power under KACC's current BPA
contract by between 20% to 60% and, perhaps, by as much as 100% in certain
periods. Additional provisions of the new BPA contract include a take-or-pay
requirement, an additional cost recovery mechanism under which KACC's base power
rate could be increased and clauses under which KACC's power allocation could be
curtailed, or its costs increased, in certain instances. KACC does not have any
remarketing rights under the new BPA contract. KACC has the right to terminate
the contract until certain pricing and other provisions of the BPA contract are
finalized, which is expected to be mid-2001.

Depending on the ultimate price for power under the terms of the new BPA
contract or the availability of an alternate power supply at an acceptable
price, KACC may be unable to operate the Mead and Tacoma smelters in the near or
long-term. Under KACC's contract with the USWA, KACC is liable for certain
severance and supplemental unemployment benefits for laid-off workers. Costs
related to the period from January 1, 2001 to September 30, 2001 have been
accrued to the extent the costs were fixed and determinable. However, the
Company may become liable for additional costs. In particular, the Company would
become liable for certain early retirement benefits for USWA workers at the Mead
and Tacoma facilities if such facilities are not restarted prior to late 2002 or
early 2003. Such costs could be significant and would adversely impact the
Company's operating results and liquidity.

8.   LONG-TERM DEBT

Long-term debt and its maturity schedule are as follows:

                                                                                                               December 31,
                                                                                                             ----------------
                                                                                                     2006
                                                                                                      and       2000     1999
                                                       2001      2002    2003     2004     2005     After      Total    Total
-----------------------------------------------------------------------------------------------------------------------------

Credit Agreement                                    $  30.4                                                  $  30.4  $  10.4
97/8% Senior Notes due 2002, net                             $  224.8                                          224.8    224.6
107/8% Senior Notes due 2006, net                                                                  $  225.5    225.5    225.6
12 3/4% Senior Subordinated Notes due 2003                               $ 400.0                               400.0    400.0
Alpart CARIFA Loans - (fixed and variable rates)
     due 2007, 2008                                                                                    56.0     56.0     60.0
Other borrowings (fixed and variable rates)             1.2        .2         .2  $    .2  $    .2     50.7     52.7     52.2
                                                    -------  ---------   -------- -------  ------- --------  -------  -------
Total                                               $  31.6  $  225.0    $ 400.2  $    .2  $    .2 $  332.2    989.4    972.8
                                                    =======  =========   ======== =======  ======= ========
Less current portion                                                                                            31.6       .3
                                                                                                             -------  -------
     Long-term debt                                                                                          $ 957.8  $ 972.5
                                                                                                             =======  =======

Credit Agreement and Liquidity. The Company and KACC have a credit agreement, as
amended, (the "Credit Agreement") which provides a secured, revolving line of
credit through August 15, 2001. KACC is able to borrow under the facility by
means of revolving credit advances and letters of credit (up to $125.0) in an
aggregate amount equal to the lesser of $300.0 (reduced from $325.0 in December
2000) or a borrowing base relating to eligible accounts receivable and eligible
inventory. As of December 31, 2000, $155.3 (of which $69.3 could have been used
for letters of credit) was available to KACC under the Credit Agreement. The
Credit Agreement is unconditionally guaranteed by the Company and by certain
significant subsidiaries of KACC. Interest on any outstanding balances will bear
a spread (which varies based on the results of a financial test) over either a
base rate or LIBOR, at KACC's option. The interest rate at December 31, 2000 was
11.0%. As of February 28, 2001, there were $94.0 of borrowings outstanding under
the Credit Agreement and remaining availability of approximately $120.0.
However, proceeds of approximately $130.0 related to 2001 power sales are
expected to be received at or near March 30, 2001, and an additional $130.0 of
power proceeds will be received periodically through October 2001 with respect
to other power sales made during the first quarter of 2001.

It is the Company's and KACC's intention to extend or replace the Credit
Agreement prior to its expiration. However, in order for the Credit Agreement to
be extended, on a short-term basis, beyond August 2001, KACC will have to have a
plan to mitigate the $225.0 million of 97/8% Notes, due February 2002. For the
Credit Agreement to be extended past February 2003, both the 97/8% Notes and the
12 3/4% Notes, due February 2003, will have to be retired and/or refinanced. As
of February 28, 2001, KACC had received approval from the Credit Agreement
lenders to purchase up to $50.0 of the 97/8% Notes. As of February 28, 2001,
KACC has purchased approximately $1.0 of 97/8% Notes.

As previously disclosed, KACC is considering the possible sale of part or all of
its interests in certain operating assets. The contemplated transactions are in
various stages of development. KACC expects that at least one operating asset
will be sold.

KACC has multiple transactions under way. It is unlikely, however, that it would
consummate all of the transactions under consideration. Further, there can be no
assurance as to the likelihood, timing or terms of such sales. The Company would
expect to use the proceeds from any such sales for debt reduction, capital
spending or some combination thereof.

Alpart CARIFA Loans. In December 1991, Alumina Partners of Jamaica ("Alpart")
entered into a loan agreement with the Caribbean Basin Projects Financing
Authority ("CARIFA"). As of December 31, 2000, Alpart's obligations under the
loan agreement were secured by two letters of credit aggregating $59.7. KACC was
a party to one of the two letters of credit in the amount of $38.8 in respect of
its ownership interest in Alpart. Alpart has also agreed to indemnify
bondholders of CARIFA for certain tax payments that could result from events, as
defined, that adversely affect the tax treatment of the interest income on the
bonds.

During March 2000, Alpart redeemed $4.0 principal amount of the CARIFA loans.
During March 2001, Alpart redeemed an additional $34.0 principal amount of the
CARIFA loans and, accordingly, KACC's letter of credit securing the loans was
reduced to $15.3. The March 2001 redemption had a modest beneficial effect on
the unused availability remaining under the Credit Agreement as the additional
Credit Agreement borrowings of $22.1 required for KACC's share of the redemption
were more than offset by a reduction in the amount of letters of credit
outstanding.

Debt Covenants and Restrictions. The Credit Agreement requires KACC to comply
with certain financial covenants and places restrictions on the Company's and
KACC's ability to, among other things, incur debt and liens, make investments,
pay dividends, undertake transactions with affiliates, make capital
expenditures, and enter into unrelated lines of business. The Credit Agreement
is secured by, among other things, (i) mortgages on KACC's major domestic plants
(excluding KACC's Gramercy alumina plant); (ii) subject to certain exceptions,
liens on the accounts receivable, inventory, equipment, domestic patents and
trademarks, and substantially all other personal property of KACC and certain of
its subsidiaries; (iii) a pledge of all the stock of KACC owned by Kaiser; and
(iv) pledges of all of the stock of a number of KACC's wholly owned domestic
subsidiaries, pledges of a portion of the stock of certain foreign subsidiaries,
and pledges of a portion of the stock of certain partially owned foreign
affiliates.

