<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 March 31, 2000

                         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:  7,080,955 as of April 30,
2000.

                                      -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 10 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 11 through 15 of this Report on Form 10-Q.

ITEM 3.   Quantitative and Qualitative Disclosure About Market Risk
          ---------------------------------------------------------

          The Company has certain fixed-rate debt which it believes to have a
          fair value that approximates reported amounts. The Company believes
          that any market risk arising from these financial instruments is not
          material.


                          PART II.  OTHER INFORMATION

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

          The information required by Item 103 of Regulation S-K is provided on
          pages 8 and 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
          ---------------------------------------------------

          The information required hereunder is incorporated by reference to the
          Registrant's Current Report on Form 8-K dated March 14, 2000.

ITEM 5.   Other Information
          -----------------

          None.

ITEM 6.   Exhibits and Reports on Form 8-K
          --------------------------------

          a)   27.  Financial Data Schedules. This Exhibit is filed in
                    connection with the Registrant's electronic filing.

          b)   A Current Report on Form 8-K, dated March 14, 2000, was filed
               during the Registrant's second quarter of fiscal 2000. The Form
               8-K reported the voting results of matters submitted to a vote of
               Security Holders at the Registrant's Annual Meeting of
               Stockholders held March 14, 2000, and a change to an ammonium
               perchlorate purchase order from a major customer.

                                      -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:  May 11, 2000               /S/ JOHN R. GIBSON
                                  -----------------------------
                                  John R. Gibson
                                  Chief Executive Officer and President


Date:  May 11, 2000               /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 Income Statements
                                  (unaudited)

<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
                                                   For the three months ended            For the six months
                                                            March 31,                      ended March 31,
                                                  2000                   1999           2000            1999
----------------------------------------------------------------------------------------------------------------
<S>                                           <C>                <C>             <C>             <C>
Sales and Operating Revenues                   $16,319,000        $ 16,891,000     $  37,295,000    $ 35,745,000
Cost of Sales                                   11,294,000          10,970,000        23,697,000      22,558,000
                                             -------------------------------------------------------------------
  Gross Profit                                   5,025,000           5,921,000        13,598,000      13,187,000

Operating Expenses                               2,815,000           2,465,000         5,240,000       4,957,000
                                             -------------------------------------------------------------------
Operating Income                                 2,210,000           3,456,000         8,358,000       8,230,000

Net Interest and Other Expense                     984,000           1,392,000         2,108,000       2,865,000
                                             -------------------------------------------------------------------

Income Before Provision for Income
  Taxes                                          1,226,000           2,064,000         6,250,000       5,365,000

Provision for Income Taxes
                                             -------------------------------------------------------------------
Net Income Before Extraordinary Loss             1,226,000           2,064,000         6,250,000       5,365,000

Extraordinary Loss-Debt Extinguishment             614,000                               614,000
                                            ---------------------------------------------------------------------
Net Income                                     $   612,000         $ 2,064,000     $   5,636,000    $  5,365,000
                                            ---------------------------------------------------------------------
Basic Net Income (Loss) Per Share:

 Income Before Extraordinary Loss              $       .16         $       .25      $       .83     $       .66

 Extraordinary Loss                            $      (.08)                         $      (.08)
                                           ---------------------------------------------------------------------
 Net Income                                    $       .08         $       .25      $       .75     $       .66
                                           ---------------------------------------------------------------------
Average Shares Outstanding                       7,315,000           8,144,000        7,559,000       8,167,000
                                           ---------------------------------------------------------------------
Diluted Net Income (Loss) Per Share:

 Income Before Extraordinary Loss              $       .16         $       .25      $       .81     $       .65

 Extraordinary Loss                            $      (.08)                         $      (.08)
                                           ---------------------------------------------------------------------

 Net Income                                    $       .08         $       .25      $       .73     $       .65
                                           ---------------------------------------------------------------------
Diluted Shares                                   7,473,000           8,291,000        7,673,000       8,267,000
                                           ---------------------------------------------------------------------
</TABLE>

See the accompanying Notes to Condensed Consolidated Financial Statements.

