<PAGE>
 
                       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, 1998
                         COMMISSION FILE NUMBER 1-8137

                                       OR
                                        
              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
                    OF THE  SECURITIES EXCHANGE ACT OF 1934
                                        
                          AMERICAN PACIFIC CORPORATION
             (Exact name of registrant as specified in its charter)

               DELAWARE                        59-6490478
      (State or other jurisdiction           (IRS Employer
          of incorporation or             Identification No.)
            organization)

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)

                                 NOT APPLICABLE
                                 --------------
            (Former name, former address and former fiscal year, if
                          changed since last report.)

     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 / /

                      Applicable Only to Corporate Issuers

     Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common  stock,  as of the latest  practicable  date:  8,249,537 AS
OF JULY 31, 1998.

                                      -1-
<PAGE>
 
                        PART I.   FINANCIAL INFORMATION
                                        
ITEM 1.  Condensed Consolidated Financial Statements
         -------------------------------------------

         The  information  required  by Rule  10-01  of  Regulation  S-X is
         provided on pages 4 through 12 of this Report on Form 10-Q.

ITEM 2.  Management's  Discussion  and Analysis of Financial  Condition and
         ------------------------------------------------------------------
         Results of Operations
         ---------------------

         The information required by Item 303 of Regulation S-K is provided on
         pages 13 through 18 of this Report on Form 10-Q.



                          PART II.  OTHER INFORMATION
                                        
ITEM 1.  Legal Proceedings
         -----------------

         None.

ITEM 2.  Changes in Securities
         ---------------------

         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 and Reports on Form 8-K
         --------------------------------

        a)   The following Exhibit is filed in connection with the Registrant's
              electronic filing:

                   27. Financial Statement Schedules.

        b)   None.

                                      -2-
<PAGE>
 
                                   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 4, 1998                    /S/ JOHN R. GIBSON
                                         ------------------
                                         John R. Gibson
                                         Chief Executive Officer and President


Date:  August 4, 1998                    /S/ DAVID N. KEYS
                                         -----------------
                                         David N. Keys
                                         Executive Vice President,
                                         Chief Financial Officer,  Secretary
                                         and Treasurer; Principal Financial
                                         and Accounting Officer

                                      -3-
<PAGE>
 
                          AMERICAN PACIFIC CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (unaudited)
<TABLE>
<CAPTION>
 
                                                      FOR THE THREE MONTHS                  FOR THE NINE MONTHS
                                                          ENDED JUNE 30,                        ENDED JUNE 30,
                                                     1998               1997               1998                1997
-----------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                <C>                 <C>                 <C> 
Sales and Operating Revenues                     $13,136,000        $12,767,000         $38,523,000         $30,545,000
Cost of Sales                                      9,047,000         10,434,000          26,282,000          25,542,000
                                                 ----------------------------------------------------------------------
  Gross Profit                                     4,089,000          2,333,000          12,241,000           5,003,000
  
Operating Expenses                                 2,361,000          2,304,000           6,791,000           6,936,000
                                                 ----------------------------------------------------------------------
  
Operating Income (Loss)                            1,728,000             29,000           5,450,000          (1,933,000)
 
Equity in Earnings of Real Estate   
  Venture                                                                                   300,000             100,000

Net Interest and Other
Expense                                            1,514,000            202,000           2,977,000             735,000
                                                 ----------------------------------------------------------------------
Income (Loss) Before Credit
  for Income Taxes                                   214,000           (173,000)          2,773,000          (2,568,000)
 
Credit for Income Taxes                                                 (59,000)                               (875,000)
                                                 ---------------------------------------------------------------------- 
Net Income (Loss) Before
  Extraordinary Loss                                 214,000           (114,000)          2,773,000          (1,693,000)
 
Extraordinary Loss-Debt                                                          
  Extinguishment                                                                          5,005,000
                                                 ----------------------------------------------------------------------
 
Net Income (Loss)                                $   214,000        $  (114,000)        $(2,232,000)        $(1,693,000)
                                                 ----------------------------------------------------------------------
 
Basic Net Income (Loss) Per
  Share:
 
  Income (Loss) Before
    Extraordinary Loss                           $       .03        $      (.02)        $       .34         $      (.21)
  
  Extraordinary Loss                                                                    $      (.61)
                                                 ----------------------------------------------------------------------
 
  Net Income (Loss)                              $       .03        $      (.02)        $      (.27)        $      (.21)
                                                 ----------------------------------------------------------------------
 
Average Shares Outstanding                         8,250,000          8,098,000           8,184,000           8,098,000
                                                 ----------------------------------------------------------------------
 
Diluted Net Loss Per Share:
 
  Income (Loss) Before
    Extraordinary Loss                           $       .02        $      (.02)        $       .33         $      (.21)
 
  Extraordinary Loss                                                                    $      (.60)
                                                 ----------------------------------------------------------------------
 
  Net Income (Loss)                              $       .02        $      (.02)        $      (.27)        $      (.21)
                                                 ----------------------------------------------------------------------
 
Diluted Shares                                     8,563,000          8,098,000           8,384,000           8,098,000
                                                 ----------------------------------------------------------------------
</TABLE> 
 
See the accompanying Notes to Condensed Consolidated Financial Statements.