The obligations of KACC with respect to its 97/8% Notes, its 107/8% Notes and
its 12 3/4% Notes are guaranteed, jointly and severally, by certain subsidiaries
of KACC. The indentures governing the 97/8% Notes, the 107/8% Notes and the 12
3/4% Notes (collectively, the "Indentures") restrict, among other things, KACC's
ability to incur debt, undertake transactions with affiliates, and pay
dividends. Further, the Indentures provide that KACC must offer to purchase the
97/8% Notes, the 107/8% Notes and the 12 3/4% Notes, respectively, upon the
occurrence of a Change of Control (as defined therein), and the Credit Agreement
provides that the occurrence of a Change in Control (as defined therein) shall
constitute an Event of Default thereunder.

The Credit Agreement does not permit the Company, and significantly restricts
KACC's ability, to pay dividends on their common stock.

Restricted Net Assets of Subsidiaries. Certain debt instruments restrict the
ability of KACC to transfer assets, make loans and advances, and pay dividends
to the Company. The restricted net assets of KACC totaled $87.0 and $70.7 at
December 31, 2000 and 1999, respectively.

9.   INCOME TAXES

Income (loss) before income taxes and minority interests by geographic area is
as follows:

                                                        Year Ended December 31,
                                              -------------------------------------------
                                                  2000             1999            1998
-----------------------------------------------------------------------------------------
Domestic                                      $   (96.6)      $    (81.8)      $   (93.6)
Foreign                                           122.0             (8.1)           77.7
                                              ----------      -----------      ----------

     Total                                    $    25.4       $    (89.9)      $   (15.9)
                                              =========       ===========      ==========

Income taxes are classified as either domestic or foreign, based on whether
payment is made or due to the United States or a foreign country. Certain income
classified as foreign is also subject to domestic income taxes.

The (provision) benefit for income taxes on income (loss) before income taxes
and minority interests consists of:

                                             Federal           Foreign           State          Total
-----------------------------------------------------------------------------------------------------
2000     Current                        $      (1.9)      $     (35.3)     $      (.3)     $   (37.5)
         Deferred                              35.5              (8.9)            (.7)          25.9
                                        ------------      ------------     -----------     ----------
              Total                     $      33.6       $     (44.2)     $     (1.0)     $   (11.6)
                                        ============      ============     ===========     ==========

1999     Current                        $       (.5)      $     (23.1)     $      (.3)     $   (23.9)
         Deferred                              43.8               7.1             5.7           56.6
                                        ------------      ------------     -----------     ----------
              Total                     $      43.3       $     (16.0)     $      5.4      $    32.7
                                        ============      ============     ===========     ==========

1998     Current                        $      (1.8)      $     (16.5)     $      (.2)     $   (18.5)
         Deferred                              44.4             (12.5)            3.0           34.9
                                        ------------      ------------     -----------     ----------
              Total                     $      42.6       $     (29.0)     $      2.8      $    16.4
                                        ============      ============     ===========     ==========

A reconciliation between the (provision) benefit for income taxes and the amount
computed by applying the federal statutory income tax rate to income (loss)
before income taxes and minority interests is as follows:

                                                                                              Year Ended December 31,
                                                                                        -----------------------------------
                                                                                            2000          1999         1998
---------------------------------------------------------------------------------------------------------------------------
Amount of federal income tax (provision) benefit based on the statutory rate            $  (8.9)      $  31.2      $   5.6
Revision of prior years' tax estimates and other changes in valuation allowances           (1.8)          1.1          8.3
Percentage depletion                                                                        3.0           2.8          3.2
Foreign taxes, net of federal tax benefit                                                  (3.2)         (3.2)        (1.9)
Other                                                                                       (.7)           .8          1.2
                                                                                        --------      --------     --------
(Provision) benefit for income taxes                                                    $ (11.6)      $  32.7      $  16.4
                                                                                        ========      ========     ========

The components of the Company's net deferred income tax assets are as follows:
                                                                           December 31,
                                                                   ----------------------------
                                                                       2000             1999
-----------------------------------------------------------------------------------------------
Deferred income tax assets:
     Postretirement benefits other than pensions                   $     267.4       $    274.7
     Loss and credit carryforwards                                       125.2            119.3
     Other liabilities                                                   143.7            146.3
     Other                                                               181.5            193.9
     Valuation allowances                                               (122.3)          (125.6)
                                                                   ------------      -----------
         Total deferred income tax assets-net                            595.5            608.6
                                                                   ------------      -----------
Deferred income tax liabilities:
     Property, plant, and equipment                                     (105.1)          (101.6)
     Other                                                               (26.2)           (69.6)
                                                                   ------------      -----------
         Total deferred income tax liabilities                          (131.3)          (171.2)
                                                                   ------------      -----------
Net deferred income tax assets                                     $     464.2       $    437.4
                                                                   ============      ===========

The principal component of the Company's net deferred income tax assets is the
tax benefit, net of certain valuation allowances, associated with the accrued
liability for postretirement benefits other than pensions. The future tax
deductions with respect to the turnaround of this accrual will occur over a
30-to-40-year period. If such deductions create or increase a net operating
loss, the Company has the ability to carry forward such loss for 20 taxable
years. Accordingly, the Company believes that a long-term view of profitability
is appropriate and has concluded that this net deferred income tax asset will
more likely than not be realized.

A substantial portion of the valuation allowances provided by the Company
relates to loss and credit carryforwards. To determine the proper amount of
valuation allowances with respect to these carryforwards, the Company evaluated
all appropriate factors, including any limitations concerning their use and the
year the carryforwards expire, as well as the levels of taxable income necessary
for utilization. With regard to future levels of income, the Company believes,
based on the cyclical nature of its business, its history of operating earnings,
and its expectations for future years, that it will more likely than not
generate sufficient taxable income to realize the benefit attributable to the
loss and credit carryforwards for which valuation allowances were not provided.

As of December 31, 2000 and 1999, $56.0 and $39.1, respectively, of the net
deferred income tax assets listed above are included in the Consolidated Balance
Sheets in the caption entitled Prepaid expenses and other current assets.
Certain other portions of the deferred income tax liabilities listed above are
included in the Consolidated Balance Sheets in the captions entitled Other
accrued liabilities and Long-term liabilities.

The Company and its domestic subsidiaries file consolidated federal income tax
returns. During the period from October 28, 1988, through June 30, 1993, the
Company and its domestic subsidiaries were included in the consolidated federal
income tax returns of MAXXAM. The tax allocation agreements of the Company and
KACC with MAXXAM terminated pursuant to their terms, effective for taxable
periods beginning after June 30, 1993. However, payments or refunds for periods
prior to July 1, 1993 related to certain jurisdictions could still be required
pursuant to the Company's and KACC's respective tax allocation agreements with
MAXXAM. In accordance with the Credit Agreement, any such payments to MAXXAM by
KACC would require lender approval, except in certain specific circumstances.

