<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 DECEMBER 31, 1996

                         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:  8,098,537 as of January 31,
1997.

<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 11 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 12 through 16 of this Report on Form 10-Q.

                          PART II.  OTHER INFORMATION

ITEM 1.  Legal Proceedings
         -----------------

         The information required by Item 103 of Regulation S-K is provided on
         pages 8 through 9 of this Report on Form 10-Q.

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:  February 13, 1997                /s/ C. Keith Rooker
                                        -----------------------
                                        C. Keith Rooker
                                        Executive Vice President
                                        Secretary/General Counsel



Date:  February 13, 1997                /s/ David N. Keys
                                        ---------------------
                                        David N. Keys
                                        Vice President,
                                        Chief Financial Officer and
                                        Treasurer; Principal
                                        Financial and Accounting
                                        Officer

                                       3
<PAGE>
 
                         AMERICAN PACIFIC CORPORATION
                Condensed Consolidated Statements of Operations
                    For the Three Months Ended December 31,

<TABLE>
<CAPTION>
-------------------------------------------------------------------
                                             1996           1995
===================================================================
<S>                                      <C>            <C>
Sales and Operating Revenues             $ 8,396,000     $9,776,000
Cost of Sales                              7,083,000      7,903,000
                                      -----------------------------
 
 Gross Profit                              1,313,000      1,873,000
 
Operating Expenses                         2,363,000      2,350,000
                                      -----------------------------

Operating Loss                            (1,050,000)      (477,000)
 
Net Interest and Other Expense               240,000        415,000
                                      -----------------------------
                                                 
Loss Before Credit for Income Taxes       (1,290,000)      (892,000)
 
Credit for Income Taxes                     (440,000)      (304,000)
                                      -----------------------------

Net Loss                                 $  (850,000)    $ (588,000)
                                      -----------------------------
 
Net Loss Per Common Share                $      (.10)    $     (.07)
                                      -----------------------------
 
Weighted Average Outstanding               8,099,000      8,104,000
                                      -----------------------------
</TABLE>

See the accompanying Notes to Condensed Consolidated Financial Statements.

                                       4
<PAGE>
 
                          AMERICAN PACIFIC CORPORATION
                     Condensed Consolidated Balance Sheets

<TABLE>
<CAPTION>
=====================================================================
                                        DECEMBER 31,    SEPTEMBER 30,
                                            1996            1996
=====================================================================
<S>                                     <C>             <C>
ASSETS
 
Current Assets:
 Cash and Cash Equivalents               $ 16,377,000    $ 18,501,000
 Short-term Investments                     2,000,000       2,000,000
 Accounts and Notes Receivable              4,896,000       4,165,000
 Related Party Notes Receivable               703,000         737,000
 Inventories                               12,965,000      11,297,000
 Prepaid Expenses and Other Assets          1,265,000         946,000
                                     --------------------------------
  Total Current Assets                     38,206,000      37,646,000
 
Property, Plant and Equipment, Net         76,429,000      77,217,000
Development Property                        8,741,000       8,631,000
Real Estate Equity Investments             18,860,000      18,698,000
Other Assets                                2,771,000       2,858,000
Restricted Cash                             5,305,000       4,969,000
                                     --------------------------------
  TOTAL ASSETS                           $150,312,000    $150,019,000
                                     --------------------------------
 
</TABLE>

See the accompanying Notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>
 
                         AMERICAN PACIFIC CORPORATION
                     Condensed Consolidated Balance Sheets

<TABLE>
<CAPTION>
=========================================================================
                                            DECEMBER 31,    SEPTEMBER 30,
                                                1996             1996
=========================================================================
<S>                                        <C>              <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current Liabilities:
 Accounts Payable and Accrued
  Liabilities                               $  6,959,000     $  5,407,000
 Current Portion of Long-Term Debt             7,334,000        7,334,000
                                        ---------------------------------
  Total Current Liabilities                   14,293,000       12,741,000
 
 Long-Term Debt                               29,569,000       29,452,000
 Deferred Income Taxes                         9,661,000       10,101,000
                                        ---------------------------------
  TOTAL LIABILITIES                           53,523,000       52,294,000
                                        ---------------------------------
 
