---

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For Quarterly Period Ended June 30, 2005

OR

Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

Commission File Number 1-8137

AMERICAN PACIFIC CORPORATION
(Exact name of registrant as specified in its charter)

|Delaware                                               |  | 59-6490478           
|------------------------------------------------------ |  | ---------------------
|(State or   other jurisdiction                         |  | (I.R.S.   Employer   
|of   incorporation or organization)                    |  | Identification   No.)
|                                                       |  |                      
|3770 Howard Hughes Parkway, Suite   300                |  |                      
|Las Vegas, NV                                          |  | 89109                
|(Address   of principal executive offices)             |  | (Zip Code)           
|                                                       |  |                      
|(702) 735-2200                                        
|(Registrants   telephone number, including area code)

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

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

The number of shares of the Registrants Common Stock outstanding as of July 31, 2005 was 7,299,000.

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AMERICAN PACIFIC CORPORATION QUARTERLY REPORT ON FORM 10-Q

|PART I.   FINANCIAL INFORMATION |                                                                                        
|------------------------------- | ---------------------------------------------------------------------------------------
|                                |                                                                                        
|ITEM 1.                         | Condensed Consolidated Statements   of Operations (unaudited)                          
|                                |                                                                                        
|                                | Condensed Consolidated Balance   Sheets (unaudited)                                    
|                                |                                                                                        
|                                | Condensed Consolidated Statements   of Cash Flows (unaudited)                          
|                                |                                                                                        
|                                | Notes to Condensed Consolidated   Financial Statements (unaudited)                     
|                                |                                                                                        
|ITEM 2.                         | Managements Discussion and   Analysis of Financial Condition and Results of Operations
|                                |                                                                                        
|ITEM 3.                         | Quantitative and Qualitative   Disclosure About Market Risk                            
|                                |                                                                                        
|ITEM 4.                         | Controls and Procedures                                                                
|                                |                                                                                        
|PART II.   OTHER INFORMATION    |                                                                                        
|                                |                                                                                        
|ITEM 1.                         | Legal Proceedings                                                                      
|                                |                                                                                        
|ITEM 2.                         | Unregistered Sales of Equity   Securities and Use of Proceeds                          
|                                |                                                                                        
|ITEM 3.                         | Defaults Upon Senior Securities                                                        
|                                |                                                                                        
|ITEM 4.                         | Submission of Matters to a Vote of   Security Holders                                  
|                                |                                                                                        
|ITEM 5.                         | Other Information                                                                      
|                                |                                                                                        
|ITEM 6.                         | Exhibits                                                                               

- 1 -



PART I.  FINANCIAL STATEMENTS

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AMERICAN PACIFIC CORPORATIONCondensed Consolidated Statements of Operations (Unaudited, Dollars in Thousands, Except per Share Amounts)

|                                                                                           |  | Three   months ended   June 30, |           | Nine   months ended   June 30, |  
|------------------------------------------------------------------------------------------ |  | ------------------------------- | --------- | ------------------------------ | -
|                                                                                           |  |                                 |           |                                |  
|                                                                                           |  | 2005                            |           | 2004                           |  
|                                                                                           |  |                                 |           |                                |  
|Revenues                                                                                   |  | $                               | 16,301    |                                | $
|Cost of Revenues                                                                           |  |                                 | 12,178    |                                |  
|                                                                                           |  |                                 |           |                                |  
|Gross Profit                                                                               |  |                                 | 4,123     |                                |  
|Operating Expenses                                                                         |  |                                 | 6,871     |                                |  
|Environmental Remediation   Charge                                                         |  |                                 | 22,400    |                                |  
|                                                                                           |  |                                 |           |                                |  
|Operating Loss                                                                             |  |                                 | (25,148   | )                              |  
|Interest Income                                                                            |  |                                 | 174       |                                |  
|Interest and Other Expense                                                                 |  |                                 | 93        |                                |  
|                                                                                           |  |                                 |           |                                |  
|Loss before Incomes Taxes,   Extraordinary Gain and Cumulative Effect of Accounting Change |  |                                 | (25,067   | )                              |  
|Income Tax Benefit                                                                         |  |                                 | (9,275    | )                              |  
|                                                                                           |  |                                 |           |                                |  
|Loss Before Extraordinary   Gain and Cumulative Effect of Accounting Change                |  |                                 | (15,792   | )                              |  
|Extraordinary Gain, Net of   Tax                                                           |  |                                 |          |                                |  
|Cumulative Effect of   Accounting Change, Net of Tax                                       |  |                                 |          |                                |  
|                                                                                           |  |                                 |           |                                |  
|Net Loss                                                                                   |  | $                               | (15,792   | )                              | $
|                                                                                           |  |                                 |           |                                |  
|Basic Loss Per Share:                                                                      |  |                                 |           |                                |  
|Loss   before Extraordinary Gain and Cumulative Effect of Accounting Change                |  | $                               | (2.16     | )                              | $
|Extraordinary   Gain                                                                       |  |                                 |          |                                |  
|Cumulative   Effect of Change in Accounting                                                |  |                                 |          |                                |  
|                                                                                           |  |                                 |           |                                |  
|Net   Loss                                                                                 |  | $                               | (2.16     | )                              | $
|                                                                                           |  |                                 |           |                                |  
|Diluted Loss Per Share:                                                                    |  |                                 |           |                                |  
|Loss   before Extraordinary Gain and Cumulative Effect of Accounting Change                |  | $                               | (2.16     | )                              | $
|Extraordinary   Gain                                                                       |  |                                 |          |                                |  
|Cumulative   Effect of Change in Accounting                                                |  |                                 |          |                                |  
|                                                                                           |  |                                 |           |                                |  
|Net   Loss                                                                                 |  | $                               | (2.16     | )                              | $
|                                                                                           |  |                                 |           |                                |  
|Weighted Average Shares   Outstanding:                                                     |  |                                 |           |                                |  
|Basic                                                                                      |  |                                 | 7,297,000 |                                |  
|Diluted                                                                                    |  |                                 | 7,297,000 |                                |  

See accompanying notes to condensed consolidated financial statements

- 2 -



AMERICAN PACIFIC CORPORATIONCondensed Consolidated Balance Sheets (unaudited, in thousands)

|                                                      |  | June 30,    2005 |         | September 30,2004 |  
|----------------------------------------------------- |  | ---------------- | ------- | ----------------- | -
|                                                      |  |                  |         |                   |  
|ASSETS                                                |  |                  |         |                   |  
|Current   Assets:                                     |  |                  |         |                   |  
|Cash   and Cash Equivalents                           |  | $                | 20,594  |                   | $
|Accounts   and Notes Receivable                       |  |                  | 17,438  |                   |  
|Related   Party Notes and Accrued Interest Receivable |  |                  | 229     |                   |  
|Inventories                                           |  |                  | 18,266  |                   |  
|Prepaid   Expenses and Other Assets                   |  |                  | 1,683   |                   |  
|Deferred   Income Taxes                               |  |                  | 1,501   |                   |  
|                                                      |  |                  |         |                   |  
|Total Current Assets                                  |  |                  | 59,711  |                   |  
|Property, Plant and   Equipment, Net                  |  |                  | 17,836  |                   |  
|Intangible Assets, Net                                |  |                  | 10,838  |                   |  
|Investment in Joint Venture                           |  |                  |        |                   |  
|Deferred Income Taxes                                 |  |                  | 19,065  |                   |  
|Other Assets, Net                                     |  |                  | 2,091   |                   |  
|                                                      |  |                  |         |                   |  
|TOTAL ASSETS                                          |  | $                | 109,541 |                   | $
|                                                      |  |                  |         |                   |  
|LIABILITIES   AND SHAREHOLDERS EQUITY                |  |                  |         |                   |  
|Current   Liabilities:                                |  |                  |         |                   |  
|Accounts   Payable                                    |  | $                | 4,898   |                   | $
|Accrued   Liabilities                                 |  |                  | 6,201   |                   |  
|                                                      |  |                  |         |                   |  
|Total Current Liabilities                             |  |                  | 11,099  |                   |  
|Enviromental Remediation   Reserves                   |  |                  | 22,400  |                   |  
|Other Long-Term Liabilities                           |  |                  | 6,212   |                   |  
|                                                      |  |                  |         |                   |  
|Total Liabilities                                     |  |                  | 39,711  |                   |  
|                                                      |  |                  |         |                   |  
|Commitments and   Contingencies                       |  |                  |         |                   |  
|Shareholders   Equity:                               |  |                  |         |                   |  
|Common   Stock                                        |  |                  | 932     |                   |  
|Capital   in Excess of Par Value                      |  |                  | 86,172  |                   |  
|Retained   Earnings                                   |  |                  | 830     |                   |  
|Treasury   Stock                                      |  |                  | (16,982 | )                 |  
|Accumulated   Other Comprehensive Loss                |  |                  | (1,122  | )                 |  
|                                                      |  |                  |         |                   |  
|Total Shareholders Equity                            |  |                  | 69,830  |                   |  
|                                                      |  |                  |         |                   |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY            |  | $                | 109,541 |                   | $
|                                                      |  |                  |         |                   |  