                                      -4-
<PAGE>

                          AMERICAN PACIFIC CORPORATION
                     Condensed Consolidated Balance Sheets
                                  (unaudited)

<TABLE>
<CAPTION>
________________________________________________________________________________________________________________
                                                                             March 31,             September 30,
                                                                               2000                    1999
----------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                     <C>
ASSETS
Current Assets:

 Cash and Cash Equivalents                                                $ 35,932,000            $ 40,434,000

 Accounts and Notes Receivable                                              11,094,000               8,859,000

 Related Party Notes Receivable                                                423,000                 447,000

 Inventories                                                                10,459,000               9,577,000

 Prepaid Expenses and Other Assets                                             774,000                 680,000

 Restricted Cash                                                                                     1,195,000
                                                              ------------------------------------------------
  Total Current Assets                                                      58,682,000              61,192,000

Property, Plant and Equipment, Net                                          16,415,000              17,254,000

Intangible Assets, Net                                                      32,007,000              34,210,000

Real Estate Equity Investments                                               8,543,000              11,237,000

Development Property                                                         6,197,000               6,440,000

Other Assets, Net                                                            2,001,000               2,549,000
                                                              ------------------------------------------------
  TOTAL ASSETS                                                            $123,845,000            $132,882,000
                                                              ------------------------------------------------

</TABLE>

See the accompanying Notes to Condensed Consolidated Financial Statements.

                                      -5-
<PAGE>

                          AMERICAN PACIFIC CORPORATION
                     Condensed Consolidated Balance Sheets
                                  (unaudited)

<TABLE>
<CAPTION>
________________________________________________________________________________________________________________
                                                                             March 31,             September 30,
                                                                                2000                   1999
----------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                      <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:

 Accounts Payable and Accrued Liabilities                                 $  8,952,000             $  6,909,000

 Current Portion of Long-Term Debt                                                                    1,195,000
                                                                          -------------------------------------
  Total Current Liabilities                                                  8,952,000                8,104,000

 Long-Term Debt                                                             58,175,000               67,000,000

 Long-Term Payables                                                          1,635,000                2,005,000
                                                                          -------------------------------------
  TOTAL LIABILITIES                                                         68,762,000               77,109,000
                                                                          -------------------------------------
Commitments and Contingencies

Warrants to Purchase Common Stock                                            3,569,000                3,569,000

Shareholders' Equity:

Common Stock                                                                   852,000                  847,000

Capital in Excess of Par Value                                              80,094,000               79,757,000

Accumulated Deficit                                                        (17,643,000)             (23,279,000)

Treasury Stock                                                             (11,722,000)              (5,034,000)

Receivable from the Sale of Stock                                              (67,000)                 (87,000)
                                                                          -------------------------------------
  Total Shareholders' Equity                                                51,514,000               52,204,000
                                                                          -------------------------------------
  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                              $123,845,000             $132,882,000
                                                                          -------------------------------------
</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 six months
                                                             ended March 31,                 ended March 31,
                                                          2000            1999            2000            1999
----------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>             <C>             <C>

Cash Flows From Operating Activities                $  2,578,000     $  (591,000)   $ 10,627,000     $10,670,000
                                                 ---------------------------------------------------------------

Cash Flows From Investing Activities:
 Capital Expenditures                                   (989,000)       (387,000)     (1,155,000)     (2,092,000)
 Real Estate Equity Investment
 Capital Activity                                      1,077,000         916,000       2,694,000       1,380,000
                                                 ---------------------------------------------------------------

Net Cash Flows From Investing Activities                  88,000         529,000       1,539,000        (712,000)
                                                 ---------------------------------------------------------------

Cash Flows From Financing Activities:
 Debt Related Payments                                (9,127,000)                    (10,322,000)
 Issuance of Common Stock                                 21,000          45,000         342,000          45,000
 Treasury Stock Acquired                              (5,946,000)       (425,000)     (6,688,000)       (725,000)
                                                 ---------------------------------------------------------------

Net Cash Flows From Financing Activities             (15,052,000)       (380,000)    (16,668,000)       (680,000)
                                                 ---------------------------------------------------------------

Net Change in Cash and Cash Equivalents              (12,386,000)       (442,000)     (4,502,000)      9,278,000
Cash and Cash Equivalents,
 Beginning of Period                                  48,318,000      30,109,000      40,434,000      20,389,000
                                                 ---------------------------------------------------------------

Cash and Cash Equivalents,
 End of Period                                      $ 35,932,000     $29,667,000    $ 35,932,000     $29,667,000
                                                 ---------------------------------------------------------------

Supplemental Disclosure of Cash Flow Information:
Interest Paid                                       $  3,050,000     $ 3,238,000    $  3,050,000     $ 3,238,000
                                                 ---------------------------------------------------------------

</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, 1999 was
     derived from the Consolidated Financial Statements included in the
     Company's Annual Report on Form 10-K for the year ended September 30, 1999.
     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, 1999.
     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
     six-month periods ended March 31, 2000 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 estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     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 these and other estimates.