                                      -4-
<PAGE>
 
                          AMERICAN PACIFIC CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)


<TABLE>
<CAPTION>                                                      

------------------------------------------------------------------------------------------------------------
                                                                JUNE 30,                       SEPTEMBER 30,
                                                                  1998                             1997
------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                               <C> 
ASSETS

CURRENT ASSETS:
  Cash and Cash Equivalents                                   $27,731,000                       $18,881,000
  Accounts and Notes Receivable                                 6,031,000                         5,551,000
  Related Party Notes Receivable                                  565,000                           637,000
  Inventories                                                  13,864,000                        11,116,000
  Prepaid Expenses and Other Assets                             1,292,000                           979,000
                                                             ----------------------------------------------
     TOTAL CURRENT ASSETS                                      49,483,000                        37,164,000
 
Property, Plant and Equipment, Net                             19,515,000                        19,314,000
Intangible Assets, Net                                         39,286,000                         1,540,000
Development Property                                            7,003,000                         7,362,000
Real Estate Equity Investments                                 17,157,000                        20,248,000
Other Assets, Net                                               3,052,000                           873,000
Restricted Cash                                                 1,171,000                         3,580,000
                                                             ----------------------------------------------
     TOTAL ASSETS                                            $136,667,000                       $90,081,000
                                                             ----------------------------------------------
</TABLE> 
See the accompanying Notes to Condensed Consolidated Financial Statements.

                                      -5-
<PAGE>
 
                          AMERICAN PACIFIC CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                  (Unaudited)


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
                                                                       JUNE 30,              SEPTEMBER 30,
                                                                         1998                     1997
----------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                      <C> 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
CURRENT LIABILITIES:
  Accounts Payable and Accrued Liabilities                           $ 11,023,000             $  7,519,000
  Current Portion of Long-Term Debt                                     1,171,000                6,166,000
                                                                     -------------------------------------
    TOTAL CURRENT LIABILITIES                                          12,194,000               13,685,000
 
  Long-Term Debt                                                       75,000,000               24,900,000
  Long-Term Payables                                                    1,794,000                2,376,000
                                                                     ------------------------------------- 
    TOTAL LIABILITIES                                                  88,988,000               40,961,000
                                                                     -------------------------------------
 
Commitments and Contingencies
 
Warrants to Purchase Common Stock                                       3,569,000                3,569,000
 
SHAREHOLDERS' EQUITY:
Common Stock                                                              840,000                  829,000
Capital in Excess of Par Value                                         79,341,000               78,561,000
Accumulated Deficit                                                   (34,939,000)             (32,707,000)
Treasury Stock                                                         (1,035,000)              (1,035,000)
Receivable from the Sale of Stock                                         (97,000)                 (97,000)
                                                                     -------------------------------------
    TOTAL SHAREHOLDERS' EQUITY                                         44,110,000               45,551,000
                                                                     -------------------------------------
                                                                     -------------------------------------
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                       $136,667,000             $ 90,081,000
                                                                     -------------------------------------
 
</TABLE> 
  See the accompanying Notes to Condensed Consolidated Financial Statements.>

                                      -6-
<PAGE>
 
                          AMERICAN PACIFIC CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------- 
                                                         FOR THE THREE-MONTHS                 FOR THE NINE-MONTHS
                                                            ENDED JUNE 30,                       ENDED JUNE 30,
                                                     1998                1997                1998                1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                 <C>                 <C>                 <C>  
Cash Provided by (Used For)
  Operating Activities                              $ 8,916,000         $(1,153,000)        $  8,505,000        $ 5,190,000
                                                    -----------------------------------------------------------------------
 
Cash Flows Provided by (Used For)
   Investing Activities:
   Capital Expenditures                                (406,000)           (275,000)          (2,054,000)        (1,576,000)
   Payment for Acquisition of 
     Intangible                                                                              (39,000,000)
   Real estate equity investment  
     capital activity                                   360,000            (773,000)           3,091,000         (1,293,000)
                                                     ----------------------------------------------------------------------
Net Cash Used For
   Investing Activities                                 (46,000)         (1,048,000)         (37,963,000)        (2,869,000)
                                                     ----------------------------------------------------------------------
 
Cash Flows From
   Financing Activities:
   Principal Payments on Debt                                                                (31,166,000)        (6,168,000)
   Issuance of Senior Notes                                                                   75,000,000
   Premium Paid on Debt
     Extinguishment                                                                           (3,250,000)
   Debt Issue Costs                                    (360,000)                              (3,067,000)
   Issuance of Common Stock                             192,000                                  791,000             70,000
   Treasury Stock Acquired                                                                                         (156,000)
                                                     ----------------------------------------------------------------------
Net Cash Provided by (Used For) 
   Financing  Activities                               (168,000)                              38,308,000         (6,254,000)
                                                     ----------------------------------------------------------------------
Net Increase (Decrease) in Cash and
   Cash Equivalents                                   8,702,000          (2,201,000)           8,850,000         (3,933,000)
 Cash and Cash Equivalents,
   Beginning of Period                               19,029,000          16,769,000           18,881,000         18,501,000
 Cash and Cash Equivalents, End of                  -----------------------------------------------------------------------
   Period                                           $27,731,000         $14,568,000        $ 27,731,000         $14,568,000
                                                    -----------------------------------------------------------------------
Supplemental Disclosure of Cash
   Flow Information:
Interest Paid (net of amounts
   capitalized)                                     $                   $                  $  1,650,000         $   851,000
                                                    -----------------------------------------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.