At December 31, 2000, the Company had certain tax attributes available to offset
regular federal income tax requirements, subject to certain limitations,
including net operating loss and general business credit carryforwards of $84.9
and $1.0, respectively, which expire periodically through 2019 and 2011,
respectively, foreign tax credit ("FTC") carryforwards of $67.1, which expire
primarily in 2004 and 2005, and alternative minimum tax ("AMT") credit
carryforwards of $25.8, which have an indefinite life. The Company also has AMT
net operating loss and FTC carryforwards of $45.3 and $89.8, respectively,
available, subject to certain limitations, to offset future alternative minimum
taxable income, which expire periodically through 2019 and 2005, respectively.

10.  EMPLOYEE BENEFIT AND INCENTIVE PLANS

Pension and Other Postretirement Benefit Plans. Retirement plans are
non-contributory for salaried and hourly employees and generally provide for
benefits based on formulas which consider such items as length of service and
earnings during years of service. The Company's funding policies meet or exceed
all regulatory requirements.

The Company and its subsidiaries provide postretirement health care and life
insurance benefits to eligible retired employees and their dependents.
Substantially all employees may become eligible for those benefits if they reach
retirement age while still working for the Company or its subsidiaries. The
Company has not funded the liability for these benefits, which are expected to
be paid out of cash generated by operations. The Company reserves the right,
subject to applicable collective bargaining agreements, to amend or terminate
these benefits. Assumptions used to value obligations at year-end and to
determine the net periodic benefit cost in the subsequent year are:

                                                               Pension Benefits                  Medical/Life Benefits
                                                        --------------------------------    -------------------------------
                                                             2000        1999       1998         2000       1999       1998
                                                        --------------------------------    -------------------------------
Weighted-average assumptions as of December 31,
Discount rate                                               7.75%       7.75%      7.00%        7.75%      7.75%      7.00%
Expected return on plan assets                              9.50%       9.50%      9.50%          -          -          -
Rate of compensation increase                               4.00%       4.00%      5.00%        4.00%      4.00%      4.00%

In 2000, the average annual assumed rate of increase in the per capita cost of
covered benefits (i.e., health care cost trend rate) is 8.0% for all
participants. The assumed rate of increase is assumed to decline gradually to
5.0% in 2009 for all participants and remain at that level thereafter.

The following table presents the funded status of the Company's pension and
other postretirement benefit plans as of December 31, 2000 and 1999, and the
corresponding amounts that are included in the Company's Consolidated Balance
Sheets:

                                                               Pension Benefits                  Medical/Life Benefits
                                                       --------------------------------    --------------------------------
                                                            2000              1999              2000              1999
                                                       --------------    --------------    --------------     -------------
Change in Benefit Obligation:
     Obligation at beginning of year                   $       806.0     $       872.5     $       615.4      $      616.8
     Service cost                                               19.0              14.6               5.3               5.2
     Interest cost                                              60.5              59.7              45.0              41.5
     Currency exchange rate change                              -                 (5.7)               -                 -
     Curtailments, settlements and amendments                   33.7                .4             (33.4)               -
     Actuarial (gain) loss                                       9.1             (44.5)             79.5                .1
     Benefits paid                                             (92.5)            (91.0)            (53.6)            (48.2)
                                                       --------------    --------------    --------------     -------------
         Obligation at end of year                             835.8             806.0             658.2             615.4
                                                       --------------    --------------    --------------     -------------
Change in Plan Assets:
     FMV of plan assets at beginning of year                   857.8             801.8                -                 -
     Actual return on assets                                   (18.0)            133.0                -                 -
     Employer contributions                                     10.7              14.0              53.6              48.2
     Benefits paid                                             (92.5)            (91.0)            (53.6)            (48.2)
                                                       --------------    --------------    --------------     -------------
     FMV of plan assets at end of year                         758.0             857.8               -                 -
                                                       --------------    --------------    --------------     -------------
     Obligation in excess of (less than) plan
         assets                                                 77.8             (51.8)            658.2             615.4
     Unrecognized net actuarial gain (loss)                     25.1             131.9             (21.6)             56.7
     Unrecognized prior service costs                          (45.1)            (15.2)             78.3              57.7
     Adjustment required to recognize minimum liability          1.8               1.2                -                 -
     Intangible asset and other                                  3.0               2.6                -                 -
                                                       --------------    --------------    --------------     -------------
         Accrued benefit liability                     $        62.6     $        68.7     $       714.9      $      729.8
                                                       ==============    ==============    ==============     =============

The aggregate accumulated benefit obligation and fair value of plan assets for
pension plans with accumulated benefit obligation in excess of plan assets were
$789.3 and $748.5, respectively, as of December 31, 2000, and $92.4 and $79.7,
respectively, as of December 31, 1999.

                                                               Pension Benefits                  Medical/Life Benefits
                                                       ---------------------------------   --------------------------------
                                                          2000       1999        1998         2000       1999       1998
                                                       ---------- ----------- ----------   ---------- ---------- ----------
Components of Net Periodic Benefit Costs:
     Service cost                                      $    19.0  $     14.6  $    14.2    $     5.3  $     5.2  $     4.2
     Interest cost                                          60.5        59.7       59.7         45.0       41.5       37.5
     Expected return on assets                             (77.9)      (72.9)     (69.4)            -          -         -
     Amortization of prior service cost                      3.9         3.3        3.2        (12.8)     (12.1)     (12.4)
     Recognized net actuarial (gain) loss                   (1.9)         .7        1.4            -          -       (7.1)
                                                       ---------- ----------- ----------   ---------- ---------- ----------
     Net periodic benefit cost                               3.6         5.4        9.1         37.5       34.6       22.2
     Curtailments, settlements, etc.                          .1          .4        3.2            -          -          -
                                                       ---------- ----------- ----------   ---------- ---------- ----------
         Adjusted net periodic benefit costs           $     3.7  $      5.8  $    12.3    $    37.5  $    34.6  $    22.2
                                                       ========== =========== ==========   ========== ========== ==========

Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage- point change in assumed
health care cost trend rates would have the following effects:

                                                                       1% Increase           1% Decrease
                                                                      --------------        -------------
Increase (decrease) to total of service and interest cost             $        6.8          $       (5.0)
Increase (decrease) to the postretirement benefit obligation          $       68.3          $      (48.0)

Postemployment Benefits. The Company provides certain benefits to former or
inactive employees after employment but before retirement.

Incentive Plans. The Company has an unfunded incentive compensation program,
which provides incentive compensation based on performance against annual plans
and over rolling three-year periods. In addition, the Company has a
"nonqualified" stock option plan and KACC has a defined contribution plan for
salaried employees. The Company's expense for all of these plans was $5.7, $6.0
and $7.5 for the years ended December 31, 2000, 1999 and 1998, respectively.