See accompanying notes to condensed consolidated financial statements

- 3 -



AMERICAN PACIFIC CORPORATIONCondensed Consolidated Statements of Cash Flow (unaudited, in thousands)

|                                                     |  | Nine   Months Ended    June 30, |       
|---------------------------------------------------- |  | ------------------------------- | ------
|                                                     |  |                                 |       
|                                                     |  | 2005                            |       
|                                                     |  |                                 |       
|Cash Flows From Operating   Activities               |  | $                               | 2,433 
|                                                     |  |                                 |       
|Cash Flows From Investing   Activities:              |  |                                 |       
|Capital   Expenditures                               |  |                                 | (1,611
|Acquisition   of ISP Business                        |  |                                 | (4,468
|                                                     |  |                                 |       
|Net   Cash Used in Investing Activities              |  |                                 | (6,079
|                                                     |  |                                 |       
|Cash Flows From Financing   Activities:              |  |                                 |       
|Dividends   paid                                     |  |                                 |      
|Equity   Purchased by Minority Shareholders          |  |                                 | 125   
|Proceeds   from Issuance of Debt                     |  |                                 | 300   
|Issuance   of Common Stock                           |  |                                 | 23    
|Treasury   Stock Acquired                            |  |                                 |      
|Other                                                |  |                                 | 15    
|                                                     |  |                                 |       
|Net   Cash Provided by (Used in) Financing Activites |  |                                 | 463   
|                                                     |  |                                 |       
|Net Change in Cash and Cash   Equivalents            |  |                                 | (3,183
|Cash and Cash Equivalents,   Beginning of Period     |  |                                 | 23,777
|                                                     |  |                                 |       
|Cash and Cash Equivalents,   End of Period           |  | $                               | 20,594
|                                                     |  |                                 |       

See accompanying notes to condensed consolidated financial statements

- 4 -



AMERICAN PACIFIC CORPORATIONNotes to Condensed Consolidated Financial Statements (Unaudited, Dollars in Thousands, Except per Share Amounts)

|1. | INTERIM BASIS OF PRESENTATION AND   ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Interim Basis of Presentation:  The accompanying condensed consolidated   financial statements of American Pacific Corporation and subsidiaries (the   Company, we, us, or our) are unaudited, but in our opinion, include   all adjustments, which are of a normal recurring nature, necessary for the   fair presentation of financial results for interim periods.  These statements should be read in   conjunction with our consolidated financial statements and notes thereto   included in our Annual Report on Form 10-K for the year ended September 30,   2004. The operating results and cash flows for the three-month and nine-month   periods ended June 30, 2005 are not necessarily indicative of the results   that will be achieved for the full fiscal year or for future periods.                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Accounting Policies:A description of our significant   accounting policies is included in Note 1 to our consolidated financial   statements included in our Annual Report on Form 10-K for the year ended   September 30, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Principles of Consolidation  Our consolidated   financial statements include the accounts of American Pacific Corporation,   our wholly owned subsidiaries, and variable interest entities, as discussed below.  All significant intercompany accounts have   been eliminated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | In January 2003, the Financial Accounting Standards   Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of   Variable Interest Entities, which addresses consolidation by business   enterprises of variable interest entities that either: (1) do not have   sufficient equity investment at risk to permit the entity to finance its   activities without additional subordinated financial support, or (2) hold a   significant variable interest in, or have significant involvement with, an   existing variable interest entity. In December 2003, FASB Interpretation No.   46 (Revised December 2003), Consolidation of Variable Interest Entities   (FIN 46(R)), was issued to clarify the application of Accounting Research   Bulletin No. 51, Consolidated Financial Statements, as amended by FASB   Statement No. 94, Consolidation of All Majority-Owned Subsidiaries.                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Prior to March 31, 2004, we treated our 50% equity   interest in the Energetic System (ES) joint venture as an unconsolidated   operation whose financial performance was disclosed, but not consolidated in   our financial results. However under FIN 46(R), we are required to   consolidate the ES joint venture due to a number of factors including our   majority ownership of the joint ventures debt securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | We consolidated the ES joint venture as of March 31,   2004. We reported a cumulative effect of an accounting change of $769 (net of   tax benefit of $414) on our 2004 second quarter statement of operations to   reflect the loss that we would have incurred had the ES joint venture been   consolidated since its inception. The consolidation of the ES joint venture   significantly changed various line items of our balance sheet, statement of   operations and cash flow presentations as compared to financial presentations   in earlier reports.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Use of Estimates  The preparation of financial   statements in conformity with accounting principles generally accepted in the   United States of America requires us to make estimates and assumptions that   affect the reported amounts of assets and liabilities, disclosure of   contingent assets and liabilities and the reported amounts of revenue and   expenses. Judgments and assessments of uncertainties are required in applying   our accounting policies in many areas. For example, key assumptions and   estimates are particularly important when determining our projected   liabilities for pension benefits, useful lives for depreciable and   amortizable assets, deferred tax assets and long-lived assets, including   intangible assets. Other areas in which significant uncertainties exist   include, but are not limited to, costs that may be incurred in connection   with environmental matters and the resolution of litigation and other   contingencies. Actual
results will inevitably differ to some extent from   estimates on which our condensed consolidated financial statements were   prepared.

- 5 -



| | Revenue Recognition  Revenues for Specialty   Chemicals and water treatment equipment sales are recognized when persuasive   evidence of an arrangement exists, shipment has been made, title passes, the   price is fixed or determinable and collectibility is reasonably assured. Some   of our perchlorate product customers have requested that we store materials   purchased from us in our Cedar City facility (Bill and Hold transactions).   We recognize the revenue and profit from these Bill and Hold transactions at   the point at which title and risk of ownership transfers to our customers.  We receive cash for the full amount of   real estate sales at the time of closing which is when the sale is recorded.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Revenues from our Aerospace Equipment segment is   derived from contracts that are accounted for in conformity with the American   Institute of Certified Public Accountants (AICPA) audit and accounting   guide, Audits of Federal Government Contracts and the AICPAs Statement of   Position No. 81-1, Accounting for Performance of Construction-Type and   Certain Production Type Contacts. We account for these contracts using the   percentage-of-completion method and measure progress on a cost-to-cost basis.   The percentage-of-completion method recognizes revenue as work on a contract   progresses. Revenues are calculated based on the percentage of total costs   incurred in relation to total estimated costs at completion of the contract.   For fixed-price and fixed-price-incentive contracts, if at any time expected   costs exceed the value of the contract, the loss is recognized immediately.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Environmental Reserve Policy:We are subject to environmental   regulations that relate to our past and current operations.  We record liabilities for environmental   remediation costs when our assessments indicate that remediation efforts are   probable and the costs can be reasonably estimated.  When the available information is sufficient to  estimate the amount of the liability, that   estimate is used.  When the   information is only sufficient to estimate a range of probable liability, and   no amount within the range is more likely than the other, the low end of the   range is used.  Estimates of   liabilities are based on currently available facts, existing technologies and   presently enacted laws and regulations.    These estimates are subject to revision in future periods based on   actual costs or new circumstances.    Accrued environmental remediation costs are classified as long-term
liabilities and include the undiscounted cost of equipment, operating and   maintenance costs, and fees to outside law firms or consultants, for the   estimated duration of the remediation activity.  Estimating environmental cost requires us to exercise   substantial judgment regarding the cost, effectiveness and duration of our   remediation activities.  Actual future   expenditures could differ materially to our current estimates.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | We evaluate potential claims for recoveries from   other parties separately from our estimated liabilities.  We record an asset for expected recoveries   when recovery of the amounts are probable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Pro Forma Stock Based Compensation:  We account for stock options using the   intrinsic value method provided in APB No. 25, Accounting for Stock Issued   to Employees.  Intrinsic value   represents the excess, if any, of the market price of our common stock at the   grant date over exercise price of the stock option.  No compensation expense related to stock options was recorded   in any period presented because all stock options were granted at a price   equal to the market value of our stock on the grant date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

- 6 -



| | We granted stock options to our directors in the   first quarters of both fiscal 2005 and fiscal 2004. If compensation expense   had been determined based on the fair value provisions of SFAS No. 123, our   net loss and net loss per share would have been as follows.  This fair value was determined using a   Black-Scholes option-pricing model.    Actual compensation, if any, ultimately realized by optionees may   differ significantly from the amount estimated using an option valuation   model.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                         |  | Three   Months Ended    June 30, |         | Nine Months   Ended    June 30, |  
|-------------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------- | -
|                                                         |  |                                  |         |                                 |  
|                                                         |  | 2005                             |         | 2004                            |  
|                                                         |  |                                  |         |                                 |  
|Net Loss, as Reported                                    |  | $                                | (15,792 | )                               | $
|Pro Forma Stock Based Compensation,  net of tax benefits |  |                                  | 10      |                                 |  
|                                                         |  |                                  |         |                                 |  
|Pro Forma Net Loss                                       |  | $                                | (15,802 | )                               | $
|                                                         |  |                                  |         |                                 |  
|Basic Loss Per Share:                                    |  |                                  |         |                                 |  
|As Reported                                              |  | $                                | (2.16   | )                               | $
|Pro Forma                                                |  | $                                | (2.17   | )                               | $
|Diluted Loss Per Share:                                  |  |                                  |         |                                 |  
|As Reported                                              |  | $                                | (2.16   | )                               | $
|Pro Forma                                                |  | $                                | (2.17   | )                               | $
|Weighted Fair Value of Options Granted During the Period |  | $                                | 3.74    |                                 | $

|   | Recently Issued or Adopted Accounting Standards:  In November 2004, the FASB issued SFAS   151, Inventory Costsan amendment of ARB No. 43, Chapter 4. The Statement   clarifies that abnormal amounts of idle facility expense, freight, handling   costs, and wasted materials (spoilage) should be recognized as current-period   charges and requires the allocation of fixed production overheads to   inventory based on the normal capacity of the production facilities. The   Statement is effective for us beginning in fiscal 2006.  We are in the process of assessing the   extent of the impact such adoption would have on our financial statements, if   any.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | In December 2004, the FASB issued SFAS No. 123R   (revised 2004), Share-Based Payment which requires all entities to   recognize compensation expense in an amount equal to the fair value of   share-based payments granted to employees and directors. This statement is   effective for us beginning with our first quarter of fiscal 2006.  We are in the process of assessing the   impact the adoption of this statement will have on our consolidated financial   statements.                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Reclassifications:  Certain prior period amounts have been   reclassified to conform with our current period presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|2. | ACQUISITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | AFC Acquisition:  In July 2005, the Company entered into an   agreement with GenCorp, Inc. to acquire the assets of Aerojet Fine Chemicals   (AFC or the AFC Acquisition). AFC manufactures active pharmaceutical   ingredients and registered intermediates for commercial customers in the   pharmaceutical industry.  In fiscal   year 2004, AFC reported revenues of approximately $66,000.                                                                                                                                                                                                                                                                            