                                      -7-
<PAGE>
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):

1.   BASIS OF REPORTING

     The accompanying Condensed Consolidated Financial Statements are unaudited
     and do not include certain information and disclosures  included in the
     Annual Report on Form 10-K of American Pacific Corporation (the "Company").
     The Condensed Consolidated Balance Sheet as of September 30, 1997 was
     derived from the Consolidated Financial Statements included in the
     Company's Annual Report on Form 10-K for the year ended September 30, 1997.
     Such statements should therefore be read in conjunction with the
     Consolidated Financial Statements and Notes thereto included in the
     Company's Annual Report on Form 10-K for the year ended September 30, 1997.
     In the opinion of Management, however, all adjustments (consisting only of
     normal recurring accruals) necessary for a fair presentation have been
     included.  The operating results and cash flows for the three-month and
     nine-month periods ended June 30, 1998 are not necessarily indicative of
     the results that will be achieved for the full fiscal year or for future
     periods.

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimate and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of financial
     statements and the reported amounts of revenues and expenses during the
     reporting period.  Significant estimates used by the Company include
     estimated useful lives for depreciable and amortizable assets, the
     estimated valuation allowance for deferred tax assets, and estimated cash
     flows in assessing the recoverability of long-lived assets.  Actual results
     may differ from estimates.


2.   NET INCOME (LOSS) PER COMMON SHARE

     During the first quarter of fiscal 1998, the Company adopted SFAS No. 128
     "Earnings per Share." SFAS No. 128 requires the presentation of basic net
     income (loss) per share and diluted net income (loss) per share.  Basic per
     share amounts are computed by dividing net income (loss) by average shares
     outstanding during the period.  Diluted net income (loss) per share amounts
     are computed by dividing net income (loss) by average shares outstanding
     plus the dilutive effect of common share equivalents.  Since the Company
     incurred a net loss before extraordinary loss during the three-month and
     nine-month periods ended June 30, 1997, diluted per share calculations are
     based upon average shares outstanding during these periods.  Accordingly,
     the effect of stock options and warrants outstanding for 3,525,000 shares
     at June 30, 1997 was not included in diluted net loss per share
     calculations.  Diluted net income (loss) per share amounts during the
     three-month and nine-month periods ended June 30, 1998 is determined
     considering the dilutive effect of stock options and warrants.  The effect
     of stock options and warrants outstanding to purchase approximately
     2,900,000 shares was not included in diluted per share calculations during
     the three-month and nine-month periods ended June 30, 1998 as the average
     exercise price of such options and warrants was greater than the average
     price of the Company's common stock.

                                      -8-
<PAGE>
 
3.      INVENTORIES

        Inventories consist of the following:
<TABLE>
<CAPTION>
                                          June 30,          September 30,
                                           1998                 1997
                                        -----------         -------------
        <S>                             <C>                  <C>
        Work-in-process                 $ 8,982,000          $ 3,349,000
        Raw materials and supplies        4,882,000            7,767,000
                                        -----------          -----------
        Total                           $13,864,000          $11,116,000
                                        -----------          -----------
 </TABLE>

4.      COMMITMENTS AND CONTINGENCIES

        Trace amounts of perchlorate chemicals have been found in Lake Mead.
        Clark County, Nevada, where Lake Mead is situated, is the location of
        Kerr-McGee Chemical Corporation's ("Kerr-McGee") ammonium perchlorate
        ("AP") operations, and was the location of the Company's AP operations
        until May 1988. The Company is cooperating with State and local
        agencies, and with Kerr-McGee and other interested firms, in the
        investigation and evaluation of the source or sources of these trace
        amounts, possible environmental impacts, and potential remediation
        methods. Until these investigations and evaluations have reached
        definitive conclusions, it will not be possible for the Company to
        determine the extent to which, if at all, the Company may be called upon
        to contribute to or assist with future remediation efforts, or the
        financial impact, if any, of such cooperation, contributions or
        assistance.

                                      -9-
<PAGE>
 
5.      INCOME TAXES

        The Company established a valuation allowance for deferred tax assets in
        the amount of $10.4 million as of September 30, 1997.  The Company's
        effective tax rate will be 0% until its net operating losses expire or
        the Company has taxable income in an amount sufficient to eliminate the
        need for the valuation allowance.

6.      FINANCING ACTIVITIES

        On March 12, 1998, the Company sold $75.0 million principal amount of
        unsecured senior notes (the "Notes"), consummated an acquisition (the
        "Acquisition") of certain assets from Kerr-McGee described below and
        repurchased the remaining $25.0 million principal amount balance
        outstanding of subordinated secured notes (the "Azide Notes").