Commitments and Contingencies
 
Warrants to Purchase Common Stock              3,569,000        3,569,000
 
Shareholders' Equity:
Common Stock                                     829,000          823,000
Capital in Excess of Par Value                78,399,000       78,331,000
Retained Earnings                             15,128,000       15,978,000
Treasury Stock                                (1,039,000)        (879,000)
Receivable from the Sale of Stock                (97,000)         (97,000)
                                        ---------------------------------
  Total Shareholders' Equity                  93,220,000       94,156,000
                                        ---------------------------------
 
  TOTAL LIABILITIES AND SHAREHOLDERS'       
   EQUITY
                                        ---------------------------------
                                            $150,312,000     $150,019,000
                                        ---------------------------------
 
</TABLE>

See the accompanying Notes to Condensed Consolidated Financial Statements.

                                       6
<PAGE>
 
                         AMERICAN PACIFIC CORPORATION
                Condensed Consolidated Statements of Cash Flows
                    For the Three Months Ended December 31,
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
                                               1996            1995
=======================================================================
<S>                                        <C>             <C>
Cash Used For Operating Activities          $  (854,000)    $(5,058,000)
                                        -------------------------------
 
Cash Flows Used for Investing
 Activities:
 Capital Expenditures, Development
  Property Additions and Real Estate         
  Equity Investments                         (1,184,000)     (1,394,000) 
                                        -------------------------------
Net Cash Used For Investing Activities       (1,184,000)     (1,394,000)
                                        -------------------------------
 
Cash Flows From Financing Activities:
 Treasury Stock Acquired                       (156,000)        (29,000)
 Issuance of Common Stock                        70,000          39,000
                                        -------------------------------
Net Cash Provided By (Used For)                 
 Financing Activities                           (86,000)         10,000
                                        -------------------------------
 
Net Decrease in Cash and Cash                
 Equivalents                                 (2,124,000)     (6,442,000)
Cash and Cash Equivalents, Beginning of
 Period                                      18,501,000      24,540,000
                                        -------------------------------
Cash and Cash Equivalents, End of Period    $16,377,000     $18,098,000
                                        -------------------------------
</TABLE>

See the accompanying Notes to Condensed Consolidated Financial Statements.

                                       7
<PAGE>
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:

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, 1996 was
    derived from the Consolidated Financial Statements included in the Company's
    Annual Report on Form 10-K for the year ended September 30, 1996. The
    Condensed Consolidated Financial Statements for the three-month periods
    ended December 31, 1996 and 1995 are unaudited. 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, 1996. In the opinion of Management, however,
    all adjustments (consisting only of normal recurring accruals) necessary for
    a fair presentation have been included.

2.  NET LOSS PER COMMON SHARE

    Net loss per common share for the three-month periods ended December 31,
    1996 and 1995 is determined based upon the weighted average number of common
    shares outstanding.  Common share equivalents, although not considered
    during net loss periods, consist of outstanding stock options and warrants.

3.  INVENTORIES

    Inventories consist of the following:
<TABLE>
<CAPTION>
                                    December 31,   September 30,
                                        1996           1996
                                    ------------   -------------
    <S>                             <C>            <C>
 
    Work-in-process                  $ 7,760,000     $ 5,011,000
    Raw materials and supplies         5,205,000       6,286,000
                                     -----------     -----------
    Total                            $12,965,000     $11,297,000
                                     -----------     -----------
</TABLE>

4.  COMMITMENTS AND CONTINGENCIES

    In fiscal 1993, three shareholder lawsuits, purporting to be class actions,
    were filed in the United States District Court for the District of Nevada
    against the Company and certain of its directors and officers.  The
    complaints, which were consolidated, alleged that the Company's public
    statements violated Federal securities laws by inadequately disclosing
    information concerning its agreements with Thiokol Corporation ("Thiokol")
    and the Company's operations.  On November 27, 1995, the U.S. District Court
    granted in part the Company's motion for summary judgment, ruling that the
    Company had not violated the federal securities laws in relation to
    disclosures concerning the Company's agreements with Thiokol.  The remaining
    claims, which related to allegedly misleading or inadequate disclosures
    regarding Halotron, were the subject of a jury trial that ended on January
    17, 1996.  The jury reached a unanimous verdict that neither the Company nor
    its directors and officers made misleading or inadequate statements
    regarding Halotron.  The plaintiffs have appealed the summary judgment
    ruling and portions of the trial proceedings to the Ninth Circuit of the
    United States District Court of Appeals.  Oral arguments with respect to the
    appeal were conducted on February 11, 1997.