- 7 -



|   | The preliminary purchase price for the AFC   Acquisition includes cash and other consideration of approximately $119,000   and the assumption of certain liabilities. The AFC Acquisition is expected to   be financed primarily with commercial bank loans underwritten by Wachovia   Bank, N.A. and the issuance of a seller note.  The agreement contains customary closing conditions and   regulatory approvals and is expected to close in early fall 2005.                                                                                                                  
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | ISP Acquisition:  October 1, 2004, the Company acquired the   former Atlantic Research Corporations in-space propulsion business (ISP or   ISP Acquisition) from Aerojet-General Corporation for $4,468. The purchase   agreement includes a post-closing working capital adjustment to the purchase   price which has not been finalized.                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | We accounted for this acquisition using the purchase   method of accounting.  The fair value   of the assets acquired and liabilities assumed was approximately $8,500.  Since the purchased price was less than   the fair value of the net assets acquired, non-current assets were recorded   at zero and an after-tax extraordinary gain of $1,622 was recognized (net of   approximately $953 income tax expense). The purchase price allocation   reflected in the condensed consolidated financial statements is preliminary   and subject to possible future reallocations.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|3. | SELECTED BALANCE SHEET DATA                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Inventories:  Inventories consist of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                           |  | June 30,   2005 |        | September  30,   2004 |  
|-------------------------- |  | --------------- | ------ | --------------------- | -
|                           |  |                 |        |                       |  
|Work-in-process            |  | $               | 9,963  |                       | $
|Raw materials and supplies |  |                 | 8,303  |                       |  
|                           |  |                 |        |                       |  
|Total                      |  | $               | 18,266 |                       | $
|                           |  |                 |        |                       |  

| | Intangible Assets:  We account for our intangible assets in   accordance with SFAS No. 142, Goodwill and Other Intangible Assets.   Intangible assets consist of the following:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           |  | June 30,   2005 |         | September 30,   2004 |  
|-------------------------- |  | --------------- | ------- | -------------------- | -
|                           |  |                 |         |                      |  
|Perchlorate Customer List  |  | $               | 38,697  |                      | $
|Pension-related Intangible |  |                 | 546     |                      |  
|                           |  |                 |         |                      |  
|                           |  |                 | 39,243  |                      |  
|Accumulated amortization   |  |                 | (28,405 | )                    |  
|                           |  |                 |         |                      |  
|Total                      |  | $               | 10,838  |                      | $
|                           |  |                 |         |                      |  

| | The perchlorate customer list is an asset of our   Specialty Chemicals segment and is subject to amortization. Amortization   expense was $2,925 for both the nine months ended June 30, 2005 and 2004 and   $975 for both the three months ended June 30, 2005 and 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                          
| | The pension-related intangible is an actuarially   calculated amount related to unrecognized prior service cost for our defined   benefit pension plan and supplemental executive retirement plan.                                                                       

- 8 -



|4. | COMPREHENSIVE INCOME (LOSS)                                                                                                                                                                            
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                        
|   | Other comprehensive income (loss) consists of   adjustments to our minimum pension liabilities and foreign currency   translation adjustments. Comprehensive income (loss) consists of the   following:

|                                          |  | Three   Months Ended    June 30, |         | Nine   Months Ended    June 30, |  
|----------------------------------------- |  | -------------------------------- | ------- | ------------------------------- | -
|                                          |  |                                  |         |                                 |  
|                                          |  | 2005                             |         | 2004                            |  
|                                          |  |                                  |         |                                 |  
|Net Loss                                  |  | $                                | (15,792 | )                               | $
|                                          |  |                                  |         |                                 |  
|Other Comprehensive Income (Loss):        |  |                                  |         |                                 |  
|Foreign Currency   Translation Adjustment |  |                                  | 23      |                                 |  
|Minimum Pension   Liability Adjustment    |  |                                  | (188    | )                               |  
|                                          |  |                                  |         |                                 |  
|Total Other   Comprehensive Income (Loss) |  |                                  | (165    | )                               |  
|                                          |  |                                  |         |                                 |  
|Comprehensive Loss                        |  | $                                | (15,957 | )                               | $
|                                          |  |                                  |         |                                 |  

|5. | EARNINGS (LOSS) PER SHARE                                                                                                                             
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                       
|   | Shares used to compute earnings (loss) per share   before extraordinary item and cumulative effect of change in accounting   principle are as follows:

|                                                                           |  | Three   Months Ended June 30, |           | Nine   Months Ended    June 30, |  
|-------------------------------------------------------------------------- |  | ----------------------------- | --------- | ------------------------------- | -
|                                                                           |  |                               |           |                                 |  
|                                                                           |  | 2005                          |           | 2004                            |  
|                                                                           |  |                               |           |                                 |  
|Loss before Extraordinary Gain and  Cumulative Effect of Accounting Change |  | $                             | (15,792   | )                               | $
|                                                                           |  |                               |           |                                 |  
|Basic:                                                                     |  |                               |           |                                 |  
|Weighted Average Shares                                                    |  |                               | 7,297,000 |                                 |  
|                                                                           |  |                               |           |                                 |  
|Diluted:                                                                   |  |                               |           |                                 |  
|Weighted Average   Shares, Basic                                           |  |                               | 7,297,000 |                                 |  
|Dilutive Effect of   Stock Options                                         |  |                               |          |                                 |  
|                                                                           |  |                               |           |                                 |  
|Weighted Average   Shares, Diluted                                         |  |                               | 7,297,000 |                                 |  
|                                                                           |  |                               |           |                                 |  
|Basic Loss Per Share                                                       |  | $                             | (2.16     | )                               | $
|Diluted Loss Per Share                                                     |  | $                             | (2.16     | )                               | $
|Antidilutive Stock Options Outstanding at period end                       |  |                               | 319,500   |                                 |  

| | Our outstanding stock options are antidilutive because   we are reporting a loss before extraordinary gain and cumulative effect of   accounting change and the exercise price of certain options exceeds the   average fair market value of our stock for the period.  These options could be dilutive in future   periods if our operations are profitable and    our stock price increases.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|6. | DEBT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | As of June 30, 2005, we had approximately $2,100 in   outstanding standby letters of credit with $1,000 of additional availability   with US Bank. These letters of credit principally secure performance of   certain water treatment equipment sold by us and payment of fees associated   with the delivery of natural gas and power.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In November 2004, our ES joint venture issued $300   of senior secured debt securities (the ES Notes) to its minority   shareholders for working capital and other business purposes. The ES Notes   bear fixed interest at 8% and are renewable annually.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|7. | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Environmental Matters:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | EPA Perchlorate Review                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Perchlorate is not currently included in the list of   hazardous substances compiled by the Environmental Protection Agency (EPA),   but has been added to the EPAs Contaminant Candidate List.  The EPA has conducted a risk assessment   relating to perchlorate, two drafts of which were subject to formal peer   reviews held in 1999 and 2002.    Following the 2002 peer review, the EPA perchlorate risk assessment   together with other perchlorate related science was reviewed by the National   Academy of Sciences (NAS).  This NAS   report was released on January 11, 2005.    The recommendations contained in this NAS report indicate that human   health is protected in drinking water at a level of 24.5 parts per billion   (ppb). Certain states have also conducted risk assessments (prior to the   release of the NAS report) and have set preliminary levels from 1  14   ppb.  To our knowledge, virtually
all   independent and qualified experts believe that such preliminary levels have   been arbitrarily established and are not based on credible science.  EPA has established a reference dose   for perchlorate of .0007 mg/kg/day which is equal to a Drinking Water   Equivalent Level (DWEL) of 24.5 ppb.  A decision as to whether or not   to establish a Maximum Contaminate Level (MCL) is pending.  The   outcome of these federal EPA actions, as well as any similar, state   regulatory action, will influence the number, if any, of potential sites that   may be subject to remediation action.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Perchlorate Remediation Project in Henderson, Nevada                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | In 1997, the Southern Nevada Water Authority   (Water  Authority) detected trace   amounts of the perchlorate anion in Lake Mead and the Las Vegas Wash. Lake   Mead is a source of drinking water for Southern Nevada and areas of Southern   California. At certain levels, perchlorate can interfere with the uptake of   iodine by the thyroid gland.  While   iodine uptake inhibition is a mundane occurrence, if the uptake inhibition is   high enough and lasts for a substantial period, then thyroid hormone   production is affected.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | We commercially manufactured perchlorate chemicals   at a facility in Henderson, Nevada (the Henderson Site) from 1958 until the   facility was destroyed in May 1988, after which we relocated our production   to a new facility in Iron County, Utah. Kerr-McGee Chemical Corp (KMCC) also   operated a perchlorate production facility in Henderson, Nevada during 1967   to 1998. Between 1956 to 1967, American Potash operated a perchlorate   production facility at the same site.    For many years prior to 1956, other entities also manufactured   perchlorate chemicals at that site.    In 1998, Kerr-McGee Chemical LLC became the operating entity and it   ceased the production of perchlorate at the Henderson Site, although it   currently continues to produce other chemicals at this site. As a result of a   longer production history at Henderson, the KMCC and predecessor operations   have manufactured significantly greater amounts of perchlorate over
time than   did our operation formerly located there.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

