<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, 1997

                         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 APRIL 30,
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
         ---------------------------------------------------

            The following Class C Directors were elected on March 11, 1997 at
         the Registrant's 1997 Annual Stockholders' Meeting:
 <TABLE>
<CAPTION>
 
              NAME                    VOTES FOR   VOTES WITHELD
          --------------------        ---------   -------------
          <S>                         <C>            <C>
          Fred D. Gibson, Jr.         6,831,258      805,945
          Victor M. Rosenzweig        7,570,174       67,029
          Berlyn D. Miller            7,570,176       67,027
          Dean M. Willard             7,569,646       67,557
 
</TABLE>
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:     May 13, 1997                                     /s/ C. Keith Rooker
                                                       -----------------------
                                                       C. Keith Rooker
                                                       Executive Vice President
                                                       Secretary/General Counsel



Date:     May 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
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------- 

                                                     FOR THE THREE-MONTHS            FOR THE SIX-MONTHS
                                                         ENDED MARCH 31,                 ENDED MARCH 31,
                                                       1997           1996            1997            1996
--------------------------------------------------------------------------------------------------------------
<S>                                                <C>            <C>             <C>             <C>
 
Sales and Operating Revenues                       $ 9,382,000     $10,980,000     $17,778,000     $20,756,000
Cost of Sales                                        8,025,000       8,150,000      15,108,000      16,053,000
                                                --------------------------------------------------------------
Gross Profit                                         1,357,000       2,830,000       2,670,000       4,703,000
 
Operating Expenses                                   2,269,000       2,556,000       4,632,000       4,906,000
 
Equity in Earnings of Real Estate Venture
                                                       100,000                         100,000
                                                --------------------------------------------------------------
 
 
Operating Income (Loss)                               (812,000)        274,000      (1,862,000)       (203,000)
 
Net Interest and Other
  Expense                                              293,000         443,000         533,000         858,000
                                                --------------------------------------------------------------
 
Loss Before Credit for
  Income Taxes                                      (1,105,000)       (169,000)     (2,395,000)     (1,061,000)
 
Credit for Income Taxes                               (376,000)        (57,000)       (816,000)       (361,000)
                                                --------------------------------------------------------------
 
Net Loss                                           $  (729,000)    $  (112,000)    $(1,579,000)    $  (700,000)
                                                --------------------------------------------------------------
 
Net Loss Per Common Share                          $      (.09)    $      (.01)    $      (.19)    $      (.09)
                                                --------------------------------------------------------------
 
 
Weighted Average Common and Common Equivalent
 Shares Outstanding
                                                     8,098,000       8,106,000       8,098,000       8,105,000
                                                 --------------------------------------------------------------
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.

                                       4
<PAGE>
 
                          AMERICAN PACIFIC CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
 
--------------------------------------------------------------------- 
                                          MARCH 31,     SEPTEMBER 30,
                                            1997            1996
---------------------------------------------------------------------
<S>                                     <C>             <C>
ASSETS
 
CURRENT ASSETS:
  Cash and Cash Equivalents              $ 16,769,000    $ 18,501,000
  Short-term Investments                                    2,000,000
  Accounts and Notes Receivable             4,077,000       4,165,000
  Related Party Notes Receivable              685,000         737,000
  Inventories                              13,079,000      11,297,000
  Prepaid Expenses and Other Assets         1,020,000         946,000
                                     --------------------------------
    TOTAL CURRENT ASSETS                   35,630,000      37,646,000
 
Property, Plant and Equipment, Net         75,131,000      77,217,000
Development Property                        8,486,000       8,631,000
Real Estate Equity Investments             19,326,000      18,698,000
Other Assets                                2,748,000       2,858,000
Restricted Cash                             1,230,000       4,969,000
                                     --------------------------------
    TOTAL ASSETS                         $142,551,000    $150,019,000
                                     --------------------------------
 
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>
 
                          AMERICAN PACIFIC CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
 
---------------------------------------------------------------------------- 
                                                MARCH 31,      SEPTEMBER 30,
                                                   1997             1996
----------------------------------------------------------------------------
<S>                                           <C>              <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
 
CURRENT LIABILITIES:
  Accounts Payable and Accrued Liabilities     $  6,358,000     $  5,407,000
  Current Portion of Long-Term Debt               6,166,000        7,334,000
                                           ---------------------------------
    TOTAL CURRENT LIABILITIES                    12,524,000       12,741,000
 
  Long-Term Debt                                 24,681,000       29,452,000
  Deferred Income Taxes                           9,286,000       10,101,000
                                           ---------------------------------
    TOTAL LIABILITIES                            46,491,000       52,294,000
                                           ---------------------------------
 