        The Notes mature on March 1, 2005. Interest on the Notes will be paid in
        cash at a rate of 9-1/4% per annum on each March 1 and September 1,
        commencing September 1, 1998. The indebtedness evidenced by the Notes
        represents a senior unsecured obligation of the Company, ranks pari
        passu in right of payment with all existing and future senior
        indebtedness of the Company and is senior in right of payment to all
        future subordinated indebtedness of the Company. The Indenture under
        which the Notes were issued contains various limitations and
        restrictions including (i) change in control provisions, (ii)
        limitations on indebtedness and (iii) limitations on restricted payments
        such as dividends, stock repurchases and investments. Management
        believes the Company has complied with these limitations and
        restrictions. Under the Indenture, the Company was obligated to exchange
        the Notes for identical notes registered with the Securities and
        Exchange Commission (the "Commission") under the Securities Act of 1933,
        as amended, within a specified period of time set forth in the
        Indenture. In April 1998 the Company filed a Form S-4 registration
        statement with the Commission for the purposes of effecting this
        exchange. The registration statement was declared effective by the
        Commission on July 29, 1998, with the consummation of the exchange
        scheduled for August 28, 1998.

        The Azide Notes were 11% noncallable subordinated secured term notes,
        which were issued and sold in February 1992 to finance the design,
        construction and start-up of the Company's sodium azide facility. A
        portion of the net proceeds from sale of the Notes was applied to
        repurchase the Azide Notes for approximately $28.2 million
        (approximately 113% of the outstanding principal amount thereof). In
        connection with the repurchase, the Company recognized an extraordinary
        loss on debt extinguishment of approximately $5.0 million. The
        extraordinary loss consisted of the cash premium paid of $3.2 million
        upon repurchase and a charge of $1.8 million to write-off the
        unamortized balance of debt issue and discount costs.

7.      ACQUISITION

        On March 12, 1998 (the "Closing Date"), the Company acquired, pursuant
        to a purchase agreement (the "Purchase Agreement") with Kerr-McGee,
        certain intangible assets related to Kerr-McGee's production of AP (the
        "Rights") for a purchase price of $39.0 million. Under the Purchase
        Agreement, the Company acquired an option (the "Option") to purchase all
        or any portion of the inventory of AP stored at Kerr-McGee's premises on
        the Closing Date, which is not owned by, or identified to a firm order
        from, a Kerr-McGee customer (the "Inventory"). The Option is exercisable
        from time to time within the 12 month period commencing on the Closing
        Date (the "Option Period"). The Acquisition

                                      -10-
<PAGE>
 
        did not include Kerr-McGee's production facilities (the "Production
        Facilities") and certain water and power supply agreements used by Kerr-
        McGee in the production of AP. Under the Purchase Agreement, Kerr-McGee
        ceased the production and sale of AP although the Production Facilities
        may continue to be used by Kerr-McGee for production of AP under certain
        limited circumstances described below. Under the Purchase Agreement,
        Kerr-McGee reserved a perpetual, royalty-free, nonexclusive license to
        use any of the technology forming part of the Rights as may be necessary
        or useful to use, repair or sell the Production Facilities (the
        "Reserved License").

        Under the Purchase Agreement, Kerr-McGee reserved the right to sell the
        Inventory to the extent not purchased by the Company pursuant to the
        Option, to process and sell certain reclaimed AP that is not suitable
        for use in solid fuel rocket motors (the "Reclaimed Product"), and to
        produce and sell AP (i) to fulfill orders scheduled for delivery after
        the closing, subject to making payments to the Company with respect to
        such orders, as provided in the Purchase Agreement and (ii) in the event
        of the Company's inability to meet customer demand or requirements,
        breach of the Purchase Agreement or termination of the Company's AP
        business.

        The Purchase Agreement provides that, together with the Reserved
        License, Kerr-McGee is permitted in its discretion to (i) lease, sell,
        dismantle, demolish and/or scrap all or any portion of the Production
        Facilities, (ii) retain the Production Facilities for manufacture of
        Reclaimed Product and (iii) maintain the Production Facilities in a
        "standby" or "mothballed" condition so they will be capable of being
        used to produce AP under the limited circumstances referred to above.

        Under the Purchase Agreement, Kerr-McGee has agreed to indemnify the
        Company against loss or liability from claims associated with the
        ownership and use of the Rights prior to consummation of the Acquisition
        or resulting from any breach of its warranties, representations and
        covenants. The Company has agreed to indemnify Kerr-McGee against loss
        and liability from claims associated with the ownership and use of the
        Rights after consummation of the Acquisition or resulting from any
        breach of its warranties, representations and covenants. In addition,
        Kerr-McGee has agreed that it will, at the Company's request, store any
        Inventory as to which the Option is exercised until 90 days after the
        Option expires, introduce the Company to AP customers that are not
        currently customers of the Company, and consult with the Company
        regarding the production and marketing of AP. The Company has agreed
        that, at Kerr-McGee's request, it will use reasonable efforts to market
        Reclaimed Product on Kerr-McGee's behalf for up to three years following
        consummation of the Acquisition.
   