2.   NET INCOME PER COMMON SHARE

     Basic per share amounts are computed by dividing net income by average
     shares outstanding during the period.  Diluted per share amounts are
     computed by dividing net income by average shares outstanding plus the
     dilutive effect of common share equivalents.  The effect of stock options
     and warrants outstanding to purchase approximately 2.9 million shares of
     common stock were not included in diluted per share calculations during the
     three-month and six-month periods ended March 31, 2000 and 1999, since the
     average exercise price of such options and warrants was greater than the
     average price of the Company's common stock during these periods.

3.   INVENTORIES

     Inventories consist of the following:

<TABLE>
<CAPTION>
                                        March 31,      September 30,
                                          2000             1999
                                      -----------      -------------
<S>                                  <C>            <C>
     Work-in-process                  $ 6,485,000       $5,938,000
     Raw materials and supplies         3,974,000        3,639,000
                                      -----------       ----------
     Total                            $10,459,000       $9,577,000
                                      -----------       ----------
</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

                                      -8-
<PAGE>

     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. Accordingly, no accrual for
     potential costs has been made in the accompanying Condensed Consolidated
     Financial Statements.

     In 1999, two lawsuits were filed in Utah state court against the Company
     and certain unrelated equipment and product manufacturers claiming
     unspecified monetary damages as a result of a fire and explosion on July
     30, 1997, at the Company's AP production facility that resulted in the
     death of one employee and the injury of three employees.  The Company
     believes that it has statutory immunity as an employer under the applicable
     worker's compensation laws of the State of Utah and that there was no
     negligence on the part of the Company that contributed to the incident.
     The lawsuits are currently in a discovery phase.

     The Company is a party to an agreement with Utah Power and Light Company
     ("UPL") for its electrical requirements.  The agreement provides for the
     supply of power for a minimum of a ten-year period, which began in 1988,
     and obligates the Company to purchase minimum amounts of power, while
     assuring the Company competitive pricing for its electricity needs for the
     duration of the agreement.  Under the terms of the agreement, the Company's
     minimum monthly charge for firm and interruptible demand is approximately
     $22,000.  The agreement has a three year notice of termination provision
     and, on April 7, 1999, UPL provided written notice of termination effective
     April 7, 2002.  The Company is in the process of negotiating for its
     expected power requirements beyond April 7, 2002.

5.   INCOME TAXES

     The Company established a valuation allowance for deferred tax assets at
     September 30, 1997.  The Company's effective tax rate will be approximately
     0% until its net operating losses expire or the Company believes the
     valuation allowance is no longer required.

6.   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 earnings in GRLLC (after
     amortization of differences in basis) on a current quarterly basis.
     Summarized financial information for GRLLC as of and for the three-month
     and six-month periods ended March 31, 2000 was as follows:

<TABLE>
<CAPTION>
                                                       --------------------------------------------------------------------
                                                           Three-Month Period Ended             Six-Month Period Ended
                                                                March 31, 2000                      March 31, 2000
                                                       --------------------------------------------------------------------
<S>                                                         <C>                                <C>
         Income Statement:
                Revenues                                          $8,108,000                          $20,946,000
                Gross Profit                                         900,000                            2,433,000
                Operating Expenses                                   313,000                              730,000
                Net Income                                           581,000                            1,706,000
</TABLE>

7.   SEGMENT INFORMATION

     The Company's three reportable operating segments are specialty chemicals,
     environmental protection equipment and real estate sales and development.
     These segments are based upon business units that offer distinct products
     and services, are operationally managed separately and produce products
     using different production methods.

                                      -9-
<PAGE>

     The Company evaluates the performance of each operating segment and
     allocates resources based upon operating income or loss before an
     allocation of interest expense and income taxes. The accounting policies of
     each reportable operating segment are the same as those of the Company.

     The Company's specialty chemicals segment manufactures and sells
     perchlorate chemicals used principally in solid rocket propellants for the
     space shuttle and defense programs, sodium azide used principally in the
     inflation of certain automotive airbag systems and Halotron (TM) I, a clean
     gas fire extinguishing agent designed to replace Halon 1211. The specialty
     chemicals segment production facilities are located in Iron County, Utah.