- 10 -



| | The Water Authoritys testing has shown perchlorate   concentrations of 4 to 18 ppb in Clark County drinking water. In response to   this discovery, we engaged environmental consultants to drill ground water   bore holes and monitoring wells in order to characterize ground water and   soil at, and in the vicinity of, the Henderson Site. The results of our tests   over a period of time have shown perchlorate concentrations in the ground   water near, and at a distance from, the Henderson Site range from 0 to   approximately 750,000 ppb at certain monitoring wells. We have continued to   evaluate the sources of these amounts of perchlorate, possible environmental   impacts, and potential remediation methods.                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | We are cooperating with Federal, State and local   agencies in the investigation and evaluation of perchlorate contamination   found in Henderson, possible environmental impacts and potential remediation   methods.  We have evaluated a pilot   process to remediate groundwater containing perchlorate using a biological in   situ method (In Situ Process). During our fiscal 2005 third quarter, we   finalized a work plan with the Nevada Division of Environmental Protection   that determined the extent of the process and related estimated costs for the   installation and operation of a perchlorate in-groundwater remediation   system. We are exploring potential reimbursement for the costs related to the   Henderson Remediation Project from government agencies or their affiliates.   However, there are no assurances that we will be successful in obtaining such   cost recovery.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Environmental Remediation Reserve                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | During our fiscal 2005 third quarter, we recorded a   charge for $22,400 representing our estimate of the probable costs of our   remediation efforts at the Henderson Site, including the costs for equipment,   operating and maintenance costs, and consultants.  Key factors in determining the total estimated cost include an   estimated project life of 45 years and estimates for capital expenditures and   annual operating and maintenance costs. This estimate is based on information   currently available to us and may be subject to material adjustment upward or   downward in future periods as new facts or circumstances may indicate.                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | A summary of our environmental reserve activity is   shown below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

|Balance, September 30, 2004 |  | $ |       | 
|--------------------------- |  | - | ------ | 
|Additions or adjustments    |  |   | 22,400 | 
|Expenditures                |  |   |       | 
|                            |  |   |        | 
|Balance, June 30, 2005      |  | $ | 22,400 | 
|                            |  |   |        | 

|   | Other Matters:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | We are from time to time involved in other claims or   lawsuits. We believe that current claims or lawsuits against us, individually   and in the aggregate, will not have a material adverse effect on our   financial condition or results of operations.                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|8. | SEGMENT INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | We report our business in three operating segments:   Specialty Chemicals, Aerospace Equipment and Other Businesses. These segments   are based upon business units that offer distinct products and services, are   operationally managed separately and produce products using different   production methods.  Segment operating   profit includes all sales and expenses directly associated with each segment   plus a proportionate allocation of corporate general and administrative   expenses.  Environmental remediation   costs are charged to our Specialty Chemicals segment.  Interest is not allocated to segment   results.

- 11 -



| | Specialty Chemicals: 
Our Specialty Chemicals segment manufactures and sells: (i) perchlorate
chemicals, used principally in solid rocket propellants for the space shuttle
and defense programs, (ii) sodium azide, used principally in the inflation of
certain automotive airbag systems, (iii) Halotron®, clean gas fire
extinguishing agents designed to replace halons, and (iv) the ES joint venture
which manufactures commercial explosives and specializes in the development and
testing of energetic compounds.                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Aerospace Equipment: 
On October 1, 2004, we created a new operating segment, Aerospace Equipment, to
report the financial performance of our newly acquired ISP business (see Note
2). The ISP business manufactures and sells in-space propulsion systems,
thrusters (monopropellant or bipropellant) and propellant tanks.                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Other Businesses:  Our Other Businesses segment contains our   water treatment equipment and real estate activities. Our water treatment equipment   business designs, manufactures and markets systems for the control of noxious   odors, the disinfection of water streams and the treatment of seawater. As of   June 30, 2005, we have completed all planned sales of our improved land in   the Gibson Business Park (near Las Vegas, Nevada) and we do not anticipate   significant real estate sales activity in future financial reporting periods.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | We had one perchlorates customer that accounted for   34% and 36% of our consolidated sales during the three-month periods ended   June 30, 2005 and 2004, and 30% and 48% during the nine-month periods ended   June 30, 2005 and 2004.                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The following provides financial information about   our segment operations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                                                                        |  | Three   Months Ended    June 30, |         | Nine   Months Ended    June 30, |  
|--------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------- | -
|                                                                                        |  |                                  |         |                                 |  
|                                                                                        |  | 2005                             |         | 2004                            |  
|                                                                                        |  |                                  |         |                                 |  
|Revenues:                                                                               |  |                                  |         |                                 |  
|Specialty Chemicals                                                                     |  | $                                | 13,030  |                                 | $
|Aerospace Equipment                                                                     |  |                                  | 2,842   |                                 |  
|Other Businesses                                                                        |  |                                  | 429     |                                 |  
|                                                                                        |  |                                  |         |                                 |  
|Total Revenues                                                                          |  | $                                | 16,301  |                                 | $
|                                                                                        |  |                                  |         |                                 |  
|Operating Income (Loss):                                                                |  |                                  |         |                                 |  
|Specialty Chemicals                                                                     |  | $                                | (24,500 | )                               | $
|Aerospace Equipment                                                                     |  |                                  | (275    | )                               |  
|Other Businesses                                                                        |  |                                  | (373    | )                               |  
|                                                                                        |  |                                  |         |                                 |  
|Total Operating Loss                                                                    |  |                                  | (25,148 | )                               |  
|Interest and Other Income (Expenses)                                                    |  |                                  | 81      |                                 |  
|                                                                                        |  |                                  |         |                                 |  
|Loss before Income Tax, Extraordinary Gain and   Cumulative Effect of Accounting Change |  | $                                | (25,067 | )                               | $
|                                                                                        |  |                                  |         |                                 |  

- 12 -



|9.  | DIVIDEND AND STOCK REPURCHASE   PROGRAM                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | In January 2003, our Board of Directors approved a   Dividend and Stock Repurchase Program (the Program).  The Program specifies a formula based on a   percentage of available cash flow and the dollar amount of our repurchases of   Common Stock for the fiscal year as a basis for determining any dividend. The   Program is also subject to the Boards determination that a dividend is   appropriate in light of our overall financial condition, prospects and   anticipated cash needs.       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | In accordance with the provisions of the Program,   during the nine months ended June 30, 2004, the Company repurchased 300,000   shares of its Common Stock for $2,752 and on December 18, 2003, our Board of   Directors declared a cash dividend of $0.42 per share payable on January 9,   2004, to shareholders of record on December 29, 2003. The total amount of the   cash dividend paid in January 2004 was $3,055.  We have not repurchased shares during the nine months ended   June 30, 2005.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|10. | DEFINED BENEFIT PLANS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    | Net periodic pension cost related to our defined   benefit pension plans consists of the following:                                                                                                                                                                                                                                                                                                                                                                                                        

|                                          |  | Three   Months Ended    June 30, |      | Nine   Months Ended    June 30, |  
|----------------------------------------- |  | -------------------------------- | ---- | ------------------------------- | -
|                                          |  |                                  |      |                                 |  
|                                          |  | 2005                             |      | 2004                            |  
|                                          |  |                                  |      |                                 |  
|Defined Benefit   Pension Plan:           |  |                                  |      |                                 |  
|Service Cost                              |  | $                                | 268  |                                 | $
|Interest Cost                             |  |                                  | 413  |                                 |  
|Expected Return on Plan Assets            |  |                                  | (341 | )                               |  
|Recognized Actuarial Losses               |  |                                  | 15   |                                 |  
|Amortization of Prior Service Costs       |  |                                  | 116  |                                 |  
|                                          |  |                                  |      |                                 |  
|Net Periodic Pension Cost                 |  | $                                | 471  |                                 | $
|                                          |  |                                  |      |                                 |  
|Supplemental   Executive Retirement Plan: |  |                                  |      |                                 |  
|Service Cost                              |  | $                                |     |                                 | $
|Interest Cost                             |  |                                  | 37   |                                 |  
|Expected Return on Plan Assets            |  |                                  |     |                                 |  
|Recognized Actuarial Losses               |  |                                  | 11   |                                 |  
|Amortization of Prior Service Costs       |  |                                  | 7    |                                 |  
|                                          |  |                                  |      |                                 |  
|Net Periodic Pension Cost                 |  | $                                | 55   |                                 | $
|                                          |  |                                  |      |                                 |  

| | For the nine months ended June 30, 2005, we   contributed $1,192 to the Defined Benefit Pension Plan to fund benefit   payments and anticipate making approximately $399 in additional contributions   through September 30, 2005.  For the   nine months ended June 30, 2005, we contributed $114 to the Supplemental   Executive Retirement Plan to fund benefit payments and anticipate making   approximately $38 in additional contributions through September 30, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 13 -



ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Thousands)

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the safe harbor created by those sections. These forward-looking statements include, but are not limited to: statements about our business strategy, the effect of GAAP accounting pronouncements on our recognition of revenue, uncertainty regarding our future operating results and our profitability, anticipated sources of revenue and all plans, objectives, expectations and intentions contained in this report that are not historical facts. We usually use words such as may, will, should, expect, plan, anticipate, believe, estimate, predict, future, intend, or certain or the negative of these terms or similar
expressions to identify forward-looking statements. Discussions containing such forward-looking statements may be found throughout the document. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. We disclaim any obligation to update these forward-looking statements as a result of subsequent events. The business risks discussed later in this report, among other things, should be considered in evaluating our prospects and future financial performance.