        The Company has determined that a business was not acquired in the
        Acquisition and that the Rights acquired have no independent value to
        the Company apart from the overall benefit of the transaction that, as a
        result thereof, Kerr-McGee has ceased production of AP (except in the
        limited circumstances referred to above), thereby leaving the Company as
        the sole North American supplier of AP. Since they have no independent
        value to the Company, the Company has assigned no value to an
        unidentified intangible consisting of the benefit referred to above. The
        Company intends to amortize the purchase price for the unidentified
        intangible over ten years, the length of the terms of pricing contracts
        with two principal AP customers referred to below.

        In connection with the Acquisition, the Company entered into an
        agreement with Thiokol Corporation ("Thiokol") with respect to the
        supply of AP through the year 2008. The agreement, which was contingent
        upon consummation of the Acquisition, provides that during its term
        Thiokol will make all of its AP purchases from the Company. The

                                      -11-
<PAGE>
       
        agreement also establishes a pricing matrix under which AP unit prices
        vary inversely with the quantity of AP sold by the Company to all of its
        customers. The Company understands that, in addition to the AP purchased
        from the Company, Thiokol may use AP inventoried by it in prior years
        and AP recycled by it from certain existing rocket motors.

        In connection with the Acquisition, the Company also entered into an
        agreement with Alliant Techsystems Incorporated ("Alliant") to extend an
        existing agreement through the year 2008. The agreement establishes
        prices for any AP purchased by Alliant from the Company during the term
        of the agreement as extended. Under this agreement Alliant agrees to use
        its efforts to cause the Company's AP to be qualified on all new and
        current programs served by Alliant's Bacchus Works.

8.      REAL ESTATE EQUITY INVESTMENTS

        The Company's interest in Gibson Ranch Limited Liability Company
        ("GRLLC") is accounted for using the equity method. GRLLC operates on a
        calendar year. The Company recognizes its share of the equity in GRLLC
        on a current quarterly basis. Summarized financial information for GRLLC
        as of and for the three-month and nine-month periods ended June 30, 1998
        were as follows:

<TABLE>
<CAPTION>
 
                                     Three-Month        Nine-Month
                                    Period Ended       Period Ended
                                    June 30, 1998      June 30, 1998
                                    -------------      -------------
        <S>                          <C>                <C>
 
        Income Statement:
           Revenues                  $ 7,509,000        $23,289,000
           Gross Profit                  849,000          3,446,000
           Operating Expenses            382,000          1,123,000
           Net Income                $   473,000        $ 2,334,000
 
        Balance Sheet:
           Assets                    $27,116,000        $27,116,000
           Liabilities                13,196,000         13,196,000
           Equity                    $13,919,000        $13,919,000
</TABLE>

        GRLLC's balance sheet is not classified.  Assets consist principally of
        inventories and liabilities consist principally of Notes and accounts
        payable.  Inventories were $25,039,000 at June 30, 1998.

                                      -12-
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

OVERVIEW

The Company is principally engaged in the production of AP for the aerospace and
national defense industries.  In addition, the Company produces and sells sodium
azide, the primary component of a gas generant used in automotive airbag safety
systems, and Halotron, a chemical used in fire suppression systems ranging from
portable fire extinguishers to airport firefighting vehicles.  The perchlorate,
sodium azide and Halotron facilities are located on the Company's property in
Southern Utah and the chemicals produced and sold at these facilities
collectively represent the Company's specialty chemical segment.  The Company's
other lines of business include the development of real estate in Nevada and the
production of environmental protection equipment, including waste and seawater
treatment systems.

The Company has incurred net losses during its last three fiscal years and
operating losses during the fiscal years ended September 30, 1997 and 1995.  As
a result, pre-tax income has not been sufficient to recover interest charges.

The Company believes that North American AP demand is currently approximately 22
to 24 million pounds annually.  However, supply capacity has historically been
substantially in excess of these estimated demand levels.  In an effort to
rationalize the economics of the existing AP market, the Company entered into
the Purchase Agreement with Kerr-McGee.  Upon consummation of the Acquisition,
the Company effectively became the sole North American producer of AP.

SALES AND OPERATING REVENUES.  Sales of the Company's perchlorate chemical
----------------------------                                              
products, consisting almost entirely of AP sales, accounted for approximately
63% and 49% of revenues during the nine-month periods ended June 30, 1998 and
1997, respectively.  In general, demand for AP is driven by a relatively small
number of DOD and NASA contractors; as a result, any one individual AP customer
usually accounts for a significant portion of the Company's revenues.

Sodium azide sales accounted for approximately 23% and 27% of revenues during
the nine-month periods ended June 30, 1998 and 1997, respectively.  The Company
has incurred significant operating losses in its sodium azide operation during
the last three fiscal years.  Although the Company has achieved significant
gains in market share that appear to relate to an anti-dumping petition filed by
the Company against three Japanese sodium azide producers and the resulting
suspension agreement, the Company believes that these factors were fully
incorporated into the market by the end of fiscal 1997.  The Company's
evaluation of the sodium azide market indicated that the cash flows associated
with sodium azide operations would not be sufficient to recover the Company's
investment in sodium azide related fixed assets and, as a result, the Company
recognized an impairment charge with respect to those assets of $52.6 million in
the fourth quarter of fiscal 1997.  Depreciation expense is expected to decrease
annually by approximately $4.0 million as a result of the impairment charge.