                                       8
<PAGE>
 
    As a result of the above-described shareholder lawsuits, the Company has
    incurred legal and other costs and may incur material legal and other costs
    associated with the ultimate resolution of the shareholder lawsuits in
    future periods.  Certain of these costs may be reimbursable under policies
    providing for insurance coverage.  The Company has adopted certain policies
    in its Charter and Bylaws as a result of which the Company may have the
    obligation to indemnify its affected officers and directors to the extent,
    if at all, the existing insurance coverages are insufficient.  The Company's
    insurance carriers have reserved the right to exclude or disclaim coverage
    under certain circumstances.  The Company is currently unable to predict or
    quantify the amount or the range of such costs, if any, or the period of
    time during which such costs will be incurred.

    During the third quarter of fiscal 1996, the Company settled certain matters
    with its insurance carrier relating to legal fees and other costs associated
    with the successful defense of the shareholder lawsuits.  Under this
    settlement, the Company was reimbursed for approximately $450,000 in costs
    that had previously been expensed and incurred in connection with the
    defense.  Such amount was recognized as a reduction in operating expenses in
    the third quarter of fiscal 1996.  The insurance carrier has agreed to pay
    attorneys fees and other defense costs related to the plaintiffs' appeal
    referred to above.

    The Company was served with a complaint on December 10, 1993 in a lawsuit
    brought by limited partners in a partnership of which one of the Company's
    former subsidiaries, divested in 1985, was a general partner.  The
    plaintiffs allege that the Company is liable to them in the amount of
    approximately $5.9 million, plus interest, on a guarantee executed in 1982.
    In August 1996, the Company's cross-motion for summary judgment was granted,
    although the plaintiffs filed an appeal in January 1997.  The Company
    believes that the claim against it is wholly without merit.

    The Company and its subsidiaries are also involved in other lawsuits.  The
    Company believes that these other lawsuits, individually or in the
    aggregate, will not have a material adverse effect on the Company or any of
    its subsidiaries.

5.  SODIUM AZIDE

    In July 1990, the Company entered into agreements (the "Azide Agreements")
    pursuant to which Dynamit Nobel has licensed to the Company on an exclusive
    basis for the North American market its most advanced technology and know-
    how for the production of sodium azide, the principal component of the gas
    generant used in automotive airbag safety systems.  In addition, Dynamit
    Nobel has provided technical support for the design, construction and start-
    up of the facility. The facility was constructed and is being operated by
    American Azide Corporation ("AAC"), a wholly-owned subsidiary of the
    Company.

    Under the Azide Agreements, Dynamit Nobel was to receive, for the use of its
    technology and know-how relating to its batch production process of
    manufacturing sodium azide, quarterly royalty payments of 5% of the
    quarterly net sales of sodium azide by AAC for a period of 15 years from the
    date the Company began to produce sodium azide in commercial quantities.  In
    July 1996, the Company and Dynamit Nobel agreed to suspend the royalty
    payment effective as of July 1, 1995.  As a result, in the third quarter of
    fiscal 1996, the Company recognized an increase in sodium azide sales 

                                       9
<PAGE>
 
    of approximately $600,000. This amount had previously been recognized as a
    reduction of net sodium azide sales during the period July 1, 1995 through
    June 30, 1996.

    Commercial shipments of sodium azide began in April 1994 and are continuing,
    although sales and related variable operating margins have not reached a
    level sufficient to absorb fixed costs.  The Company's plans with respect to
    its sodium azide project continue to be grounded in the Company's objective
    to become the major supplier to the U.S. airbag inflator market.  There can
    be no assurance in that regard, however, and as a consequence, the Company
    cannot predict over what period of time, if at all, its sodium azide plant
    will operate at levels consistent with such expectations.