The following discussion and analysis is intended to provide a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto.  A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended September 30, 2004.

OVERVIEW

We are principally engaged in the production of Grade I ammonium perchlorate (AP) for aerospace and defense industries.  In addition, we produce and sell sodium azide, the primary component of a gas generator used in certain automotive airbag safety systems, and Halotron, a chemical used in fire extinguishing systems ranging from portable fire extinguishers to airport firefighting vehicles. We also hold a 50% ownership stake in Energetic Systems, an entity we consolidate under FIN 46(R) that manufactures and distributes commercial explosives. These businesses collectively represent our Specialty Chemicals operating segment.

On October 1, 2004, we acquired Aerojet-General Corporations in-space propulsion business (ISP) which manufactures product for the satellite market.  We report ISP as our Aerospace Equipment segment and have included its financial performance in our consolidated financial statements since the first quarter of fiscal 2005.

Our Other Businesses segment includes the production of water treatment equipment, including equipment for odor control and disinfection of water and the sale of our improved land in the Gibson Business Park (near Las Vegas, Nevada). All of the real estate assets that were targeted for sale have been monetized and we do not anticipate significant real estate sales activity in the future financial reporting periods.

- 14 -



The following table reflects the revenue contribution percentage from our major product lines:

|                            |  | Three   Months EndedJune 30, |     | Nine   Months EndedJune 30, | 
|--------------------------- |  | ---------------------------- | --- | --------------------------- | 
|                            |  |                              |     |                             | 
|                            |  | 2005                         |     | 2004                        | 
|                            |  |                              |     |                             | 
|Specialty Chemicals:        |  |                              |     |                             | 
|Perchlorates                |  |                              | 49  | %                           | 
|Packages explosives         |  |                              | 23  | %                           | 
|Sodium Azide                |  |                              | 3   | %                           | 
|Halotron                    |  |                              | 5   | %                           | 
|                            |  |                              |     |                             | 
|Total Specialty   Chemicals |  |                              | 80  | %                           | 
|                            |  |                              |     |                             | 
|Aerospace Equipment         |  |                              | 18  | %                           | 
|                            |  |                              |     |                             | 
|Other Businesses:           |  |                              |     |                             | 
|Real Estate                 |  |                              | 0   | %                           | 
|Water Treatment   Equipment |  |                              | 2   | %                           | 
|                            |  |                              |     |                             | 
|Total Other Businesses      |  |                              | 2   | %                           | 
|                            |  |                              |     |                             | 
|Total Revenues              |  |                              | 100 | %                           | 
|                            |  |                              |     |                             | 

Specialty Chemicals Segment

Perchlorate Chemicals:

Perchlorate chemicals account for a major portion of the Specialty Chemicals segment revenues. In general, demand for Grade I AP is driven by a relatively small number of Department of Defense (DOD) and National Aeronautics and Space Administration (NASA) contractors.  As a result, any one individual AP customer usually accounts for a significant portion of our revenues.

We entered into an agreement with the Thiokol Propulsion Division of Alcoa (Thiokol) with respect to the supply of AP through the year 2008.  The agreement, as amended, provides that during its term Thiokol will make all of its AP purchases from us.  In addition to the Grade I AP purchased from us, Thiokol may use AP inventoried by it in prior years.  The agreement also establishes a pricing matrix under which Grade I AP unit prices vary inversely with the quantity of Grade I AP sold by us to all of our customers.  Grade I AP unit prices in the matrix at all quantity levels escalate each year through fiscal 2003.  In fiscal 2004, prices were subject to a one-time downward adjustment of approximately 20%.  Such downward adjustment had the effect of reducing revenues and operating cash flows on Grade I AP sold to Thiokol by 20% in fiscal 2004.  After the adjustment, AP unit prices continue to escalate each year through
fiscal 2008.

We also entered into an agreement with Alliant Techsystems, Inc. (Alliant) to extend an existing agreement through the year 2008.  The agreement establishes prices for any Grade I AP purchased by Alliant from us during the term of the agreement as extended.  Under this agreement, Alliant agrees to use its efforts to cause our Grade I AP to be qualified on all new and current programs served by Alliants Bacchus Works.

During 2001, Alliant acquired Thiokol.  We have agreed with Alliant that the individual agreements in place prior to Alliants acquisition of Thiokol remain in place.  All Thiokol programs existing at the time of the Alliant acquisition (principally the Space Shuttle and Minuteman) will continue to be priced under the Thiokol Agreement.  All Alliant programs (principally the Delta, Pegasus and Titan) will be priced under the Alliant Agreement.

- 15 -



Our annual sales volumes of Grade I AP have been approximately 20.2 million, 16.4 million, 12.6 million, 16.4 million and 15.5 million pounds during the 1999, 2000, 2001, 2002 and 2003 fiscal years (ended September 30) respectively. The suspension of Space Shuttle missions since the Columbia disaster reduced the sales volume of our Grade I AP products in fiscal 2004 to 11.2 million pounds. This reduced sales volume exceeded the actual consumption of Grade I AP product by our customers. As a result, our customers inventory levels of Grade I AP increased during the year.

The Space Shuttle resumed flights in July 2005 with the expectation of three to five flights per year thereafter, although there is no assurance in this regard. Based principally upon market information we received from our customers, we currently estimate that our annual sales volumes of Grade I AP will range between 10.0 and 13.0 million pounds over the next three years. In addition, the space exploration initiative for NASA announced by President Bush in January 2004 could have a significant impact on the demand for Grade I AP, however, the ultimate impact from this initiative remains uncertain at this time.

Packaged Explosives:

As discussed in Note 1 to our condensed consolidated financial statements, we began consolidating our ES packaged explosive joint venture as of March 31, 2004. Geographic markets for ES products include the US, Canada and Mexico.

Overall consumption of commercial explosives is expected to increase through 2006, as a result of continued growth in the coal and mining sectors, as well as the continued strong performance of the aggregates and construction sectors. A significant event for the packaged explosives business continues to be the multi-year Transportation Bill which is expected to stimulate spending on new road construction and infrastructure maintenance.  The bill should increase demand for package products used in road construction and quarrying, particularly our Presplit product line and the new emulsion products. The increased mining activity in the coal industry seen during 2005 is expected to continue as long as there is no significant downturn in the price of oil and natural gas, with coal being broadly recognized as a leading future commodity in the energy sector.  We expect sales of products sold to the Eastern U.S. coal industry to remain robust in 2006. 
However, there can be no assurance that the Transportation Bill will stimulate spending or that mining activity in the coal industry will continue.

Sodium Azide:

Worldwide demand for sodium azide has declined considerably over the last several years. Currently, worldwide demand for sodium azide is substantially less than worldwide supply. Based principally upon market information received from airbag inflator manufacturers, we expect sodium azide use to continue to decline and that inflators using sodium azide will be phased out over some period of time.

Halotron ® Fire Extinguishing Agents:

Halotron is a series of clean fire extinguishing agents designed to replace halon-based fire extinguishing systems. Demand for Halotron depends upon a number of factors including the willingness of commercial, government, and military consumers to spend more on a clean agent than for conventional, cheaper agents and, in some circumstances to switch from halon-based systems.  The effects of competing products, as well as existing and potential governmental regulations also affects demand for Halotron products.

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Aerospace Equipment Segment

The ISP business is the sole contributor to the Aerospace Equipment segment. The ISP business manufactures in-space propulsion thrusters that are either monopropellant or bipropellant based products. Monopropellant thrusters utilize a single liquid fuel source (typically hydrazine), whereas bipropellant thrusters use a combination of a liquid fuel (typically monomethylhydrazine) and an oxidizer.

The selection of a propulsion system is based on the satellites or spacecrafts mission and encompasses a variety of factors. The factors generally include type of mission, mission length, type of orbit, mass, type of launch vehicle and price. The ISP business supplies both government and commercial satellite customers. Sales to these customers are usually awarded based on product performance, pricing, and reliability.

The market for ISP products is expected to grow modestly over the next several years. Government funding for defense, earth observation and space systems satellites is stable, but continued budget pressure will stretch the timing of some of these programs. Funding for missile defense programs is also expected to remain flat given budget pressures. The commercial satellite industry is expecting higher growth as a result of demand from broadband, HDTV and communications applications. Higher growth rates are expected in the markets for ISP products after the next several years as a result of the replacement of existing military and defense communications constellation systems.

Other Businesses Segment

The Other Businesses segment includes sales from our real estate and water treatment equipment businesses.

