<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C. 20549

                                   FORM 10-Q

             X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
             -                                                   
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                   FOR QUARTERLY PERIOD ENDED JUNE 30, 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
JULY 31, 1997.
<PAGE>
 
                        PART I.  FINANCIAL INFORMATION

ITEM 1.  Condensed Consolidated Financial Statements
         -------------------------------------------

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

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

         The information required by Item 303 of Regulation S-K is provided on
         pages 13 through 17 of this Report on Form 10-Q.

                          PART II.  OTHER INFORMATION

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

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

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

         None.

ITEM 3.  Defaults Upon Senior Securities
         -------------------------------

         None.

ITEM 4.  Submission of Matters to a Vote of Security Holders
         ---------------------------------------------------

         None.

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

         None.

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

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

                   27.  Financial Statement Schedules.

         (b) None.

                                       2
<PAGE>
 
                                  SIGNATURES



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



                                            AMERICAN PACIFIC CORPORATION



Date:  July 30, 1997                           /s/ John R. Gibson
                                               ----------------------
                                               John R. Gibson
                                               President and Chief Executive
                                               Officer



Date:  July 30, 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 NINE-MONTHS
                                                                   ENDED JUNE 30,                       ENDED JUNE 30,
                                                               1997              1996               1997              1996
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                        <C>                <C>                <C>                <C>
Sales and Operating Revenues                               $12,767,000        $10,617,000        $30,545,000        $31,373,000
Cost of Sales                                               10,434,000          8,293,000         25,542,000         24,346,000
                                                           -------------------------------------------------------------------------
 Gross Profit                                                2,333,000          2,324,000          5,003,000          7,027,000
 
Operating Expenses                                           2,304,000          2,035,000          6,936,000          6,941,000
 
Equity in Earnings of Real Estate 
 Venture                                                                          600,000            100,000            600,000
 
                                                           -------------------------------------------------------------------------
Operating Income (Loss)                                         29,000            889,000         (1,833,000)           686,000
 
Net Interest and Other
 Expense                                                       202,000            357,000            735,000          1,215,000
                                                           -------------------------------------------------------------------------

Income (Loss) Before Provision (Credit)
 for Income Taxes                                             (173,000)           532,000         (2,568,000)          (529,000)
 
Provision (Credit) for Income Taxes                            (59,000)           181,000           (875,000)          (180,000)
                                  
                                                           -------------------------------------------------------------------------
Net Income (Loss)                                          $  (114,000)       $   351,000        $(1,693,000)       $  (349,000)
                                                           -------------------------------------------------------------------------

Net Income (Loss) Per Common
 Share                                                     $      (.02)       $       .04        $      (.21)       $      (.04)
                                                           -------------------------------------------------------------------------

Weighted Average Common and Common
 Equivalent Shares Outstanding                               8,098,000          8,142,000          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>
----------------------------------------------------------------------------------------------------------------
                                                                     JUNE 30,                      SEPTEMBER 30,
                                                                      1997                            1996
----------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                                <C>
ASSETS
 
CURRENT ASSETS:
 Cash and Cash Equivalents                                   $      14,568,000                  $     18,501,000
 Short-term Investments                                                                                2,000,000
 Accounts and Notes Receivable                                       5,851,000                         4,165,000
 Related Party Notes Receivable                                        664,000                           737,000
 Inventories                                                        12,837,000                        11,297,000
 Prepaid Expenses and Other Assets                                   1,214,000                           946,000
                                               -----------------------------------------------------------------
  TOTAL CURRENT ASSETS                                              35,134,000                        37,646,000
 
Property, Plant and Equipment, Net                                  73,725,000                        77,217,000
Development Property                                                 7,295,000                         8,631,000
Real Estate Equity Investments                                      19,992,000                        18,698,000
Other Assets                                                         2,638,000                         2,858,000
Restricted Cash                                                      4,618,000                         4,969,000
                                               -----------------------------------------------------------------   
  TOTAL ASSETS                                               $     143,402,000                 $     150,019,000
                                               -----------------------------------------------------------------
</TABLE>

See the accompanying Notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>
 
                          AMERICAN PACIFIC CORPORATION
                     CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
                                                                        JUNE 30,              SEPTEMBER 30,
                                                                          1997                    1996
--------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                     <C>
             LIABILITIES AND SHAREHOLDERS' EQUITY
 