     The Company's environmental protection equipment operating segment designs,
     manufactures and markets systems for the control of noxious odors, the
     disinfection of waste water streams and the treatment of seawater. These
     operations are also located in Iron County, Utah.

     At March 31, 2000, the Company's real estate operating segment had
     approximately 70 remaining acres of improved land in the Gibson Business
     Park near Las Vegas, Nevada, that is held for development and sale. Recent
     activity has consisted of sales of land parcels. Although not included in
     operating activities, this segment also has an equity investment in a
     residential joint venture that is located across the street from the Gibson
     Business Park. (See Note 6).

     Additional information about the Company's operations, by segment, for
     the three months and six months ended March 31, is provided below.

<TABLE>
<CAPTION>
                                               --------------------------------------------------------------
                                                       Three Months Ended               Six Months Ended
                                                            March 31,                       March 31,
                                                       2000           1999              2000          1999
                                               --------------------------------------------------------------
<S>                                               <C>             <C>             <C>            <C>
Revenues:
 Specialty chemicals                               $13,661,000     $16,675,000     $33,015,000    $33,161,000
 Environmental protection                            2,655,000         149,000       3,127,000        856,000
 Real estate                                             3,000          67,000       1,153,000      1,728,000
                                               --------------------------------------------------------------
 Total revenues                                    $16,319,000     $16,891,000     $37,295,000    $35,745,000
                                               --------------------------------------------------------------

Operating income (loss):
 Specialty chemicals                               $ 1,640,000     $ 4,198,000     $ 7,316,000    $ 7,911,000
 Environmental protection                              730,000        (360,000)        692,000       (367,000)
 Real estate                                          (150,000)        (94,000)        578,000      1,217,000
                                               --------------------------------------------------------------
 Total segment operating income                      2,220,000       3,744,000       8,586,000      8,761,000
Unallocated net expenses
(principally net interest)                             994,000       1,680,000       2,336,000      3,396,000
                                               --------------------------------------------------------------
Income before income taxes
                                                   $ 1,226,000     $ 2,064,000     $ 6,250,000    $ 5,365,000
                                               ==============================================================
</TABLE>

8.   DEBT REPURCHASE

     In June 1999 and September 1998, the Company repurchased and retired $3.0
     million and $5.0 million, respectively, in principal amount of its senior
     unsecured notes (the "Notes"). The Company incurred extraordinary losses on
     debt extinguishment of approximately $0.2 million on each of these
     transactions principally as a result of writing off costs associated with
     the issuance of the Notes. During the second quarter of fiscal 2000, the
     Company repurchased and retired approximately $8.8 million in principal
     amount of Notes. The Company incurred extraordinary losses on debt
     extinguishment of approximately $0.6 million on these second quarter
     transactions. In April and May 2000, the Company repurchased and retired an
     additional $14.0 million in principal amount of Notes. Since the original
     issuance of the Notes, the Company has repurchased and retired
     approximately $30.8 million in principal amount at a weighted average cost
     of approximately 102.7% of par.

                                      -10-
<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 certain automotive airbag
safety systems, and Halotron, a chemical used in fire extinguishing 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.

During 1998, the Company entered into a Purchase Agreement with Kerr-McGee.  On
March 12, 1998, the Company sold $75.0 million of Notes, consummated an
acquisition (the "Acquisition") of certain assets from Kerr-McGee and
repurchased the remaining $25.0 million principal amount balance outstanding of
subordinated secured notes (the "Azide Notes").  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
69% and 72% of revenues during the six-month periods ended March 31, 2000 and
1999, 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 17% and 20% of revenues during
the six-month periods ended March 31, 2000 and 1999, respectively.  The
Company's principal sodium azide customer accounted for in excess of 80% of such
revenues.

Sales of Halotron amounted to approximately 3% and 1% of revenues during the
six-month periods ended March 31, 2000 and 1999, respectively.  Halotron is
designed to replace halon-based fire extinguishing systems.  Accordingly, demand
for Halotron depends upon a number of 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 3% and 5% of revenues
during the six-month periods ended March 31, 2000 and 1999, 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 8% and 2%
of revenues during the six-month periods ended March 31, 2000 and 1999,
respectively.