Water Treatment Equipment:

We sell electrochemical equipment used to purify air or water in municipal, industrial and power generation applications. At the heart of these systems is a proprietary bi-polar electrochemical cell which uses brine or seawater to produce the necessary chemicals. We compete with companies that utilize other technologies and those that utilize technologies similar to ours. Our success depends principally upon our ability to be cost competitive and, at the same time, to provide a quality product.

Real Estate:

Our real estate operations have been in a wind-down phase over the last several years.  In fiscal 2005 we completed the sale of all our Nevada real estate assets that were targeted for disposal.

Raw Materials and Manufacturing Costs

The principal elements comprising our cost of sales are raw materials, component parts, electric power, labor, manufacturing overhead, depreciation and amortization and the book basis in real estate sold. The major raw materials used in our production processes are graphite, sodium chlorate, ammonia, hydrochloric acid, sodium metal, nitrous oxide and HCFC-123. Significant increases in the cost of raw materials may have an adverse impact on margins if we are unable to pass along such increases to our customers.

All the raw materials used in our manufacturing processes have been available in commercial quantities. Although we recently had some difficulty in obtaining graphite, significant progress has been made in establishing an assured source of supply. We continue to explore other technologies that would reduce our dependence on graphite. A substantial portion of the total cash costs of operating our specialty chemical plants, consisting mostly of labor and overhead, are largely fixed in nature.

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Profitability

Although our operating results have not been subject to seasonal fluctuations, they have been and are expected to continue to be subject to variations from quarter to quarter and year to year due to the following factors, among others:

| |  | as discussed in Note 7 to our condensed consolidated   financial statements, we may incur material legal and other costs associated   with environmental remediation, litigation and other contingencies;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the magnitude, pricing and timing of perchlorate   chemicals, sodium azide, Halotron, packaged explosives and water treatment   equipment sales in the future is uncertain;                              
| |  | the results of periodic reviews for impairments of   long-lived assets; and                                                                                                                              
| |  | the ability to pass on increases in raw material   costs to our customers.                                                                                                                               

RESULTS OF OPERATIONS

Revenues

|                    |  | June 30, |        | Increase   (Decrease) |   | Percentage   Change | 
|------------------- |  | -------- | ------ | --------------------- | - | ------------------- | 
|                    |  |         
|                    |  |          |       
|                    |  | 2005     |        | 2004                  |  
|                    |  |          |        |                       |   |                     | 
|Three Months Ended: |  |          |        |                       |   |                     | 
|Revenues:           |  |          |        |                       |   |                     | 
|Specialty Chemicals |  | $        | 13,030 |                       | $ | 15,124              | 
|Aerospace Equipment |  |          | 2,842  |                       |   |                    | 
|Other Businesses    |  |          | 429    |                       |   | 705                 | 
|                    |  |          |        |                       |   |                     | 
|Total Revenues      |  | $        | 16,301 |                       | $ | 15,829              | 
|                    |  |          |        |                       |   |                     | 
|Nine Months Ended:  |  |          |        |                       |   |                     | 
|Revenues:           |  |          |        |                       |   |                     | 
|Specialty Chemicals |  | $        | 39,764 |                       | $ | 37,429              | 
|Aerospace Equipment |  |          | 8,721  |                       |   |                    | 
|Other Businesses    |  |          | 4,583  |                       |   | 1,981               | 
|                    |  |          |        |                       |   |                     | 
|Total Revenues      |  | $        | 53,068 |                       | $ | 39,410              | 
|                    |  |          |        |                       |   |                     | 

The decline in Specialty Chemicals segment revenues during the three months ended June 30, 2005, was principally due to lower volume of perchlorate sales compared to the prior year period.

For the nine months ended June 30, 2005, perchlorate sales experienced a similar decline.  However, this revenue decline is offset by the inclusion of packaged explosive sales from our ES joint venture, resulting in a year-to-date net increase in Specialty Chemicals revenues.  We began consolidating our ES joint venture on March 31, 2004.  Accordingly, the fiscal 2005 year-to-date results include nine months of ES operations as compared to the fiscal 2004 year-to-date results which include three months of ES operations.

The increased revenues from our Other Businesses segment was principally due to a higher level of real estate activity completed during the second quarter of fiscal 2005 compared to the prior year periods.

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Cost of Revenues

|                        |  | June 30, |        | Increase   (Decrease) |   | Percentage   Change |  
|----------------------- |  | -------- | ------ | --------------------- | - | ------------------- | -
|                        |  |         
|                        |  |          |       
|                        |  | 2005     |        | 2004                  |  
|                        |  |          |        |                       |   |                     |  
|Three Months Ended:     |  |          |        |                       |   |                     |  
|Revenues                |  | $        | 16,301 |                       | $ | 15,829              |  
|Cost of Revenues        |  |          | 12,178 |                       |   | 10,994              |  
|                        |  |          |        |                       |   |                     |  
|Gross Margin            |  |          | 4,123  |                       |   | 4,835               |  
|Gross Margin Percentage |  |          | 25     | %                     |   | 31                  | %
|Nine Months Ended:      |  |          |        |                       |   |                     |  
|Revenues                |  | $        | 53,068 |                       | $ | 39,410              |  
|Cost of Revenues        |  |          | 36,709 |                       |   | 26,717              |  
|                        |  |          |        |                       |   |                     |  
|Gross Margin            |  |          | 16,359 |                       |   | 12,693              |  
|Gross Margin Percentage |  |          | 31     | %                     |   | 32                  | %

Cost of sales increased during both the three and nine months ended June 30, 2005 primarily due to the related increases in sales.  Cost of sales increased, however, at a greater rate than sales, resulting in a decline in the gross margin percentage.  This is primarily due to changes in the mix of our products.

For the three months ended June 30, 2005, the gross margin percentage declined compared to the prior year period primarily due to the inclusion of our ISP business beginning October 1, 2004.  ISP products carry a lower gross margin percentage than our Specialty Chemicals.  Thus, the change in the mix of our products reduced our aggregate gross margin percentage.

For the nine months ended June 30, 2005, the gross margin percentage is substantially consistent with the prior period due to offsetting factors.  The inclusion of our ISP business and lower volumes for our Special Chemicals during fiscal 2005 reduced the gross margin percentage.  This decline was substantially offset by gross margin provided by Real Estate sales during the second quarter of fiscal 2005.

Operating Expenses

|                       |  | June 30, |        | Increase   (Decrease) |   | Percentage   Change |  
|---------------------- |  | -------- | ------ | --------------------- | - | ------------------- | -
|                       |  |         
|                       |  |          |       
|                       |  | 2005     |        | 2004                  |  
|                       |  |          |        |                       |   |                     |  
|Three Months Ended:    |  |          |        |                       |   |                     |  
|Operating Expenses     |  | $        | 6,871  |                       | $ | 5,638               |  
|Percentage of Revenues |  |          | 42     | %                     |   | 36                  | %
|Nine Months Ended:     |  |          |        |                       |   |                     |  
|Operating Expenses     |  | $        | 20,679 |                       | $ | 15,505              |  
|Percentage of Revenues |  |          | 39     | %                     |   | 39                  | %

The increases in operating expenses was due primarily to (i) the consolidation of our ES joint venture beginning March 31, 2004, (ii) the addition of the ISP business into the newly formed Aerospace Equipment segment on October 1, 2004, (iii) an increase in corporate development costs, and (iv) an increase in environmental expenses.

The increase in operating expenses during fiscal 2005 was partially offset because the second quarter of fiscal 2004 included a charge for severance expense of $2,000.

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Environmental Charge

During our fiscal 2005 third quarter, we recorded a charge for $22,400 representing our estimate of the probable costs of our remediation efforts at the Henderson Site, including the costs for equipment, operating and maintenance costs, and consultants.  Key factors in determining the total estimated cost include an estimated project life of 45 years and estimates for capital expenditures and annual operating and maintenance costs. This estimate is based on information currently available to us and may be subject to material adjustment upward or downward in future periods as new facts or circumstances may indicate.  See also note 7 to our condensed consolidated financial statements.

Segment Operating Loss

|                    |  | June 30, |         | Increase   (Decrease) |   | Percentage   Change |  
|------------------- |  | -------- | ------- | --------------------- | - | ------------------- | -
|                    |  |         
|                    |  |          |        
|                    |  | 2005     |         | 2004                  |  
|                    |  |          |         |                       |   |                     |  
|Three Months Ended: |  |          |         |                       |   |                     |  
|Specialty Chemicals |  | $        | (24,500 | )                     | $ | (676                | )
|Aerospace Equipment |  |          | (275    | )                     |   |                    |  
|Other Businesses    |  |          | (373    | )                     |   | (127                | )
|                    |  |          |         |                       |   |                     |  
|                    |  | $        | (25,148 | )                     | $ | (803                | )
|                    |  |          |         |                       |   |                     |  
|Nine Months Ended:  |  |          |         |                       |   |                     |  
|Specialty Chemicals |  | $        | (27,875 | )                     | $ | (200                | )
|Aerospace Equipment |  |          | (821    | )                     |   |                    |  
|Other Businesses    |  |          | 1,976   |                       |   | (2,612              | )
|                    |  |          |         |                       |   |                     |  
|                    |  | $        | (26,720 | )                     | $ | (2,812              | )
|                    |  |          |         |                       |   |                     |  

Segment operating profit or loss includes operating results for each segments product lines plus a proportionate allocation of corporate general and administrative expenses.  Segment operating losses have increased due to sales volume declines, reductions in gross margins, and greater allocated corporate costs.  Each of these factors is discussed in more detail above.