Up to 8,000,000 shares of the Company's Common Stock were reserved for issuance
under its stock incentive compensation plans. At December 31, 2000, 1,861,752
shares of Common Stock remained available for issuance under those plans. Stock
options granted pursuant to the Company's nonqualified stock option program are
granted at or above the prevailing market price, generally vest at a rate of 20
- 33% per year, and have a five or ten year term. Information concerning
nonqualified stock option plan activity is shown below. The weighted average
price per share for each year is shown parenthetically.

                                                                         2000          1999         1998
----------------------------------------------------------------------------------------------------------
Outstanding at beginning of year ($10.24, $9.98 and $10.45)          4,239,210     3,049,122      819,752
Granted ($10.23, $11.15 and $9.79)                                     757,335     1,218,068    2,263,170
Exercised ($7.25 in both years)                                           -           (7,920)     (10,640)
Expired or forfeited ($11.08, $11.02 and $9.60)                       (620,598)      (20,060)     (23,160)
                                                                     ----------    ----------   ----------
Outstanding at end of year ($10.24, $10.24 and $9.98)                4,375,947     4,239,210    3,049,122
                                                                     ==========    ==========   ==========
Exercisable at end of year ($10.18, $10.17 and $10.09)               2,380,491     1,763,852    1,261,262
                                                                     ==========    ==========   ==========

Options exercisable at December 31, 2000 had exercisable prices ranging from
$6.13 to $12.75 and a weighted average remaining contractual life of 3.4 years.

11.  MINORITY INTERESTS AND PLEDGED SHARES OF COMMON STOCK

Minority Interests. The Company owns a 90% interest in Volta Aluminium Company
Limited ("Valco") and a 65% interest in Alumina Partners of Jamaica ("Alpart").
These companies' financial statements are fully consolidated into the Company's
consolidated financial statements because they are majority-owned. Interests of
Alpart's and Valco's minority shareholders' (included in "Other" in the table
below) are included in minority interests together with KACC's Redeemable
Preference Stock and KACC's Preference Stock discussed below. Changes in
minority interest were:

                                             2000                           1999                           1998
                                   -------------------------     ----------------------    ---------------------------
                                     Redeemable                  Redeemable                  Redeemable
                                     Preference                  Preference                  Preference
                                          Stock      Other            Stock      Other          Stock        Other
----------------------------------------------------------------------------------------------------------------------
Beginning of period balance        $    19.5    $    98.2      $     20.1   $    103.4     $     27.7    $   100.0
Redeemable preference stock -
   Accretion                                -           -             1.0            -            1.1             -
   Stock redemption                     (2.0)         (.8)           (1.6)           -           (8.7)            -
   Reclassification (see below)        (17.5)           -              -             -             -              -
Minority interests                          -         3.7              -          (5.2)            -           3.4
                                   ----------   ----------     -----------  -----------    -----------   ----------
End of period balance              $        -   $   101.1      $     19.5   $     98.2     $     20.1    $   103.4
                                   ==========   ==========     ===========  ===========    ===========   ==========

In 1985, KACC issued its Cumulative (1985 Series A) Preference Stock and its
Cumulative (1985 Series B) Preference Stock (together, the "Redeemable
Preference Stock") each of which has a par value of $1 per share and a
liquidation and redemption value of $50 per share plus accrued dividends, if
any. No additional Redeemable Preference Stock is expected to be issued. In
connection with the USWA settlement agreement (see Note 5), during March 2001,
KACC redeemed all of the Redeemable Preference Stock (350,872 shares outstanding
at December 31, 2000). The amount applicable to the unredeemed shares at
December 31, 2000 ($17.5), was included in Other accrued liabilities. The net
cash impact of the redemption on KACC was only approximately $5.5 because
approximately $12.0 of the redemption amount had previously been funded into
redemption funds (included in Prepaid expenses).

KACC has four series of $100 par value Cumulative Convertible Preference Stock
("$100 Preference Stock") outstanding with annual dividend requirements of
between 41/8% and 4 3/4% (included in "Other" in the above table). KACC has the
option to redeem the $100 Preference Stock at par value plus accrued dividends.
KACC does not intend to issue any additional shares of the $100 Preference
Stock. The $100 Preference Stock can be exchanged for per share cash amounts
between $69 - $80. KACC records the $100 Preference Stock at their exchange
amounts for financial statement presentation and the Company includes such
amounts in minority interests. At December 31, 2000 and 1999, outstanding shares
of $100 Preference Stock were 9,250 and 19,538, respectively.

Pledged Shares. From time to time MAXXAM or certain of its subsidiaries which
own the Company's Common Stock may use such stock as collateral under various
financing arrangements. At December 31, 2000, 26,737,443 shares of the Company's
Common Stock beneficially owned by MAXXAM Group Holdings Inc. ("MGHI"), a wholly
owned subsidiary of MAXXAM, were pledged as security for $130.0 principal amount
of 12% Senior Secured Notes due 2003 issued in December 1996 by MGHI. An
additional 7,915,000 shares of the Company's Common Stock were pledged by MAXXAM
under a separate agreement under which $13.4 had been borrowed by MAXXAM at
December 31, 2000.

12.  COMMITMENTS AND CONTINGENCIES

Commitments. KACC has a variety of financial commitments, including purchase
agreements, tolling arrangements, forward foreign exchange and forward sales
contracts (see Note 13), letters of credit, and guarantees. Such purchase
agreements and tolling arrangements include long-term agreements for the
purchase and tolling of bauxite into alumina in Australia by QAL. These
obligations are scheduled to expire in 2008. Under the agreements, KACC is
unconditionally obligated to pay its proportional share of debt, operating
costs, and certain other costs of QAL. KACC's share of the aggregate minimum
amount of required future principal payments at December 31, 2000, is $101.5
which matures as follows: $14.1 in 2001, $43.0 in 2002 and $44.4 in 2003. KACC's
share of payments, including operating costs and certain other expenses under
the agreements, has ranged between $92.0 - $96.0 over the past three years. KACC
also has agreements to supply alumina to and to purchase aluminum from Anglesey.

Minimum rental commitments under operating leases at December 31, 2000, are as
follows: years ending December 31, 2001 - $36.5; 2002 - $32.3; 2003 - $29.4;
2004 - $26.9; 2005 - $26.4; thereafter - $78.0. The future minimum rentals
receivable under noncancelable subleases was $132.3 at December 31, 2000.

Rental expenses were $42.5, $41.1 and $34.5, for the years ended December 31,
2000, 1999 and 1998, respectively.