In June and July of this year, shipments of sodium azide were negatively
impacted by the recent labor strike at certain General Motor's ("GM")
facilities.  Although this strike has recently been reported to have been
settled, the Company is unable to predict the impact this strike may have on its
sodium azide operations in the future.

Sales of Halotron amounted to approximately 3% and 5% of revenues during the
nine-month periods ended June 30, 1998 and 1997, respectively.  Halotron is
designed to replace halon-based fire suppression systems.  Accordingly, demand
for Halotron depends upon a number of 

                                      -13-
<PAGE>
 
factors including the willingness of consumers to switch from halon-based
systems, as well as existing and potential governmental regulations.

Real estate and related sales amounted to approximately 6% and 12% of revenues
during the nine-month periods ended June 30, 1998 and 1997, respectively.  The
nature of real estate development and sales is such that the Company is unable
reliably to predict any pattern of future real estate sales or the recognition
of the equity in earnings of real estate ventures.

Environmental protection equipment sales accounted for approximately 5% and 7%
of revenues during the nine-month periods ended June 30, 1998 and 1997,
respectively.  It is currently anticipated that sales of this segment will be
adversely affected in fiscal 1999 by the continuing adverse economic
developments and conditions in the Company's foreign markets (particularly Asian
markets).

COST OF SALES.  The principal elements comprising the Company's cost of sales
--------------                                                               
are raw materials, electric, power, labor, manufacturing overhead and the basis
in real estate sold.  The major raw materials used by the Company in its
production processes are graphite, sodium chlorate, ammonia, hydrochloric acid,
sodium metal, and nitrous oxide.  Significant increases in the cost of raw
materials may have an adverse impact on margins if the Company is unable to pass
along such increases to its customers, although all the raw materials used in
the Company's manufacturing processes have historically been available in
commercial quantities, and the Company has had no difficulty obtaining necessary
raw materials.

Raw material, electric power and labor costs have not changed significantly
recently.  The costs of operating the Company's specialty chemical plants are,
however, largely fixed.  Accordingly, the Company believes that the potential
additional AP sales volume resulting from the Acquisition should generate
significant incremental cash flow because of the operating leverage associated
with the perchlorate plant.  However, amortization of the Acquisition costs is
expected to amount to approximately $4.0 million annually.

INCOME TAXES.  The Company's effective income tax rates were 0% during the three
------------                                                                    
and nine-month periods ended June 30, 1998 and 34% during the three and nine-
month periods ended June 30, 1997.  The Company's effective income tax rate
decreased to 17% for the entire 1997 fiscal year as a result of the
establishment of a $10.4 million deferred tax valuation allowance in the fourth
quarter.  The Company's effective tax rate will be 0% until the Company's net
operating losses expire or the Company has taxable income in an amount
sufficient to eliminate the need for the valuation allowance.

NET INCOME (LOSS).  Although the Company's net income (loss) and diluted net
-----------------                                                           
income (loss) per common share 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:
(i) as discussed in Note 4 of Notes to Condensed Consolidated Financial
Statements, the Company may incur material costs associated with certain
contingencies; (ii) timing of real estate and related sales and equity in
earnings of real estate ventures is not predictable; (iii) the recognition of
revenues from environmental protection equipment orders not accounted for as
long-term contracts depends upon orders generated and the timing of shipment of
the equipment; (iv) weighted average common and common equivalent shares for
purposes of calculating diluted net income (loss) per common share are subject
to significant fluctuations based upon changes in the market price of the
Company's Common Stock due to outstanding warrants and options; and (v) the
magnitude, pricing and timing of AP, sodium azide, Halotron, and environmental
protection equipment sales in the future is uncertain.  (See "Forward Looking
Statements/Risk Factors" below.)

                                      -14-
<PAGE>
 
RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997

SALES AND OPERATING REVENUES.  Sales increased $0.3 million, or 3% during the
----------------------------                                                 
three months ended June 30, 1998 to $13.1 million from $12.8 million in the
corresponding period of the prior year.  This increase was attributable to
increased sales of specialty chemicals.  Such increase was partially offset by
decreases in environmental protection equipment and real estate sales.
Perchlorate chemical sales increased approximately $4.6 million principally as a
result of the consummation of the Acquisition. Real estate sales decreased
approximately $3.2 million due to the fact that a significant land sale closed
in the third quarter of fiscal 1997. Environmental protection equipment sales
decreased approximately $0.5 million due principally to the timing of shipment
of certain equipment.

COST OF SALES.  Cost of sales decreased $1.4 million, or 13% in the three months
-------------                                                                   
ended June 30, 1998 to $9.0 million from $10.4 million in the corresponding
period of the prior year.  Such decrease was principally due to decreases in
sodium azide and real estate costs offset by an increase in costs associated
with perchlorate operations.  The decrease in sodium azide cost of sales was
attributable to a reduction in depreciation expense as a result of the sodium
azide charge referred to above.  The increase in perchlorate costs was due to
increased volumes.  As a percentage of sales, cost of sales decreased in the
three months ended June 30, 1998 to 69% as compared to 82% in the corresponding
period of the prior year.  This decrease was due principally to the increase in
perchlorate sales volume and the reduction in sodium azide related depreciation
expense.