    The Company previously believed that the demand for sodium azide in North
    America and the world would substantially exceed existing manufacturing
    capacity and announced expansions or new facilities (including the AAC
    plant) by the 1994 model year (which for sodium azide sales purposes is the
    period June 1993 through May 1994).  Currently, demand for sodium azide is
    substantially less than supply on a worldwide basis.  The Company believes
    this is the result of capacity expansions by existing producers, although
    the Company's information with respect to competitiors' existing and planned
    capacity is limited.  There can be no assurance that other manufacturing
    capacities not now known to the Company will not be established.  By reason
    of this highly competitive market environment, and other factors discussed
    below, there exists considerable pressure on the price of sodium azide.

    The Company believes that the price erosion of sodium azide over the past
    few years is due to unlawful pricing procedures of Japanese sodium azide
    producers.  In response to such practices, in January 1996, the Company
    filed an antidumping petition with the International Trade Commission
    ("ITC") and the Department of Commerce ("Commerce").  In August 1996,
    Commerce issued a preliminary determination that Japanese imports of sodium
    azide have been sold in the United States at prices that are significantly
    below fair value.  Commerce's preliminary dumping determination applied to
    all Japanese imports of sodium azide, regardless of end-use.  Commerce's
    preliminary determination followed a March 1996 preliminary determination by
    ITC that dumped Japanese imports have caused material injury to the U.S.
    sodium azide industry.

    On January 7, 1997 the anti-dumping investigation initiated by Commerce,
    based upon the Company's petition, against the three Japanese producers of
    sodium azide was suspended by agreement.

    It is the Company's understanding that, owing to the terms of the Suspension
    Agreement, two of the three Japanese sodium azide producers have ceased
    their exports of sodium azide to the United States for the time being.  As
    to the third and largest Japanese sodium azide producer, which has not
    admitted any prior unlawful conduct, the Suspension Agreement requires that
    it make all necessary price revisions to eliminate all United States sales
    at below "Normal Value," and that it conform to the requirements of sections
    732 and 733 of the Tariff Act of 1930, as amended (the Act), in connection
    with its future sales of sodium azide in the United States.

                                       10
<PAGE>
 
    The Suspension Agreement contemplates a cost-based determination of "Normal
    Value" and establishes reporting and verification procedures to assure
    compliance.  Accordingly, the minimum pricing for sodium azide sold in the
    United States by the remaining Japanese producer will be based primarily on
    its actual costs, and may be affected by changes in the relevant exchange
    rates.

    Finally, the Suspension Agreement provides that it may be terminated by any
    party on 60 days notice, in which event the anti-dumping proceeding would be
    re-instituted at the stage to which it had advanced at the time the
    Suspension Agreement became effective.

                                       11
<PAGE>
 
Management's Discussion and Analysis of Financial Condition and Results of
Operations

Results of Operations

Sales and Operating Revenues and Gross Profit

Sales and operating revenues were $8,396,000 and $9,776,000 during the three-
month periods ended December 31, 1996 and 1995.  Gross profit as a percentage of
sales and operating revenues was 16 percent in the first three months of fiscal
1997 and 19 percent during the same period in fiscal 1996.  A discussion of
sales and operating revenues and gross profit percentages relating to the
Company's principal operating activities is provided below.

Perchlorate Chemical Operations

Sales of all perchlorate chemicals amounted to approximately $4,149,000 and
$5,145,000 during the three-month periods ended December 31, 1996 and 1995.  In
September 1996, Western Electrochemical Company ("WECCO") an indirect wholly-
owned subsidiary of the Company, executed a purchase order for deliveries of AP
to Thiokol Corporation ("Thiokol") during the fiscal year ending September 30,
1997.  The purchase order amounts to approximately $13.3 million.  In October
1995, the Company received a purchase order for the delivery of AP to another
customer from October 1996 through 1999 having a value in the range of $8
million to $10 million.  This contract includes options that could increase the
order during the 1997-1999 period, and that could extend the contract to the
year 2000.  Based upon this backlog and negotiations currently in process, the
Company estimates that total perchlorate revenues, including sodium perchlorate
and potassium perchlorate, will range between $19 and $24 million during the
fiscal year ended September 30, 1997.

Operating results during the first quarter of fiscal 1997 were adversely
affected by a brief delay in a shipment of AP to a major customer.  The product
for this shipment was manufactured during the first quarter, and was ready to be
shipped on schedule in late December.  By reason of directions received from the
customer, the shipment was delayed to early January.  The shipment has now been
completed.  This delayed shipment represented approximately $2.4 million in
revenues which will be recognized in the second quarter.