KACC has a long-term liability, net of estimated subleases income (included in
Long-term liabilities), on a building in which KACC has not maintained offices
for a number of years, but for which it is responsible for lease payments as
master tenant through 2008 under a sale-and-leaseback agreement. During 2000,
KACC reduced its net lease obligation by $17.0 (see Note 1) to reflect new
third-party sublease agreements which resulted in occupancy and lease rates
above those previously projected.

Environmental Contingencies. The Company and KACC are subject to a number of
environmental laws, to fines or penalties assessed for alleged breaches of the
environmental laws, and to claims and litigation based upon such laws. KACC
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. The following
table presents the changes in such accruals, which are primarily included in
Long-term liabilities, for the years ended December 31, 2000, 1999 and 1998:

                                                  2000        1999       1998
-----------------------------------------------------------------------------
Balance at beginning of period                 $ 48.9      $ 50.7     $ 29.7
Additional accruals                               2.6         1.6       24.5
Less expenditures                                (5.4)       (3.4)      (3.5)
                                               -------     -------    -------
Balance at end of period                       $ 46.1      $ 48.9     $ 50.7
                                               =======     =======    =======

These environmental accruals represent the Company's estimate of costs
reasonably expected to be incurred 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. The Company expects
that these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $3.0 to $12.0 for the years 2001 through 2005 and an
aggregate of approximately $21.0 thereafter.

As additional facts are developed and definitive remediation plans and necessary
regulatory approvals for implementation of remediation are established or
alternative technologies are developed, changes in these and other factors may
result in actual costs exceeding the current environmental accruals. The Company
believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $35.0. As the resolution of these matters
is subject to further regulatory review and approval, no specific assurance can
be given as to when the factors upon which a substantial portion of this
estimate is based can be expected to be resolved. However, the Company is
currently working to resolve certain of these matters.

The Company believes that KACC has insurance coverage available to recover
certain incurred and future environmental costs and is pursuing claims in this
regard. During December 1998, KACC received recoveries totaling approximately
$35.0 from certain of its insurers related to current and future claims. Based
on the Company's analysis, a total of $12.0 of such recoveries was allocable to
previously accrued (expensed) items and, therefore, was reflected in earnings
during 1998 (see Note 1 - Other Income (Expense)). The remaining recoveries were
offset against increases in the total amount of environmental reserves. No
assurances can be given that the Company will be successful in other attempts to
recover incurred or future costs from other insurers or that the amount of
recoveries received will ultimately be adequate to cover costs incurred.

While uncertainties are inherent in the final outcome of these environmental
matters, and it is presently impossible to determine the actual costs that
ultimately may be incurred, management currently believes that the resolution of
such uncertainties should not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity.

Asbestos Contingencies. KACC is a defendant in a number of lawsuits, some of
which involve claims of multiple persons, in which the plaintiffs allege that
certain of their injuries were caused by, among other things, exposure to
asbestos during, and as a result of, their employment or association with KACC
or exposure to products containing asbestos produced or sold by KACC. The
lawsuits generally relate to products KACC has not sold for more than 20 years.

The following table presents the changes in number of such claims pending for
the years ended December 31, 2000, 1999 and 1998.

                                                                         2000         1999         1998
--------------------------------------------------------------------------------------------------------
Number of claims at beginning of period                               100,000       86,400       77,400
Claims received                                                        30,600       29,300       22,900
Claims settled or dismissed                                           (19,800)     (15,700)     (13,900)
                                                                    ----------    ---------    ---------

Number of claims at end of period                                     110,800      100,000       86,400
                                                                    ==========    =========    =========
Number of claims at end of period (included above) covered by
     agreements under which KACC expects to settle over an
     extended period                                                   66,900       31,900       30,000
                                                                    ==========    =========    =========

The Company maintains a liability for estimated asbestos-related costs for
claims filed to date and an estimate of claims to be filed over a 10 year period
(i.e., through 2010). The Company's estimate is based on the Company's view, at
each balance sheet date, of the current and anticipated number of
asbestos-related claims, the timing and amounts of asbestos-related payments,
the status of ongoing litigation and settlement initiatives, and the advice of
Wharton Levin Ehrmantraut Klein & Nash, P.A., with respect to the current state
of the law related to asbestos claims. However, there are inherent uncertainties
involved in estimating asbestos- related costs and the Company's actual costs
could exceed the Company's estimates due to changes in facts and circumstances
after the date of each estimate. Further, while the Company does not presently
believe there is a reasonable basis for estimating asbestos-related costs beyond
2010 and, accordingly, no accrual has been recorded for any costs which may be
incurred beyond 2010, the Company expects that such costs are likely to continue
beyond 2010, and that such costs could be substantial.

The Company believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Although the Company has
settled asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements and disputes with
certain carriers exist. The timing and amount of future recoveries from these
and other insurance carriers will depend on the pace of claims review and
processing by such carriers and on the resolution of any disputes regarding
coverage under such policies. The Company believes that substantial recoveries
from the insurance carriers are probable. The Company reached this conclusion
after considering its prior insurance-related recoveries in respect of asbestos-
related claims, existing insurance policies, and the advice of Heller Ehrman
White & McAuliffe LLP with respect to applicable insurance coverage law relating
to the terms and conditions of those policies. During 2000, KACC filed suit
against a group of its insurers, after negotiations with certain of the insurers
regarding an agreement covering both reimbursement amounts and the timing of
reimbursement payments were unsuccessful. The litigation is intended, among
other things, to: (1) ensure that the insurers provide KACC with timely and
appropriate reimbursement payments for asbestos-related settlements and related
legal costs incurred; and (2) to resolve certain issues between the parties with
respect to how specific provisions of the applicable insurance policies are to
be applied. Given the significance of expected asbestos-related payments in 2001
and 2002 based on settlement agreements in place at December 31, 2000, the
receipt of timely and appropriate reimbursements from such insurers is critical
to KACC's liquidity. The court is not expected to try the case until late 2001
or 2002. KACC is continuing to receive cash payments from the insurers.

The following tables present historical information regarding KACC's
asbestos-related balances and cash flows:

                                                                             December 31,
                                                                   ----------------------------
                                                                        2000            1999
-----------------------------------------------------------------------------------------------
Liability (current portion of $130.0 and $53.0)                    $     492.4     $     387.8
Receivable (included in Other assets)(1)                                 406.3           315.5
                                                                   ------------    ------------
                                                                   $      86.1     $      72.3
                                                                   ============    ============

(1)  The asbestos-related receivable was determined on the same basis as the
     asbestos-related cost accrual. However, no assurances can be given that
     KACC 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 KACC's aggregate insurance
     coverage. As of December 31, 2000 and 1999, $36.9 and $25.0, respectively,
     of the receivable amounts relate to costs paid. The remaining receivable
     amounts relate to costs that are expected to be paid by KACC in the future.