In March 2000, the Company received notification from Thiokol Propulsion (a
division of Cordant Technologies, Inc.) ("Thiokol") of a change in the current
purchase order for AP which will result in an estimated reduction in revenues of
approximately $4.0 million in the fiscal year ending September 30, 2000.  In
1998, the Company entered into an agreement with Thiokol with respect to the
supply of AP through the year 2008.  The agreement establishes a pricing matrix
under which AP unit prices to Thiokol vary inversely with the quantity of AP
sold by the Company to all of its customers.  The reduced AP delivery quantities
in the Thiokol change order results in an AP unit price increase for all AP sold
to Thiokol in fiscal 2000 and the Company has recognized in revenues the effects
of the higher AP unit price for quantities sold to Thiokol during the first half
of fiscal 2000.

The financial effects of the change order will be concentrated mostly on the
Company's second half of fiscal 2000.  The Company currently expects AP volumes
and revenues to be between 30% and 40% lower in the second half of fiscal 2000
as compared to the first half.  However, the change order also allows for a
price adjustment claim which the Company expects to complete and submit in May
2000.  Subject to the outcome of

                                      -11-
<PAGE>

the price adjustment claim process, the purchase order modification may have a
material adverse effect on the Company's fiscal year 2000 operating results.

Cost of Sales.  The principal elements comprising the Company's cost of sales
--------------
are depreciation and amortization, 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 of the raw materials used in the Company's manufacturing processes
have historically been available in commercial quantities with relatively stable
pricing, and the Company has had no difficulty obtaining necessary raw
materials.  The costs of operating the Company's specialty chemical plants are,
however, largely fixed.

Income Taxes.  The Company's effective income tax rates were 0% during the six-
------------
month periods ended March 31, 2000 and 1999.  The Company's effective income tax
rate was 0% during these periods as a result of the establishment of a $10.4
million deferred tax valuation allowance in the fourth quarter of fiscal 1997.
The Company's effective tax rate will be 0% until the Company's net operating
losses expire or the valuation allowance is no longer necessary.

Net Income.  Although the Company's net income and diluted net income per 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) the timing of real estate and
related sales and the 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 per 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 orders in the future is
uncertain.  (See "Forward Looking Statements/Risk Factors" below.)

Results of Operations

Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999

Sales and Operating Revenues.  Sales decreased $0.6 million, or 4%, during the
----------------------------
three months ended March 31, 2000, to $16.3 million from $16.9 million in the
corresponding period of the prior year.  This decrease was principally
attributable to decreased sales of specialty chemicals.  Perchlorate and sodium
azide chemical sales decreased approximately $3.4 million (see above for a
discussion of the impact of a change order for AP).  This decrease was partially
offset by an increase in environmental protection equipment sales of
approximately $2.5 million due primarily to the timing of the shipment of
certain equipment.

Cost of Sales.  Cost of sales increased $0.3 million, or 3%, in the three months
-------------
ended March 31, 2000, to $11.3 million from $11.0 million in the corresponding
period of the prior year.  As a percentage of sales, cost of sales was 69%
during the three-month period ended March 31, 2000 compared to 65% during the
same period last year.  The increases were principally due to a change in the
mix of sales and the lower variable margins associated with the Company's
environmental protection equipment segment as compared to the specialty
chemicals segment.

Operating Expenses.  Operating (selling, general and administrative) expenses
------------------
increased $0.3 million, or 12%, in the three months ended March 31, 2000, to
$2.8 million from $2.5 million in the corresponding period of 1999.

                                      -12-
<PAGE>

Net Interest Expense.  Net interest and other expense decreased to $1.0 million
--------------------
in the three months ended March 31, 2000, from $1.4 million in the corresponding
period of the prior year as a result of lower average debt balances.

Six Months Ended March 31, 2000 Compared to Six Months Ended March 31, 1999

Sales and Operating Revenues.  Sales increased $1.6 million, or 4%, during the
----------------------------
six months ended March 31, 2000, to $37.3 million from $35.7 million in the
corresponding period of the prior year.  The increase was principally due to an
increase in environmental protection equipment sales of approximately $2.3
million.  Such increase was partially offset by a decrease in real estate sales
of approximately $0.6 million.

Cost of Sales.  Cost of sales increased $1.1 million, or 5%, in the six months
-------------
ended March 31, 2000, to $23.7 million from $22.6 million in the corresponding
period of the prior year.  As a percentage of sales, cost of sales was 63%
during the first six months of this fiscal year and last fiscal year.