CURRENT LIABILITIES:
 Accounts Payable and Accrued Liabilities                                 $  7,277,000            $  5,407,000
 Current Portion of Long-Term Debt                                           6,166,000               7,334,000
                                                               -----------------------------------------------
  TOTAL CURRENT LIABILITIES                                                 13,443,000              12,741,000
 
 Long-Term Debt                                                             24,787,000              29,452,000
 Deferred Income Taxes                                                       9,226,000              10,101,000
                                                               -----------------------------------------------
  TOTAL LIABILITIES                                                         47,456,000              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                                                           14,285,000              15,978,000
Treasury Stock                                                              (1,035,000)               (879,000)
Receivable from the Sale of Stock                                              (97,000)                (97,000)
                                                               ----------------------------------------------- 
 TOTAL SHAREHOLDERS' EQUITY                                                 92,377,000              94,156,000
                                                               -----------------------------------------------
                                                               -----------------------------------------------
  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                              $143,402,000            $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 NINE-MONTHS  
                                                           ENDED JUNE 30,                       ENDED JUNE 30,
                                                      1997              1996              1997              1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>               <C>               <C>               <C>
Cash Provided by (Used for)
 Operating Activities                               $(1,045,000)        $  (288,000)      $ 5,252,000       $ 4,727,000
                                            -------------------------------------------------------------------------------
 Cash Flows Used for
   Investing Activities:
   Capital Expenditures, 
     Development Property
     Additions and Real Estate
     Equity Investments                              (1,156,000)           (405,000)       (2,931,000)       (5,027,000)
                                            -------------------------------------------------------------------------------         

Net Cash Used For
 Investing Activities                                (1,156,000)           (405,000)       (2,931,000)       (5,027,000)
                                            -------------------------------------------------------------------------------
 
Cash Flows From
 Financing Activities:
 Principal Payments on Debt                                                                (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
                                                                                           (6,254,000)       (4,990,000)
                                            -------------------------------------------------------------------------------
Net Decrease in Cash and
 Cash Equivalents                                    (2,201,000)           (693,000)       (3,933,000)       (5,290,000)
Cash and Cash Equivalents, Beginning of
 Period                                              16,769,000          19,943,000        18,501,000        24,540,000
                                            -------------------------------------------------------------------------------
Cash and Cash Equivalents,
 End of Period                                      $14,568,000         $19,250,000       $14,568,000       $19,250,000
                                            -------------------------------------------------------------------------------
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 nine-month periods ended June 30,
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.

    The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("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 ending 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.

    In February 1997 the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure."  This statement establishes standards for disclosing
information about an entity's capital structure.  Management intends to comply
with the disclosure requirements of this statement which are effective for
periods ending after December 15, 1997.

    In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position, and is effective for financial statements issued for fiscal
years beginning after December 15, 1997. Management does not believe this
statement will have material impact on the Company's financial statements.

    In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information."  This statement establishes additional
standards for segment reporting in the financial statements and is effective for
fiscal years beginning after December 15, 1997.  Management has not determined
the effect of this statement on the Company's financial statement disclosure.

2.  NET LOSS PER COMMON SHARE

    Net loss per common share for the three-month and nine-month periods ended
June 30, 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.

                                       8
<PAGE>
 
3.  INVENTORIES

    Inventories consist of the following:
<TABLE>
<CAPTION>
 
                                     June 30,     September 30,
                                       1997           1996
                                    -----------   -------------
    <S>                             <C>           <C>
 
    Work-in-process                 $ 8,619,000     $ 5,011,000
    Raw materials and supplies        4,218,000       6,286,000
                                    -----------     -----------
    Total                           $12,837,000     $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 "Company Defendants").  The complaints,
    which were consolidated, alleged that the Company's public statements
    violated Federal securities laws by inadequately disclosing information
    concerning its agreements with Thiokol Corporation ("Thiokol") and the
    Company's operations.  On November 27, 1995, the U.S. District Court granted
    in part the Company's motion for summary judgment, ruling that the Company
    had not violated the Federal securities laws in relation to disclosures
    concerning the Company's agreements with Thiokol.  The remaining claims,
    which related to allegedly misleading or inadequate disclosures regarding
    Halotron, were the subject of a jury trial that ended on January 17, 1996.
    The jury reached a unanimous verdict that none of the Company Defendants
    made misleading or inadequate statements regarding Halotron.  The District
    Court thereafter entered judgment in favor of the Company Defendants on the
    Halotron claims.  The plaintiffs appealed the summary judgment ruling and
    the judgment on the jury verdict to the Ninth Circuit of the United States
    District Court of Appeals.  On June 5, 1997, the Court of Appeals affirmed
    the judgments of the United States District Court in favor of the Company
    Defendants.  On June 19, 1997, the plaintiffs filed an Appellants Petition
    for Rehearing and Suggestion of Rehearing  En Banc with the Court of
    Appeals.