OPERATING EXPENSES.  Operating (selling, general and administrative) expenses
-------------------                                                          
increased $0.1 million, or 2%, in the three months ended June 30, 1998 to $2.4
million from $2.3 million in the corresponding period of 1997.

NET INTEREST EXPENSE.  Net interest and other expense increased to $1.5 million
--------------------                                                           
in the three months ended June 30, 1998 from $0.2 million in the corresponding
period of the prior year as a result of the cessation of interest capitalization
on the Company's Ventana Canyon residential joint venture project and the
issuance of the Notes in March 1998.

EQUITY IN EARNINGS OF REAL ESTATE VENTURE.  The Company's share of equity in its
-----------------------------------------                                       
Ventana Canyon joint venture was $0 million during the three-month periods ended
June 30, 1998 and 1997.  The joint venture has historically operated at or near
a break-even point on residential activity and generated net income on sales of
improved land (see below).

NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997

SALES AND OPERATING REVENUES.  Sales increased $8.0 million, or 26%, during the
----------------------------                                                   
nine months ended June 30, 1998 to $38.5 million from $30.5 million in the
corresponding period of the prior year.  The increase was principally due to
increased sales of specialty chemicals.  Such increase was partially offset by a
decrease in real estate sales.  Perchlorate chemical sales increased
approximately $9.6 million primarily as a result of the pending and ultimate
consummation of the Acquisition.  Real estate sales decreased approximately $1.2
million due to a difference in the timing and magnitude of land closings.

COST OF SALES.  Cost of sales increased $0.8 million, or 3%, in the nine months
-------------                                                                  
ended June 30, 1998 to $26.3 million from $25.5 million in the corresponding
period of the prior year.  The increase in cost of sales was primarily due to
increases in perchlorate sales volume.  As a percentage of sales, cost of sales
decreased in the nine months ended June 30, 1998 to 69% as compared to 

                                      -15-
<PAGE>
 
84% in the corresponding period of the prior year.  The decrease was primarily
attributable to the increase in perchlorate sales volume and a reduction in
depreciation expense as a result of the sodium azide impairment charge referred
to above.  Cost of sales is expected to increase by approximately $4.0 million
annually as a result of the amortization of capitalized Acquisition costs.

OPERATING EXPENSES.  Operating expenses were $6.8 million during the nine-month
------------------                                                             
period ended June 30, 1998 compared to $6.9 million in the corresponding period
of the prior year.

NET INTEREST EXPENSE.  Net interest and other expense increased to $3.0 million
--------------------                                                           
in the nine months ended June 30, 1998 from $0.7 million in the corresponding
period of the prior year as a result of the cessation of interest capitalization
on the Company's Ventana Canyon residential joint venture project and the
issuance of the Notes in March, 1998.  Interest expense will increase
significantly in future periods as a result of the issuance of the Notes.  (See
Note 6 of Notes to Condensed Consolidated Financial Statements.)

EQUITY IN EARNINGS OF REAL ESTATE VENTURE.  The Company's share of equity in its
-----------------------------------------                                       
Ventana Canyon joint venture was $0.3 million and $0.1 million during the nine
months ended June 30, 1998 and 1997.  The increase in the equity in earnings of
Ventana Canyon relates principally to the sale of improved land to an outside
developer in the first quarter of fiscal 1998.

SEGMENT OPERATING INCOME (LOSS).  Operating income (loss) of the Company's
--------------------------------                                          
industry segments during the nine-month periods ended June 30, 1998 and 1997 was
as follows:

<TABLE>
<CAPTION>
                                                               1998                          1997
                                                           ----------                    -----------
<S>                                                        <C>                           <C>
Specialty chemicals                                        $3,882,000                    $(3,433,000)
Environmental protection equipment                             36,000                       (352,000)
Real Estate                                                 1,155,000                      1,630,000
                                                           ----------                    -----------
          Total                                            $5,073,000                    $(2,155,000)
                                                           ==========                    ===========
</TABLE>

The increase in operating income in the Company's specialty chemical industry
segment was attributable to the increase in perchlorate sales in the second and
third quarters of fiscal 1998 referred to above and a decrease in depreciation
expense associated with sodium azide operations as a result of the impairment
charge discussed above.  The increase in environmental protection equipment
segment operating income was primarily due to improved margins.  The decrease in
real estate segment operating income was attributable to a decrease in sales
from $3.7 million during the nine months ended June 30, 1997 to $2.4 million
during the same period in 1998.

INFLATION

Inflation did not have a significant effect on the Company's sales and operating
revenues or costs during the three-month or nine-month periods ended June 30,
1998 or 1997.  Inflation may have an effect on gross profit in the future as
certain of the Company's agreements with AP and sodium azide customers require
fixed prices, although certain of such agreements contain escalation features
that should somewhat insulate the Company from increases in costs associated
with inflation.