Operating Expenses.  Operating expenses were $5.2 million during the six-month
------------------
period ended March 31, 2000 compared to $5.0 million in the corresponding period
of the prior year.  Operating expenses during the six-month periods ended March
31, 2000 and 1999 include approximately $0.5 million and $0.4 million,
respectively, in costs associated with the investigation and evaluation of trace
amounts of perchlorate chemicals found in Lake Mead.  (See Note 4 to the
Condensed Consolidated Financial Statements).

Net Interest Expense.  Net interest and other expense decreased to $2.1 million
--------------------
in the six months ended March 31, 2000, from $2.9 million in the corresponding
period of the prior year, principally as a result of lower average debt
balances.

Segment Operating Income (Loss).  Operating income (loss) of the Company's
-------------------------------
industry segments during the six-month periods ended March 31, 2000 and 1999 was
as follows:

<TABLE>
<CAPTION>
                                         ------------------------
                                             2000         1999
                                         ----------    ----------
<S>                                      <C>          <C>

Specialty chemicals                      $7,316,000    $7,911,000
Environmental protection equipment          692,000      (367,000)
Real Estate                                 578,000     1,217,000
                                         ----------    ----------
          Total                          $8,586,000    $8,761,000
                                         ==========    ==========
</TABLE>

The decrease in operating income in the Company's specialty chemical industry
segment was primarily attributable to lower sales.  The increase in operating
performance of the environmental protection equipment segment was principally
due to increased sales.  The decrease in real estate segment operating income
was attributable to decreased land sales.

Inflation

Inflation did not have a significant effect on the Company's sales and operating
revenues or costs during the three-month or six-month periods ended March 31,
2000 or 1999.  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

In March 1998, the Company sold Notes in the principal amount of $75.0 million,
acquired certain 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.  In June 1999 and September
1998, the Company repurchased and retired $3.0 million and $5.0 million,
respectively, in principal amount of Notes.

                                      -13-
<PAGE>

The Company incurred extraordinary losses on debt extinguishment of
approximately $0.2 million on each of these transactions principally as a result
of writing off costs associated with the issuance of the Notes.  During the
second quarter of fiscal 2000, the Company repurchases and retired approximately
$8.8 million in principal amount of Notes. The Company incurred extraordinary
losses on debt extinguishment of approximately $0.6 million on these second
quarter transactions. In April and May 2000, the Company repurchased and retired
an additional $14.0 million in principal amount of Notes. Since the original
issuance of the Notes, the Company has repurchased and retired approximately
$30.8 million in principal amount at a weighted average cost of approximately
102.7% of par.

Cash flows provided by operating activities were $10.6 million and $10.7 million
during the six-months ended March 31, 2000 and 1999, respectively.  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 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.

Capital expenditures were $1.2 million during the six months ended March 31,
2000, compared to $2.1 million during the same period last year.  Capital
expenditures are budgeted to amount to approximately $3.0 million in fiscal 2000
and are expected to relate primarily to specialty chemical segment capital
improvement projects.

During the six-month period ended March 31, 2000, the Company received cash of
approximately $2.7 million relating to the return of capital invested in GRLLC.
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.

During the six-month period ended March 31, 2000, the Company spent
approximately $6.7 million on the repurchase of its Common Stock.  The Company
may (but is not obligated to) continue to repurchase its Common Stock but is
limited in its ability to use cash to repurchase stock by certain covenants
contained in the Indenture associated with the Notes.

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)
          governmental budget decreases affecting the DOD or NASA that would
          cause a decrease in demand for AP, (c) the results achieved by the
          Suspension Agreement resulting from the Company's anti-dumping
          petition against foreign sodium azide producers and the possible
          termination of such agreement, (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, environmental effects 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 sodium azide market and the development or
          penetration of competing new products, particularly in the propulsion,
          airbag inflation and fire suppression businesses.

                                      -14-
<PAGE>

     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 cost of financing, the performance of the managing
          partner of its residential real estate joint venture (GRLLC) 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 investigations
          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.

     10.  Provisions of the Company's Certificate of Incorporation and By-laws,
          and Series D Preferred Stock, the potential dividend of preference
          stock purchase rights thereunder and the related Rights Agreement
          could have the effect of making it more difficult for potential
          acquirors to obtain a control position in the Company.

                                      -15-