Commitments and Contingencies
 
Warrants to Purchase Common Stock                 3,569,000        3,569,000
 
SHAREHOLDERS' EQUITY:
Common Stock                                        825,000          823,000
Capital in Excess of Par Value                   78,399,000       78,331,000
Retained Earnings                                14,399,000       15,978,000
Treasury Stock                                   (1,035,000)        (879,000)
Receivable from the Sale of Stock                   (97,000)         (97,000)
    TOTAL SHAREHOLDERS' EQUITY             ---------------------------------
                                                 92,491,000       94,156,000
                                           ---------------------------------
 
TOTAL LIABILITIES AND SHAREHOLDERS'        ---------------------------------
 EQUITY                                        $142,551,000     $150,019,000   
                                           ---------------------------------
 
</TABLE>
See the accompanying Notes to Condensed Consolidated Financial Statements.

                                       6
<PAGE>
 
                          AMERICAN PACIFIC CORPORATION
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
 
--------------------------------------------------------------------------------------------------------------------------
                                                                 FOR THE THREE-MONTHS             FOR THE SIX-MONTHS
                                                                     ENDED MARCH 31,                 ENDED MARCH 31,
                                                                  1997            1996            1997            1996
--------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>             <C>             <C>             <C>
Cash Provided by
  Operating Activities                                         $ 7,151,000     $10,073,000     $ 6,297,000     $ 5,015,000
                                                           ---------------------------------------------------------------
 Cash Flows Used for
  Investing Activities:
  Capital Expenditures,
    Development Property Additions
    and Real Estate Equity 
    Investments
                                                                  (591,000)     (3,228,000)     (1,775,000)     (4,622,000)
Net Cash Used For                                           ---------------------------------------------------------------
  Investing Activities                                            (591,000)     (3,228,000)     (1,775,000)     (4,622,000)
                                                           ---------------------------------------------------------------
 
Cash Flows From
  Financing Activities:
  Principal Payments on Debt                                    (6,168,000)     (5,000,000)     (6,168,000)     (5,000,000)
  Issuance of Common Stock                                                                          70,000          39,000
  Treasury Stock Acquired                                                                         (156,000)        (29,000)
Net Cash Used For Financing Activities
                                                           ---------------------------------------------------------------
                                                                (6,168,000)     (5,000,000)     (6,254,000)     (4,990,000)
                                                           ---------------------------------------------------------------
 
Net Increase (Decrease) in Cash 
  and Cash Equivalents                                             392,000       1,845,000      (1,732,000)     (4,597,000)
Cash and Cash Equivalents,
  Beginning of Period                                           16,377,000      18,098,000      18,501,000      24,540,000
                                                           ---------------------------------------------------------------
Cash and Cash Equivalents, End of Period                       $16,769,000     $19,943,000     $16,769,000     $19,943,000
                                                           ---------------------------------------------------------------
Supplemental Disclosure of Cash
  Flow Information:
Interest Paid (net of amounts capitalized)                     $   851,000     $ 1,230,000     $   851,000     $ 1,230,000
                                                           ---------------------------------------------------------------
</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 and six-
    month periods ended March 31, 1997 and 1996 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 and six-month periods ended
    March 31, 1997 and 1996 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.

    The Financial Accounting Standards Board ("FASB") recently issued SFAS No.
    128 "Earnings per Share." This statement establishes standards for computing
    and presenting earnings per share and is effective for financial statements
    issued for periods ended after December 15, 1997. Earlier application of
    this statement is not permitted and upon adoption requires restatement (as
    applicable) of all prior-period earnings per share data presented.
    Management believes that the implementation of this standard will not have a
    significant impact on earnings per share.

3.  INVENTORIES

    Inventories consist of the following:
<TABLE>
<CAPTION>
 
                                     March 31,    September 30,
                                        1997           1996
                                    -----------   -------------
    <S>                             <C>           <C>
    Work-in-process                 $ 9,331,000     $ 5,011,000
    Raw materials and supplies        3,748,000       6,286,000
                                    -----------     -----------
    Total                           $13,079,000     $11,297,000
                                    -----------     -----------
</TABLE>
4.  COMMITMENTS AND CONTINGENCIES

    In fiscal 1993, three shareholder lawsuits 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

                                       8
<PAGE>
 
    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.

    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 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.

                                       9
<PAGE>
 
    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 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.

    In May, 1997 the Company entered into a three-year contract with Autoliv
    ASP, Inc. (formerly Morton International Automotive Safety Products). The
    contract provides for the Company to supply sodium azide used by Autoliv in
    the manufacture of automotive airbags. Deliveries under the contract will
    commence in July 1997.