                                                                         Year Ended December 31,
                                                               -------------------------------------------      Inception
                                                                   2000          1999            1998           To Date
                                                               -----------   -----------     -------------   ---------------
Payments made, including related legal costs................   $      99.5   $      24.6     $       18.5    $        220.5
Insurance recoveries........................................          62.8           6.6             19.9             131.3
                                                               -----------   -----------     -------------   ---------------
                                                               $      36.7   $      18.0     $       (1.4)   $         89.2
                                                               ===========   ===========     =============   ===============

                                                                                 As of December 31, 2000
                                                                -------------------------------------------------------
                                                                   2001 and              2003 to
                                                                     2002                 2005              Thereafter
                                                                ---------------       -------------       -------------
Expected annual payment amounts, before considering
   insurance recoveries.......................................  $110.0 - $135.0       $25.0 - $50.0           $125.0

Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. This process resulted in the Company
reflecting charges of $43.0, $53.2 and $12.7 (included in Other income(expense)
- see Note 1) in the years ended December 31, 2000, 1999 and 1998, respectively,
for asbestos-related claims, net of expected insurance recoveries, based on
recent cost and other trends experienced by KACC and other companies. While
uncertainties are inherent in the final outcome of these asbestos matters and it
is presently impossible to determine the actual costs that ultimately may be
incurred and insurance recoveries that will be received, management currently
believes that, based on the factors discussed in the preceding paragraphs, the
resolution of asbestos-related uncertainties and the incurrence of
asbestos-related costs net of related insurance recoveries should not have a
material adverse effect on the Company's consolidated financial position or
liquidity. However, as the Company's estimates are periodically re-evaluated,
additional charges may be necessary and such charges could be material to the
results of the period in which they are recorded.

Labor Matters. In connection with the USWA strike and subsequent lock-out by
KACC, which was settled in September 2000, certain allegations of unfair labor
practices ("ULPs") were filed with the National Labor Relations Board ("NLRB")
by the USWA. As previously disclosed, KACC responded to all such allegations and
believes that they were without merit. Twenty-two of twenty-four allegations of
ULPs previously brought against KACC by the USWA have been dismissed. A trial
before an administrative law judge for the two remaining allegations commenced
in November 2000 and is continuing. The Company is unable to estimate when the
trial will be completed. Any outcome from the trial before the administrative
law judge would be subject to additional appeals by the general counsel of the
NLRB, the USWA or KACC. This process could take months or years. If these
proceedings eventually resulted in a final ruling against KACC with respect to
either allegation, it could be obligated to provide back pay to USWA members at
the five plants and such amount could be significant. The Company continues to
believe that the charges are without merit. While uncertainties are inherent in
matters such as this and it is presently impossible to determine the actual
costs, if any, that may ultimately arise in connection with this matter, the
Company does not believe that the ultimate outcome of this matter will have a
material adverse impact on the Company's liquidity or financial position.
However, amounts paid, if any, in satisfaction of this matter could be
significant to the results of the period in which they are recorded.

Other Contingencies. The Company or KACC is involved in various other claims,
lawsuits, and other proceedings relating to a wide variety of matters related to
past or present operations. While uncertainties are inherent in the final
outcome of such matters, and it is presently impossible to determine the actual
costs that ultimately may be incurred, management currently believes that the
resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Company's consolidated financial position,
results of operations, or liquidity.

13.   DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

In conducting its business, KACC uses various instruments, including forward
contracts and options, to manage the risks arising from fluctuations in aluminum
prices, energy prices and exchange rates. KACC enters into hedging transactions
to limit its exposure resulting from (1) its anticipated sales of alumina,
primary aluminum, and fabricated aluminum products, net of expected purchase
costs for items that fluctuate with aluminum prices, (2) the energy price risk
from fluctuating prices for natural gas, fuel oil and diesel oil used in its
production process, and (3) foreign currency requirements with respect to its
cash commitments with foreign subsidiaries and affiliates.

As KACC's hedging activities are generally designed to lock-in a specified price
or range of prices, gains or losses on the derivative contracts utilized in
these hedging activities (except the impact of those contracts discussed below
which have been marked to market) will generally offset at least a portion of
any losses or gains, respectively, on the transactions being hedged. See Note 1
for a discussion of the effects of the new accounting requirements under SFAS
No. 133, which will be used for reporting results beginning with the first
quarter of 2001. The following table summarizes KACC's derivative hedging
positions at December 31, 2000:

                                                                             Estimated %
                                                                              of Annual
                                                             Notional      Sales/Purchases     Carrying         Market
               Commodity                     Period           Amount           Hedged            Value           Value
--------------------------------------  ----------------   -------------  ----------------   ------------    ------------
Aluminum (in tons) -
       Option contracts                       2001               362,000       82%(1)        $       18.2    $       3.1
       Option contracts                       2002               262,000       52%(1)                10.9           13.4
       Option contracts                       2003                42,000        9%(1)                 1.8            1.7

Natural gas (in MMBtus per day) -
       Option contracts and swaps         1/01 to 6/01            27,900         24%                  1.3           21.8

Australian dollars (A$ per year) -
       Forwards and option contracts          2001              A$ 160.0         80%                  1.4           (5.2)
       Option contracts                   2002 to 2005          A$  90.0         56%                 12.2           13.3

(1)  As of February 28, 2001, the estimated percentages of annual sales of
     primary aluminum (equivalents) hedged for 2001, 2002 and 2003 were 82%, 63%
     and 14%, respectively.

During late 1999 and early 2000, KACC also entered into a series of transactions
with a counterparty that provided KACC with a premium over the forward market
prices at the date of the transaction for 2,000 tons of primary aluminum per
month during the period January 2000 through June 2001. KACC also contracted
with the counterparty to receive certain fixed prices (also above the forward
market prices at the date of the transaction) on 4,000 tons of primary aluminum
per month over a three year period commencing October 2001, unless market prices
during certain periods decline below a stipulated "floor" price, in which case
the fixed price sales portion of the transactions terminate. The price at which
the October 2001 and after transactions terminate is well below current market
prices. While the Company believes that the October 2001 and after transactions
are consistent with its stated hedging objectives, these positions do not
qualify for treatment as a "hedge" under both pre-2001 and post-2001 accounting
guidelines. Accordingly, these positions are marked-to-market each period. See
Note 1 for mark-to-market pre-tax gains (losses) associated with the
transactions for the years ended December 31, 2000, 1999 and 1998.

As of December 31, 2000, KACC had sold forward approximately 100% and 80% of the
alumina available to it in excess of its projected internal smelting
requirements for 2001 and 2002, respectively, at prices indexed to future prices
of primary aluminum.

14.  SEGMENT AND GEOGRAPHICAL AREA INFORMATION

The Company's operations are located in many foreign countries, including
Australia, Canada, Ghana, Jamaica, and the United Kingdom. Foreign operations in
general may be more vulnerable than domestic operations due to a variety of
political and other risks. Sales and transfers among geographic areas are made
on a basis intended to reflect the market value of products.