Specialty Chemicals segment operating loss for the three month and nine month periods ended June 30, 2005 includes a charge for environmental remediation of $22,400.

Other Businesses operating loss for the nine months ended June 30, 2004 includes the above mentioned severance charge.  Other Businesses operating income for the nine months ended June 30, 2005, includes Real Estate Sales during our fiscal 2005 second quarter that did not occur in the comparative periods.

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Interest Income/Interest and Other Expense

|                             |  | June 30, |     | Increase   (Decrease) |   | Percentage   Change | 
|---------------------------- |  | -------- | --- | --------------------- | - | ------------------- | 
|                             |  |         
|                             |  |          |    
|                             |  | 2005     |     | 2004                  |  
|                             |  |          |     |                       |   |                     | 
|Three Months Ended:          |  |          |     |                       |   |                     | 
|Interest Income              |  | $        | 174 |                       | $ | 59                  | 
|Interest and Other   Expense |  | $        | 93  |                       | $ | 62                  | 
|Nine Months Ended:           |  |          |     |                       |   |                     | 
|Interest Income              |  | $        | 431 |                       | $ | 612                 | 
|Interest and Other   Expense |  | $        | 201 |                       | $ | 512                 | 

The decline in interest income and interest and other expense for the nine month period ending June 30, 2005 was primarily as a result of the elimination of interest income and interest expense from our ES joint venture in all periods subsequent to its consolidation beginning March 31, 2004.

Income Taxes

Our effective tax rate was 37% for the three and nine month periods ended June 30, 2005 and 35% for the three and nine month periods ended June 30, 2004.  Our effective tax rate increased in fiscal 2005 compared to the prior year because fiscal 2004 includes the benefit from changes in estimated deferred tax liabilities.

Extraordinary Gain

In October 2004, we acquired ISP.  Our preliminary allocation of the purchase price to the fair value of the assets acquired and liabilities assumed indicates that the fair value of the net assets acquired exceeds the purchase price.  In accordance with SFAS No. 141, Business Combinations, we have recorded non-current assets at zero and an after-tax extraordinary gain of $1,622 (net of approximately $953 income tax expense).

Cumulative Effect of Accounting Change

As discussed in Note 1 to our condensed consolidated financial statements, we consolidated our ES joint venture as of March 31, 2004. We reported a cumulative effect of an accounting change of $769 (net of tax benefit of $414) in our 2004 second quarter statement of operations to reflect the loss that we would have incurred had the ES joint venture been consolidated since its inception.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires that we adopt accounting policies and make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses.

Application of the critical accounting policies discussed below requires significant judgments, often as the result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results.

- 21 -



Sales and Revenue Recognition

Revenues for Specialty Chemicals and water treatment equipment sales are recognized when persuasive evidence of an arrangement exists, shipment has been made, title passes, the price is fixed or determinable and collectibility is reasonably assured. Some of our perchlorate product customers request that we store materials purchased from us in our Cedar City facility (Bill and Hold transactions). We recognize the revenue and profit from these Bill and Hold transactions at the point at which title and risks of ownership transfer to the customers. We receive cash for the full amount of real estate sales at the time of closing which is when we record the sale.

Revenues for our Aerospace Equipment segment are derived from contracts that are accounted for in conformity with the American Institute of Certified Public Accountants (AICPA) audit and accounting guide, Audits of Federal Government Contracts and the AICPAs Statement of Position No. 81-1, Accounting for Performance of Construction-Type and Certain Production Type Contacts. We account for these contracts using the percentage-of-completion method and measure progress on a cost-to-cost basis. The percentage-of-completion method recognizes revenue as work on a contract progresses. Revenues are calculated based on the percentage of total costs incurred in relation to total estimated costs at completion of the contract. For fixed-price and fixed-price-incentive contracts, if at any time expected costs exceed the value of the contract, the loss is recognized immediately.  A significant change in estimate on one or more
contract could have a material effect on our results of operations in any given period.

Depreciable Lives of Plant and Equipment

Plant and equipment is recorded at cost and depreciated using the straight-line method, which deducts equal amounts of cost of each asset from earnings every year over its estimated economic useful life. Economic useful life is the duration of time the asset is expected to be productively employed by the company, which may be less than its physical life. Managements assumptions on the following factors, among others, affect the determination of estimated economic useful life: wear and tear, obsolescence, technical standards, contract life, changes in market demand and raw material availability.

The estimated economic useful life of an asset is monitored to determine its appropriateness, especially in light of changed business circumstances. For example, changes in technological advances, changes in the estimated future demand for products, or excessive wear and tear may result in a shorter estimated useful life than originally anticipated. In these cases, the Company would depreciate the remaining net book value over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Likewise, if the estimated useful life is increased, the adjustment to the useful life decreases depreciation expense per year on a prospective basis.

Impairment of Long-Lived Assets - Plant and Equipment

Plant and equipment held for use is grouped for impairment testing at the lowest level for which there are identifiable cash flows. Impairment testing of the asset group occurs whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company assesses recoverability by comparing the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be generated by the assets. If an asset group is considered impaired, the impairment loss to be recognized would be measured as the amount by which the asset groups carrying amount exceeds its fair value. Assets to be disposed of by sale are reported at the lower of carrying amount or fair value less cost to sell.

- 22 -



The estimate of plant and equipment fair value is based on estimated discounted future cash flows expected to be generated by the asset group. The assumptions underlying cash flow projections represent managements best estimates at the time of the impairment review. Factors that management must estimate include: industry and market conditions, sales volume and prices, costs to produce and inflation. Changes in key assumptions or actual conditions which differ from estimates could result in an impairment charge. The Company uses reasonable and supportable assumptions when performing impairment reviews and cannot predict the occurrence of future events and circumstances that could result in impairment charges.

Impairment of Long-Lived Assets  Goodwill and Intangible Assets

The purchase method of accounting for business combinations requires the Company to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets. Goodwill represents the excess of the aggregate purchase price over the fair value of net assets of an acquired entity. The Company currently has no goodwill in its financial statements.

The Company performs an impairment test annually in the fourth quarter of the fiscal year. In addition, additional tests will be conducted if changes in circumstances indicate a potential impairment exists. The impairment test requires the Company to compare the fair value of business reporting units to carrying value. The results of the impairment tests have indicated fair value amounts exceeded carrying amounts.

The Company primarily uses the present value of future cash flows to determine fair value. The Companys valuation model assumes a five-year growth period for the business and an estimated exit trading multiple. Management judgment is required in the estimation of future operating results and to determine the appropriate exit multiple. The exit multiple is determined from comparable industry transactions. Future operating results and exit multiples could reasonably differ from the estimates.

Environmental Costs

We are subject to environmental regulations that relate to our past and current operations.  We record liabilities for environmental remediation costs when our assessments indicate that remediation efforts are probable and the costs can be reasonably estimated.  When the available information is sufficient to estimate the amount of the liability, that estimate is used.  When the information is only sufficient to estimate a range of probable liability, and no amount within the range is more likely than the other, the low end of the range is used.  Estimates of liabilities are based on currently available facts, existing technologies and presently enacted laws and regulations.  These estimates are subject to revision in future periods based on actual costs or new circumstances.  Accrued environmental remediation costs are classified as long-term liabilities and include the undiscounted cost of equipment, operating and maintenance costs,
and fees to outside law firms or consultants, for the estimated duration of the remediation activity.  Estimating environmental costs requires us to exercise substantial judgment regarding the cost, effectiveness and duration of our remediation activities.  Actual future expenditures could differ materially to our current estimates.

We evaluate potential claims for recoveries from other parties separately from our estimated liabilities.  We record an asset for expected recoveries when recovery of the amounts are probable.

- 23 -



Income Taxes

We account for income taxes using the asset and liability approach required by SFAS No. 109. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of our assets and liabilities. Future tax benefits attributable to temporary differences are recognized to the extent that realization of such benefits are more likely than not. These future tax benefits are measured by applying currently enacted tax rates.

Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed.

Deferred tax assets are recorded for operating losses and tax credit carryforwards. However, when there are not sufficient sources of future taxable income to realize the benefit of the operating loss or tax credit carryforwards, these deferred tax assets are reduced by a valuation allowance. A valuation allowance is recognized if, based on the weight of available evidence, it is considered more likely than not that some portion or all of the deferred tax asset will not be realized. The factors used to assess the likelihood of realization include forecasted future taxable income and available tax planning strategies that could be implemented to realize or renew net deferred tax assets in order to avoid the potential loss of future tax benefits. The effect of a change in the valuation allowance is reported in the current period tax expense.

Pension Benefits

The Company sponsors defined benefit pension plans in various forms for employees who meet eligibility requirements. Several assumptions and statistical variables are used in actuarial models to calculate the pension expense and liability related to the various plans. Assumptions about the discount rate, the expected rate of return on plan assets and the future rate of compensation increases are determined by the Company. The actuarial models also use assumptions on demographic factors such as retirement, mortality and turnover. Depending on the assumptions selected, pension expense could vary significantly and could have a material effect on reported earnings. The assumptions used can also materially affect the measurement of benefit obligations. Information with respect to pension expenses and liabilities, together with the impact of changes in key assumptions is discussed in Note 8 to our Consolidated Financial Statements included in our September 30, 2004
Annual Report on Form 10-K.