    The estimated sales value of the contract is approximately $45 - $55 million
    over the three-year period. This actual sales value, however, will depend
    upon many factors beyond the control of the Company, such as the number of
    automobiles and light trucks manufactured and competitive conditions in the
    airbag market, that will influence the actual magnitude of Autoliv's sodium
    azide requirements, and there can therefore be no assurance as to the actual
    sales value of the contract. Management believes that the Autoliv contract
    will result in improved performance of the Company's sodium azide
    operations, although there can be no assurance in that regard.

    Commercial shipments of sodium azide began in April 1994. Sales and related
    variable operating margins have historically not been at 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

                                       10
<PAGE>
 
    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.

    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 $9,382,000 and $10,980,000 during the three-
month periods ended March 31, 1997 and 1996, and $17,778,000 and $20,756,000
during the six-month periods ended March 31, 1997 and 1996.  Gross profit as a
percentage of sales and operating revenues was 15 percent in the first six
months of fiscal 1997 compared to 23 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 $6,110,000 and
$5,344,000 during the three-month periods ended March 31, 1997 and 1996, and
$10,259,000 and $10,489,000 during the six-month periods ended march 31, 1997
and 1996.  In September 1996, Western Electrochemical Company ("WECCO") an
indirect wholly-owned subsidiary of the Company, received 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 $20 and $22
million during the fiscal year ended September 30, 1997.

SODIUM AZIDE OPERATIONS

Net sodium azide sales were $1,975,000 and $2,685,000 during the three-month
periods ended March 31, 1997 and 1996, and $5,118,000 and $6,003,000 during the
six-month periods ended March 31, 1997 and 1996.  Commercial shipments of sodium
azide began in April 1994.  Sales and related variable operating margins have
historically not been at a level sufficient to absorb fixed costs.  The
operation has however, been generating positive cash flow and earnings before
interest, taxes, depreciation and amortization ("EBITDA").  Management believes
that the Autoliv contract referred to in Note 5 of Notes to Condensed
Consolidated Financial Statements will result in improved performance of the
Company's sodium azide operations, although there can be no assurance thereof.
See Note 5 of Notes to Condensed Consolidated Financial Statements for a
discussion of the sodium azide market, the status of an antidumping petition the
Company filed against certain Japanese producers of sodium azide and a
description of the Autoliv contract.

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 approximately 370 gross
remaining acres in Clark County, Nevada.  The Iron County site is primarily
dedicated to the Company's growth and diversification.  Substantially all of the
Clark County land is pledged as collateral for certain debt (the "Azide Notes").
In 1994, approximately 240 acres of its Clark County land was transferred to
Gibson Ranch Limited Liability Company ("GRLLC") for the purpose of residential
development, construction, and sale.

                                       12
<PAGE>
 
Real estate and related sales amounted to $292,000 and $1,895,000 during the
three-month periods ended March 31, 1997 and 1996, and $353,000 and $2,887,000
during the six-month periods ended March 31, 1997 and 1996.  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 equity in
earnings of GRLLC.  In April and May 1997, three land sales totaling
approximately $3.1 million closed.  These sales had been scheduled to close in
the second quarter of fiscal 1997.

ENVIRONMENTAL PROTECTION EQUIPMENT OPERATIONS

Environmental protection equipment sales were approximately $429,000 and
$832,000 during the second quarter of fiscal 1997 and 1996, and $979,000 and
$964,000 during the six-month periods ended March 31, 1997 and 1996.  As of
April 30, 1997, this segment had a backlog of approximately $1,077,000.  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 $488,000 and $180,000 during the
second quarter of fiscal 1997 and 1996, and $924,000 and $273,000  during the
first six months of fiscal 1997 and 1996.  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.

OPERATING EXPENSES

Operating expenses were $2,269,000 and $2,556,000 during the three-month periods
ended March 31, 1997 and 1996, and $4,632,000 and $4,906,000 during the six-
month periods ended March 31, 1997 and 1996.  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 and six months
of fiscal 1997 compared to the same periods in fiscal 1996 is primarily due to
the reduction in debt balances.

CREDIT FOR INCOME TAXES

The Company's effective income tax rates were approximately 34% during the
three-month and six-month periods ended March 31, 1997 and 1996.

                                       13
<PAGE>
 
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 additional 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 the sodium azide business
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 periodically reviews 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 March 31, 1997, the Company had approximately $66.9
million and $5.6 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.

INFLATION

Inflation did not have a significant effect on the Company's sales and operating
revenues or costs during the six-month periods ended March 31, 1997 or 1996.
The Company does not expect inflation to have a material effect on gross profit
in the future, because any

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<PAGE>
 
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 March 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 from operating activities were $6,297,000 and $5,015,000 during the
six-month periods ended March 31, 1997 and 1996, 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 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

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<PAGE>
 
            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.

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