The Company's operations are organized and managed by product type. The Company
operations include four operating segments of the aluminum industry and its
commodities marketing and corporate segments. The aluminum industry segments
include: Alumina and bauxite, Primary aluminum, Flat-rolled products and
Engineered products. The Alumina and bauxite business unit's principal products
are smelter grade alumina and chemical grade alumina hydrate, a value-added
product, for which the Company receives a premium over smelter grade market
prices. The Primary aluminum business unit produces commodity grade products as
well as value-added products such as rod and billet, for which the Company
receives a premium over normal commodity market prices. The Flat-rolled products
group sells value-added products such as heat treat aluminum sheet and plate
which are used in the aerospace and general engineering markets as well as
selling to the beverage container and specialty coil markets. The Engineered
products business unit serves a wide range of industrial segments including the
automotive, distribution, aerospace and general engineering markets. The Company
uses a portion of its bauxite, alumina and primary aluminum production for
additional processing at its downstream facilities. Transfers between business
units are made at estimated market prices. The Commodities marketing segment
includes the results of KACC's alumina and aluminum hedging activities (see Note
13). The accounting policies of the segments are the same as those described in
Note 1. Business unit results are evaluated internally by management before any
allocation of corporate overhead and without any charge for income taxes,
interest expense or non- recurring charges.

Financial information by operating segment at December 31, 2000, 1999 and 1998
is as follows:

                                                                             Year Ended December 31,
                                                                    ----------------------------------------
                                                                       2000           1999           1998
------------------------------------------------------------------------------------------------------------
Net Sales:(3)
   Bauxite and Alumina:(1)(4)
     Net sales to unaffiliated customers                            $   442.2     $    395.8     $    445.2
     Intersegment sales                                                 148.3          129.0          135.8
                                                                    ----------    -----------    -----------
                                                                        590.5          524.8          581.0
                                                                    ----------    -----------    -----------
   Primary Aluminum:(2)(4)
     Net sales to unaffiliated customers                                563.7          432.9          390.7
     Intersegment sales                                                 242.3          240.6          233.5
                                                                    ----------    -----------    -----------
                                                                        806.0          673.5          624.2
                                                                    ----------    -----------    -----------
   Flat-Rolled Products                                                 521.0          591.3          732.7
   Engineered Products                                                  564.9          556.8          595.3
   Commodities Marketing(4)                                             (25.4)          18.3           60.5
   Minority Interests                                                   103.4           88.5           78.0
   Eliminations                                                        (390.6)        (369.6)        (369.3)
                                                                    ----------    -----------    -----------
                                                                    $ 2,169.8     $  2,083.6     $  2,302.4
                                                                    ==========    ===========    ===========
Equity in income (loss) of unconsolidated affiliates:
   Bauxite and Alumina                                              $    (8.4)    $      3.4     $     (3.2)
   Primary Aluminum                                                       3.6           (1.0)           1.2
   Engineered Products and Other                                            -            2.5            7.4
                                                                    ----------    -----------    -----------
                                                                    $    (4.8)    $      4.9     $      5.4
                                                                    ==========    ===========    ===========
Operating income (loss):(4)(6)
   Bauxite and Alumina - Note 2                                     $    57.2     $    (10.5)    $      5.5
   Primary Aluminum (5)                                                 100.1           (4.8)          28.3
   Flat-Rolled Products                                                  16.6           17.1           86.8
   Engineered Products                                                   34.1           38.6           51.5
   Commodities Marketing(4)                                             (48.7)          21.3           98.1
   Micromill                                                              (.6)         (11.6)         (18.4)
   Eliminations                                                            .1            6.9            8.9
   Corporate and Other                                                  (61.4)         (61.8)         (65.1)
   Labor Settlement and Other Non-Recurring Operating Items,
        Net - Notes 5 and 6                                              41.9          (24.1)        (105.0)
                                                                    ----------    -----------    -----------
                                                                    $   139.3     $    (28.9)    $     90.6
                                                                    ==========    ===========    ===========

                                                                            Year Ended December 31,
                                                                   ----------------------------------------
                                                                      2000          1999           1998
-----------------------------------------------------------------------------------------------------------
Depreciation and amortization:
   Bauxite and Alumina - Note 2                                    $    22.2     $     29.7     $     36.4
   Primary Aluminum                                                     24.8           27.8           29.9
   Flat-Rolled Products                                                 16.7           16.2           16.1
   Engineered Products                                                  11.5           10.7           10.8
   Corporate and Other (includes Micromill in 1999 and 1998)             1.7            5.1            5.9
                                                                   ----------    -----------    -----------
                                                                   $    76.9     $     89.5     $     99.1
                                                                   ==========    ===========    ===========
Capital expenditures:
   Bauxite and Alumina - Note 2                                    $   254.6     $     30.4     $     26.9
   Primary Aluminum                                                      9.6           12.8           20.7
   Flat-Rolled Products                                                  7.6           16.6           20.4
   Engineered Products - Note 4                                         23.6            7.8            8.4
   Corporate and Other                                                   1.1             .8            1.2
                                                                   ----------    -----------    -----------
                                                                   $   296.5     $     68.4     $     77.6
                                                                   ==========    ===========    ===========

(1)  Net sales for 2000 and 1999, included approximately 267,000 tons and
     264,000 tons, respectively of alumina purchased from third parties and
     resold to certain unaffiliated customers of the Gramercy facility and
     55,000 tons and 131,000 tons, respectively, of alumina purchased from third
     parties and transferred to the Company's Primary aluminum business unit.
(2)  Net sales for 2000, 1999 and 1998 included approximately 206,500 tons,
     260,100 tons and 251,300 tons, respectively, of primary aluminum purchased
     from third parties to meet third-party and internal commitments.
(3)  Net sales for 1999 and 1998 for all segments have been restated to conform
     to a new accounting requirement which states that freight charges should be
     included in cost of products sold rather than netted against net sales as
     was the Company's prior policy.
(4)  Net sales and operating income (loss) for Bauxite and alumina and Primary
     aluminum segments for 1999 and 1998 have been restated to reflect a change
     in the Company's segment reporting. The results of the Company's metal
     hedging activities in the Commodities marketing segment are now set out
     separately rather than being allocated between the two commodity business
     units.
(5)  Operating income (loss) for 1999 included potline preparation and restart
     costs of $12.8.
(6)  The allocation of the labor settlement charge to the Company's business
     units for the year ended December 31, 2000, is as follows: Bauxite and
     Alumina - $2.1, Primary aluminum - $15.9, Flat-rolled products - $18.2 and
     Engineered products - $2.3.