LIQUIDITY AND CAPITAL RESOURCES

As discussed in Notes 6 and 7 of Notes to Condensed Consolidated Financial
Statements, in March 1998, the Company sold Notes in the principal amount of
$75.0 million, acquired certain 

                                      -16-
<PAGE>
 
assets from Kerr-McGee for a cash purchase price of $39.0 million and paid $28.2
million to repurchase the remaining $25.0 million principal amount outstanding
of the Azide Notes. Through June 30, 1998, the Company has incurred
approximately $3.1 million in costs associated with the issuance of the Notes.
In connection with the Azide Notes repurchase, the Company recognized an
extraordinary loss on debt extinguishment of approximately $5.0 million.

Cash flows provided by operating activities were $8.5 million and $5.2 million
during the nine-months ended June 30, 1998 and 1997, respectively.  Cash flows
from operating activities increased in the first nine months of fiscal 1998
principally as a result of increased sales and margins in the Company's
perchlorate operations.  The Company believes that its cash flows from
operations and existing cash balances will be adequate for the foreseeable
future to satisfy the needs of its operations.  However, the resolution of
contingencies, and the timing, pricing and magnitude of orders for AP, sodium
azide and Halotron, may have an effect on the use and availability of cash.

Capital expenditures were $2.1 million during the nine months ended June 30,
1998 compared to $1.6 million during the same period last year.  Capital
expenditures are budgeted to amount to approximately $2.5 million in fiscal 1998
and relate principally to specialty chemical segment capital improvement
projects.

During the three-month and nine-month periods ended June 30, 1998, the Company
received cash of approximately $0.4 million and $3.1 million, respectively,
relating to the return of capital invested in the Ventana Canyon joint venture.
The Company currently anticipates that cash returns of invested capital and
equity in earnings will continue through the conclusion of the project currently
projected to be the end of calendar 2001.

As a result of the litigation and contingencies discussed in Note 4 of Notes to
Condensed Consolidated Financial Statements, the Company has incurred legal and
other costs, and it may incur material legal and other costs associated with the
resolution of contingencies in future periods.  Any such costs, to the extent
borne by the Company and not recovered through insurance, would adversely affect
the Company's liquidity.  The Company is currently unable to predict or quantify
the amount or range of such costs, if any, or the period of time over which such
costs will be incurred.

The Company is currently in the process of evaluating its computer software and
databases to determine whether or not modifications will be required to prevent
problems related to the Year 2000.  These problems, which have been widely
reported in the media, could cause malfunctions in certain software and
databases with respect to dates on or after January 1, 2000, unless corrected.
Based upon its evaluation to date, the Company does not believe that the costs
of any modifications required to correct for Year 2000 problems will have a
material impact on operations, although there can be no assurance given with
respect thereto.

FORWARD-LOOKING STATEMENTS/RISK FACTORS

Certain matters discussed in this Report may be forward-looking statements that
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected.  Such risks and uncertainties include, but are
not limited to, the risk factors set forth below.

The following risk factors, among others, may cause the Company's operating
results and/or financial position to be adversely affected from time to time:

       1.      (a)  Declining demand or downward pricing pressure for the
               Company's products as a result of general or specific economic
               conditions, (b)

                                      -17-
<PAGE>
 
               governmental budget decreases affecting the Department of Defense
               or NASA that would cause a continued decrease in demand for AP,
               (c) the results achieved by the Suspension Agreement resulting
               from the Company's anti-dumping petition and the possible
               termination of such agreement and the continued impact of the GM
               labor strike, (d) technological advances and improvements with
               respect to existing or new competitive products causing a
               reduction or elimination of demand for AP, sodium azide or
               Halotron, (e) the ability and desire of purchasers to change
               existing products or substitute other products for the Company's
               products based upon perceived quality and pricing, and (f) the
               fact that perchlorate chemicals, sodium azide, Halotron and the
               Company's environmental products have limited applications and
               highly concentrated customer bases.

       2.      Competitive factors including, but not limited to, the Company's
               limitations respecting financial resources and its ability to
               compete against companies with substantially greater resources,
               significant excess market supply in the AP and sodium azide
               markets and the development or penetration of competing new
               products, particularly in the propulsion, airbag inflation and
               fire suppression businesses.

       3.      Underutilization of the Company's manufacturing facilities
               resulting in production inefficiencies and increased costs, the
               inability to recover facility costs and reductions in margins.

       4.      Risks associated with the Company's real estate activities,
               including, but not limited to, dependence upon the Las Vegas
               commercial, industrial and residential real estate markets,
               changes in general or local economic conditions, interest rate
               fluctuations affecting the availability and the cost of
               financing, the performance of the managing partner of its
               residential real estate joint venture (Ventana Canyon Joint
               Venture) and regulatory and environmental matters that may have a
               negative impact on sales or costs.

       5.      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.

       6.      The cost and effects of legal and administrative proceedings,
               settlements and investigations, particularly those described in
               Note 4 of Notes to Condensed Consolidated Financial Statements
               and claims made by or against the Company relative to patents or
               property rights.

       7.      Integration of new customers and the ability to meet additional
               production and delivery requirements resulting from the
               Acquisition.

       8.      The results of the Company's periodic review of impairment issues
               under the provisions of SFAS No.  121.

       9.      The dependence upon a single facility for the production of most
               of the Company's products.

                                      -18-