NEW ACCOUNTING PRONOUNCEMENTS

In November 2004, the FASB issued SFAS 151, Inventory Costsan amendment of ARB No. 43, Chapter 4. The Statement clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The Statement is effective for us beginning in fiscal 2006.  We are in the process of assessing the extent of the impact such adoption would have on our financial statements, if any.

In December 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment which requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees and directors. This statement is effective for us beginning with our first quarter of fiscal 2006.  We are in the process of assessing the impact the adoption of this statement will have on our consolidated financial statements.

- 24 -



LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Operating Activities:  Significant components of cash flow from operations include:

|                                             |  | Nine   Months Ended   June 30, |        
|-------------------------------------------- |  | ------------------------------ | -------
|                                             |  |                                |        
|                                             |  | 2005                           |        
|                                             |  |                                |        
|Net Loss                                     |  | $                              | (15,067
|Depreciation and amortization                |  |                                | 4,690  
|Environmental remediation charge, net of tax |  |                                | 14,112 
|Extraordinary gain                           |  |                                | (1,622 
|Cumulative effect of accounting change       |  |                                |       
|Changes in Operating Assets and Liabilities  |  |                                |        
|Accounts receivable                          |  |                                | 4,793  
|Inventories                                  |  |                                | (2,521 
|Accounts payable and   accrued expenses      |  |                                | (645   
|Other                                        |  |                                | (1,307 
|                                             |  |                                |        
|Cash Flow Provided by   Operating Activities |  | $                              | 2,433  
|                                             |  |                                |        

Our operating assets and liabilities (principally accounts receivable, inventories and accounts payable) are subject to normal variation from period to period based on the timing of production and shipment of our products.

Investing Activities:Capital expenditures were $1,611 and $886 during the nine months ended June 30, 2005 and 2004, respectively. Capital expenditures relate principally to specialty chemicals segment capital improvement projects. Capital expenditures are expected to be funded from existing cash balances and operating cash flows.

Financing Activities: We did not repurchase any of our Common Stock during the nine-month period ended June 30, 2005.  As a result of the exercise of stock options, we issued 5,000 shares, for an aggregate price of $23.

Capital Resources

Our primary source of working capital is cash flow from our operations.  The use and availability of our cash is effected by the timing, pricing and magnitude of orders for our products, and the timing of cash outflows relating to our environmental matters or other contingencies. We believe that our cash flows from operations and existing cash balances will be adequate for the foreseeable future to satisfy the needs of our operations.

As a result of the litigation and contingencies discussed in Note 7 to our Condensed Consolidated Financial Statements, we have incurred legal and other costs, and we may incur material legal and other costs associated with the resolution of litigation and contingencies in future periods. If such costs are material, to the extent not recovered by insurance, they would adversely affect our liquidity.

Our outstanding debt obligations are insignificant as of June 30, 2005.  In connection with our proposed acquisition of Aerojet Fine Chemicals AFC, discussed in Note 2 to our condensed consolidated financial statements, we anticipate financing substantially all of the purchase price with commercial bank loans and the issuance of a seller note.

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Environmental Remediation  Henderson Site

During our fiscal 2005 third quarter, we recorded a charge for $22,400 representing our estimate of the probable costs of our remediation efforts at the Henderson Site, including the costs for equipment, operating and maintenance costs, and consultants (see also note 7 to our condensed consolidated financial statements).  Key factors in determining the total estimated cost include an estimated project life of 45 years and estimates for capital expenditures and annual operating and maintenance costs. We estimate expenditures for capital equipment and initial operating costs to range from $6,000 to $8,000 over the next twelve months period.  Subsequently, we estimate expenditures for operating and maintenance costs to decrease from approximately $800 per year to approximately $300 per year over the estimated 45 year term of the project.  This estimate is based on information currently available to us and may be adjusted upward or downward in future
periods as new facts or circumstances may indicate.  Changes in this estimate could be material to our results of operations in any given period.  However, we believe that future changes to the estimated costs to remediate the Henderson Site will not have a material effect on our financial position or cash flows, primarily due to the long-term nature of the project.

Dividend and Stock Repurchase Program

In January 2003 our Board of Directors approved the Program for use in determining any dividends and stock repurchases. This plan is subject to the Boards determination that a dividend is appropriate in light of our overall financial condition, prospects and anticipated cash needs. Our ability to use cash to repurchase shares or issue dividends under the Program may be restricted by certain provisions of the commercial bank loans that we are likely to obtain to finance the proposed AFC Acquisition.

Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual commitments are comprised primarily of operating leases, pension obligations and salary commitments. In addition, we issue letters of credits related to the performance of our products.  These obligations have not changed materially from the amounts disclosed in our annual report on Form 10-K for the year ended September 30, 2004.

We do not have any other material off-balance sheet arrangements.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

Various discussions in this Quarterly Report on Form 10-Q contain forward-looking statements concerning our future products, expenses, revenue, liquidity and cash needs, as well as our plans and strategies. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Numerous factors could cause our actual results to differ significantly from the results described in these forward-looking statements, including the following risk factors.

|1. | (a) Declining demand (including excess customer   inventories) or downward pricing pressure for our products as a result of   general or specific economic conditions,                                                                                                 
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | (b) governmental budget decreases affecting the DOD   or NASA, including the status of the Space Shuttle Program (including   President Bushs current plan to ultimately terminate shuttle operations),   that would cause further decreases in demand for Grade I AP,

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|   | (c) technological advances and improvements with   respect to existing or new competitive products causing a reduction or   elimination of demand for Grade I AP and other perchlorates, sodium azide,   Halotron, explosives or thrusters,                                                                                                                                                                                                                                                
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | (d) the ability and desire of purchasers to change   existing products or substitute other products for our products based upon   perceived quality, environmental effects and pricing, and                                                                                                                                                                                                                                                                                                
|   | (e) the fact that perchlorate chemicals, sodium   azide, Halotron and our water treatment products have limited applications   and highly concentrated customer bases.                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|2. | The cost and effects of legal and administrative   proceedings, settlements and investigations, particularly those   investigations described in Note 7 to our condensed consolidated financial   statements, as well as the costs resulting from regulatory and environmental   matters that may have a negative impact on sales or costs.                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|3. | Our ability to profitably integrate, manage and   operate new businesses and/or investments competitively and cost effectively   (including recently acquired ES and Ampac-ISP and our proposed AFC   Acquisition).                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|4. | Competitive factors including, but not limited to,   our limitations respecting financial resources and our ability to compete   against companies with substantially greater resources, significant excess   market supply in the sodium azide market and in the perchlorate market,   potential patent coverage issues, and the development or penetration of   competing new products, particularly in the propulsion, airbag inflation,   fire extinguishing and explosives businesses.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|5. | Underutilization of our manufacturing facilities   resulting in production inefficiencies and increased costs, the inability to   recover facility costs, reductions in margins, and impairment issues.                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|6. | The effects of, and changes in, trade, monetary and   fiscal policies, laws and regulations and other activities of governments,   agencies or similar organizations, including, but not limited to,   environmental, safety and transportation issues.                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|7. | The dependence upon a single facility for the   production of most of our products.                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|8. | Provisions of our Certificate of Incorporation and   Bylaws and Series D Preferred Stock, and the dividend of preference stock   purchase rights and related Rights Agreement, could have the effect of making   it more difficult for potential acquirors to obtain a control position in us.                                                                                                                                                                                             

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, which arise during the normal course of our business, from changes in interest rates, commodity prices and foreign currency exchange rates. As of June 30, 2005, we did not have any long-term debt outstanding and we did not have any derivative-based financial instruments. However, the amount of any outstanding debt may fluctuate and we may at some time be subject to financing risk. There have been no material changes in market risk since September 30, 2004.

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ITEM 4. CONTROLS AND PROCEDURES

Based on their evaluation as of June 30, 2005, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) were effective as of such date to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  There were no changes in the Companys internal controls over financial reporting that occurred during the Companys last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

For a description of our legal proceedings, see Note 7 to our condensed consolidated financial statements.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

|31.1  | Certification of Chief Executive Officer Pursuant to   Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                             
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                                                                                                                                                                                                                                  
|31.2  | Certification of Chief Financial Officer Pursuant to   Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                             
|      |                                                                                                                                                                                                                                                                                                                                                                                                  
|32.1* | Certification of Principal Executive Officer   Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                         
|      |                                                                                                                                                                                                                                                                                                                                                                                                  
|32.2* | Certification of Principal Financial Officer   Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                         
|      |                                                                                                                                                                                                                                                                                                                                                                                                  
|      |                                                                                                                                                                                                                                                                                                                                                                                                  
|*     | Exhibits 32.1 and 32.2 are furnished to accompany   this quarterly report on Form 10-Q but shall not be deemed filed for the   purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise   and shall not be deemed incorporated by reference into any registration   statements filed under the Securities Act of 1933, as amended, or the   Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

|                         | AMERICAN   PACIFIC CORPORATION                          
|------------------------ | --------------------------------------------------------
|                         |                                                         
|Date:  August   12, 2005 | /s/ JOHN R. GIBSON                                      
|                         |                                                         
|                         | John R.   Gibson                                        
|                         | Chief   Executive Officer and President                 
|                         |                                                         
|Date:  August   12, 2005 | /s/ SETH L. VAN VOORHEES                                
|                         |                                                         
|                         | Seth L.   Van Voorhees                                  
|                         | Vice   President, Treasurer & Chief Financial    Officer

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