Sodium Azide Operations

Net sodium azide sales were $3,143,000 and $3,345,000 during the three-month
periods ended December 31, 1996 and 1995, respectively.  Commercial shipments of
sodium azide began in April 1994 although sales and related variable operating
margins have not reached a level sufficient to absorb fixed costs.  The
operation has however, recently been generating positive cash flow and earnings
before interest, taxes, depreciation and amortization ("EBITDA").  The Company's
plans with respect to its sodium azide project continue to be grounded in the
Company's objective of becoming the primary supplier to the U.S. automotive
airbag inflator market.  There can be no assurance in that regard however, and,
as a consequence, the Company cannot predict over what period of time, if at all
its sodium azide plant will operate at levels consistent with such expectations.
See Note 5 of Notes to Condensed Consolidated Financial Statements for a
discussion of the sodium azide market and the status of an antidumping petition
the Company filed against certain Japanese producers of sodium azide.

                                       12
<PAGE>
 
Real Estate Operations

The Company's real estate development properties consist of approximately 4,700
acres in Iron County, Utah near Cedar City, Utah and a 380-acre tract (Gibson
Business Park) in Clark County, Nevada.  All development property is held in fee
simple.  Substantially all of the Gibson Business Park land is pledged as
collateral for certain debt (the "Azide Notes").  The Company is actively
marketing its Nevada property for sale and development.  About 240 acres of its
Clark County land has been transferred to Gibson Ranch Limited Liability Company
("GRLLC") for the purpose of residential development, construction, and sale.
The Iron County site is primarily dedicated to the Company's growth and
diversification.  Real estate and related sales amounted to $61,000 and $992,000
during the three-month periods ended December 31, 1996 and 1995, 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.

Environmental Protection Equipment Operations

Environmental protection equipment sales were approximately $550,000 and
$132,000 during the three-month periods ended December 31, 1996 and 1995,
respectively.  As of January 31, 1997, this segment had a backlog of
approximately $1,300,000.  In addition, the Company has submitted a number of
bids, although there can be no assurance that any of these bids will result in
future orders.

Halotron Operations

Sales of Halotron amounted to approximately $436,000 in the first quarter of
fiscal 1997 compared to $93,000 in the same period last year.  In December 1995,
the Company, in concert with Buckeye Fire Equipment Company, successfully
completed Underwriters Laboratories (UL) fire tests of a line of portable fire
extinguishers using Halotron I.  Domestic distribution of the Buckeye Halotron
extinguisher line began in February, 1996.  Although sales to date have been
substantially less than expected, the Company remains optimistic about the
prospects for Halotron sales.

Operating Expenses

Operating expenses were $2,363,000 and $2,350,000 during the three-month periods
ended December 31, 1996 and 1995, respectively.  As discussed in Note 4 of Notes
to Condensed Consolidated Financial Statements, during the third quarter of
fiscal 1996, the Company settled certain matters with its insurance carrier
relating to legal fees and other costs associated with the successful defense of
the shareholder lawsuits.  Under this settlement, the Company was reimbursed for
approximately $450,000 in costs that had previously been expensed and incurred
in connection with the defense.  Such amount was recognized as a reduction in
operating expenses in the third quarter of fiscal 1996.  The insurance carrier
has agreed to pay attorneys fees and other defense costs related to the
plaintiffs' appeal of the case referred to above.

Net Interest and Other Expense

The decrease in net interest and other expense in the first three months of
fiscal 1997 compared to the first three months of fiscal 1996 is primarily due
to the reduction in debt balances.

                                       13
<PAGE>
 
Credit for Income Taxes

The Company's effective income tax rates were approximately 34% during the
three-month periods ended December 31, 1996 and 1995.

Operating Results

Although the Company's net income (loss) and 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
legal and other costs associated with certain litigation; (ii) the 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 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 and Halotron sales in the future is uncertain.

The Company's efforts to produce, market and sell Halotron I and Halotron II
are, among other factors, dependent upon the political climate and environmental
regulations that exist and may vary from country to country.  Although the
Company is satisfied with the progress and performance characteristics of
Halotron I and Halotron II, the magnitude of orders received, if any, in the
future will be dependent to a large degree upon political issues and
environmental regulations that are not within the Company's control, as well as
additional testing and qualification in certain jurisdictions and the ultimate
extent of market acceptance.