                                                                                 December 31,
                                                                          -------------------------
                                                                               2000         1999
---------------------------------------------------------------------------------------------------
Investments in and advances to unconsolidated affiliates:
   Bauxite and Alumina                                                    $     56.0     $     71.6
   Primary Aluminum                                                             19.0           25.3
   Corporate and Other                                                           2.8            -
                                                                          ----------     ----------
                                                                          $     77.8     $     96.9
                                                                          ==========     ==========

                                                                            December 31,
                                                                  --------------------------
                                                                       2000            1999
--------------------------------------------------------------------------------------------
Segment assets:
   Bauxite and Alumina                                            $     957.0     $    777.7
   Primary Aluminum                                                     623.3          560.8
   Flat-Rolled Products                                                 337.7          423.2
   Engineered Products                                                  232.9          253.1
   Commodities Marketing                                                 62.1           99.0
   Corporate and Other (includes Micromill in 1999)                   1,130.1        1,085.0
                                                                  -----------     ----------
                                                                  $   3,343.1     $  3,198.8
                                                                  ===========     ==========

Geographical information for net sales, based on country of origin, and
long-lived assets follows:

                                                               Year Ended December 31,
                                                    ---------------------------------------------
                                                        2000            1999             1998
-------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers:
     United  States                                 $    1,350.1    $     1,439.6    $    1,744.0
     Jamaica                                               298.5            233.1           237.0
     Ghana                                                 237.5            153.2            89.8
     Other Foreign                                         283.7            257.7           231.6
                                                    ------------    -------------    ------------
                                                    $    2,169.8    $     2,083.6    $    2,302.4
                                                    ============    =============    ============

                                                      December 31,
                                              -----------------------------
                                                  2000             1999
---------------------------------------------------------------------------
Long-lived assets: (1)
     United States                            $       809.0    $      688.1
     Jamaica                                          290.3           288.2
     Ghana                                             80.8            84.1
     Other Foreign                                     73.8            90.2
                                              -------------    ------------
                                              $     1,253.9    $    1,150.6
                                              =============    ============

(1) Long-lived assets include Property, plant, and equipment, net and
    Investments in and advances to unconsolidated affiliates.

The aggregate foreign currency gain included in determining net income was
immaterial for the years ended December 31, 2000, 1999 and 1998. No single
customer accounted for sales in excess of 10% of total revenue in 2000, 1999 and
1998. Export sales were less than 10% of total revenue during the years ended
December 31, 2000, 1999 and 1998.

QUARTERLY FINANCIAL DATA (UNAUDITED)
--------------------------------------------------------------------------------

                                                                           Quarter Ended
                                                     ------------------------------------------------------------
(In millions of dollars, except share amounts)        March 31,     June 30,    September 30,     December 31,
-----------------------------------------------------------------------------------------------------------------

2000
   Net sales                                         $   575.7 (8)  $  552.8 (8)    $ 545.2 (8)      $ 496.1
   Operating income                                       36.9          51.5            2.8             48.1
   Net income (loss)                                      11.7 (1)      11.0 (2)      (16.8)(3)         10.9 (4)
   Basic/Diluted Earnings (loss) per share                 .15 (1)       .14 (2)       (.21)(3)          .14 (4)
   Common stock market price:
      High                                                8.88          5.13           6.06             5.94
      Low                                                 4.13          2.94           3.50             3.50
1999
   Net sales                                         $   490.3 (8)  $  536.2 (8)    $ 528.7 (8)      $ 528.4 (8)
   Operating income (loss)                               (33.0)           .7          (12.1)            15.5
   Net income (loss)                                     (38.2)        (15.7)         (39.2)(5)         39.0 (6)
   Basic/Diluted Earnings (loss) per share                (.48)         (.20)          (.49)(5)          .49
   Common stock market price:
      High                                                6.94         10.13           9.69             8.25
      Low                                                 4.75          5.00           6.63             6.00
1998
   Net sales                                         $   609.6 (8)  $  626.8(8)    $  552.9 (8)      $  513.1(8)
   Operating income (loss)                                44.8          55.3           30.8            (40.3)
   Net income (loss)                                      12.0          16.7           10.8            (38.9)(7)
   Basic/Diluted Earnings (loss) per share                 .15           .21            .14             (.49)(7)
   Common stock market price:
      High                                               11.00         11.63           9.63             7.75
      Low                                                 8.13          8.88           5.63             4.63

(1)   Includes a pre-tax gain of $14.4 to reflect a mark-to-market adjustment on
      certain primary aluminum hedging transactions. Excluding this item, basic
      income per share would have been approximately $.04.
(2)   Includes a pre-tax gain of $15.8 from the sale of power offset by a
      pre-tax charge of $6.0 to reflect a mark-to-market adjustment on certain
      primary aluminum hedging transactions and a pre-tax charge of $2.0 for
      certain severance and relocation costs associated with Corporate
      restructuring initiatives and product line exit. Excluding these items,
      basic income per share would have been approximately $.09.
(3)   Includes a pre-tax labor settlement charge of $38.5, a non-cash pre-tax
      charge of $43.0 for asbestos-related claims, a pre-tax charge of $11.5 for
      incremental maintenance spending and pre-tax charges of $18.1 for
      non-recurring impairment and restructuring charges offset by a pre-tax
      gain of $40.5 from the sale of power, pre-tax gains of $39.0 related to
      real estate transactions and a pre-tax gain of $.9 to reflect a
      mark-to-market adjustment on certain primary aluminum hedging
      transactions. Excluding these items, basic income per share would have
      been approximately $.03.
(4)   Includes a pre-tax gain of $103.2 from the sale of power and a pre-tax
      gain of $1.4 to reflect a mark-to-market adjustment on certain primary
      aluminum hedging transactions offset by a non-cash impairment loss of
      approximately $33.0, a LIFO inventory charge of $7.0 and a pre-tax charge
      of $5.3 for other non-recurring impairment and restructuring charges.
      Excluding these items, but giving effect to operating profit foregone as a
      result of these power sales, basic loss per share would have been
      approximately $.19.
(5)   Includes a non-cash pre-tax charge of $19.1 to reduce the carrying value
      of the Company's Micromill assets, a non-cash pre-tax charge of $15.2 for
      asbestos-related claims and a pre-tax charge of $5.9 to reflect a
      mark-to-market adjustment on certain primary aluminum hedging
      transactions. Excluding these items, basic loss per share would have been
      approximately $.16.
(6)   Includes a pre-tax gain of $85.0 on involuntary conversion at Gramercy
      facility. See Note 2.  Excluding this item, basic loss per share would
      have been $.22.
(7)   Includes an unfavorable pre-tax strike-related gross profit impact of
      approximately $50.0, and a non-cash pre-tax charge of $45.0 related to
      impairment of the Company's Micromill assets. Excluding these items, basic
      earnings per share would have been approximately $.29.
(8)   Net sales for the quarterly periods prior to the quarter ended December
      31, 2000 have been restated to conform to a new accounting principle
      that requires freight charges to be included in cost of products sold.
```