As a result of the uncertainties with respect to volume and price of sodium
azide and the outcome of the antidumping petition referred to above, the Company
may experience significant variations in sodium azide sales and related
operating results from quarter to quarter.

In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," management reviews on a quarterly basis
whether the anticipated net cash flows from Halotron and sodium azide operations
will be sufficient to recover the Company's investment in each of such
facilities/projects.  At December 31, 1996, the Company had approximately $68
million and $5.7 million in recorded net long-lived assets associated with
sodium azide and Halotron, respectively.  A number of factors are considered in
the evaluation of  recoverability, including, but not limited to, anticipated
pricing and volume and the duration thereof, and expected costs associated with
production.  Management believes that such net asset balances are recoverable
under the requirements of SFAS No. 121, although, in light of the uncertainties
discussed above, there can be no assurance that the results of the evaluation of
recoverability will remain the same in the future.

Litigation

See Note 4 of Notes to Condensed Consolidated Financial Statements for a
discussion of litigation.

                                       14
<PAGE>
 
Inflation

Inflation did not have a significant effect on the Company's sales and operating
revenues or costs during the three-month periods ended December 31, 1996 or
1995.  The Company does not expect inflation to have a material effect on gross
profit in the future, because any increases in production costs should be
recovered through increases in product prices, although there can be no
assurance in that regard.

Liquidity and Capital Resources

On July 29, 1994, the Board of Directors of the Company authorized the
repurchase of up to 1.5 million shares of the Company's common stock through
open market purchases and private transactions.  Such authorization was briefly
suspended.  As of January 31, 1997, the Company had repurchased approximately
140,000 shares through this program.

As a result of the litigation described in Note 4 of Notes to Condensed
Consolidated Financial Statements, the Company has incurred legal and other
costs and may incur material legal and other costs associated with the
resolution of these matters in future periods.  Certain of the costs, if any,
may be reimbursable under policies providing for insurance coverage.  The
Company has adopted certain policies in its Charter and Bylaws as a result of
which the Company may be required to indemnify its affected officers and
directors to the extent, if at all, that existing insurance coverages relating
to the shareholder lawsuits are insufficient.  The Company has in force
substantial insurance covering this risk.    The Company's insurance carriers
have reserved the right to exclude or disclaim coverage under certain
circumstances.  Defense costs and any potential settlement or judgment costs
associated with litigation, 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 that litigation related costs will be incurred.

Cash flows used in operating activities were $854,000 and $5,058,000 during the
three-month periods ended December 31, 1996 and 1995, respectively.  The
increase in cash flows from operating activities is principally due to changes
in working capital balances.

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 satisfactory resolution of litigation, 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.

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

1.  Declining demand or downward pricing pressure for the Company's products as
    a result of general or specific economic conditions, further governmental
    budget decreases affecting the Department of Defense or NASA which would
    cause a continued decrease in demand for AP, the results achieved by the
    Suspension Agreement resulting from the Company's anti-dumping petition and
    the possible termination of such agreement, technological advances and
    improvements or new competitive products causing a reduction or elimination
    of demand of AP, sodium azide or Halotron, the ability and desire of
    purchasers to change existing 

                                       15
<PAGE>
 
    products or substitute other products for the Company's products based upon
    perceived quality and pricing, and 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.  Difficulties in procuring raw materials, supplies, power and natural gas
    used in the production of perchlorates, sodium azide and Halotron products
    and used in the engineering and assembly process for environmental
    protection equipment products.

5.  The Company's ability to control the amount of operating expenses and/or the
    impact of any non-recurring or unusual items resulting from the Company's
    continuing evaluation of its strategies, plans, organizational structure and
    asset valuations.

6.  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 the GRLLC
    (Ventana Canyon Joint Venture) and regulatory and environmental matters that
    may have a negative impact on sales.

7.  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.

8.  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 contained in this report and
    Note 10 in the Report on Form 10-K, and claims made by or against the
    Company relative to patents or property rights.

9.  The adoption of new, or changes in existing, accounting policies and
    practices.

                                       16