    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 

                                       9
<PAGE>
 
    carrier has agreed to pay attorneys fees and other defense costs related to
    the plaintiffs' appeals 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.

    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
    commenced 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.

                                       10
<PAGE>
   
    In accordance with the provisions of SFAS No. 121, "Accounting for the
    Impairment of Long-Lived Assets to be Disposed Of," Management periodically
    reviews whether the anticipated net cash flows from sodium azide operations
    will be sufficient to recover the Company's fixed asset investment in the
    facility.  Sales and related variable operating margins have historically
    not been at a level sufficient to absorb fixed costs, including
    depreciation.  As indicated above, Management believes that the Autoliv
    contract will result in improved performance of the sodium azide operations.
    Given the fact that deliveries under the Autoliv contract will commence in
    July 1997, Management believes that the actual sodium azide operating
    results in the fourth quarter of fiscal 1997 will be useful in the
    continuing evaluation of the recoverability of the Company's investment in
    sodium azide related fixed assets.  Management believes that the Company's
    investment in such fixed assets is recoverable under the requirements of
    SFAS No. 121, although there may be significant differences between actual
    end estimated operating performance in the fourth quarter of fiscal 1997.
    In light of these factors and the uncertainties discussed below, there can
    be no assurance that the results of the evaluation of recoverability will
    remain the same in the future.

    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 and a
    declining market for sodium azide as a result of competing airbag inflation
    technology and methods, although the Company's information with respect to
    competitors' existing and planned capacity is limited.  There can be no
    assurance that other manufacturing capacities not now known to the Company
    will not be established.  By reason of this highly competitive market
    environment, and other factors discussed below, there exists considerable
    pressure on the price of sodium azide.

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

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

    It is the Company's understanding that, by reason 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 

                                       11
<PAGE>
 
    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.

6.  RESTRUCTURING UNDER CONSIDERATION

    The Company is currently undergoing a planning process respecting its
    structure, strategic direction and operational focus.  This process may
    result in the consolidation and/or relocation of operations and/or the
    abandonment of operations or productive assets (including impairment issues
    discussed in the Notes to Condensed Consolidated Financial Statements and
    the Results of Operations section of Management's Discussion and Analysis of
    Financial Condition and Results of Operations).  The Company expects this
    process to be completed in the fourth quarter of fiscal 1997.  The
    implementation of any plan may result in events that trigger, among other
    things, the recognition of provisions for restructuring charges relating to
    the termination and/or relocation of operations and employees.

                                       12
<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 $12,767,000 and $10,617,000 during the three-
month periods ended June 30, 1997 and 1996, and $30,545,000 and $31,373,000
during the nine-month periods ended June 30, 1997 and 1996.  Gross profit as a
percentage of sales and operating revenues was 16 percent in the first nine
months of fiscal 1997 compared to 22 percent during the same period in fiscal
1996.  A discussion of sales and operating revenues and gross profit percentages
relating to the Company's principal operating activities is provided below.

PERCHLORATE CHEMICAL OPERATIONS

Sales of all perchlorate chemicals amounted to approximately $4,450,000 and
$5,410,000 during the three-month periods ended June 30, 1997 and 1996, and
$14,709,000 and $15,899,000 during the nine-month periods ended June 30, 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 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 $21 and $22 million during the fiscal
year ended September 30, 1997.

SODIUM AZIDE OPERATIONS

Sodium azide sales were $3,252,000 and $3,325,000 during the three-month periods
ended June 30, 1997 and 1996, and $8,370,000 and $9,355,000 during the nine-
month periods ended June 30, 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 improved land 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.  In addition to this project, the Company has

                                       13
<PAGE>
 
approximately 120 net acres of land in Clark County available for sale and/or
development.

Real estate and related sales amounted to $3,229,000 and $1,678,000 during the
three-month periods ended June 30, 1997 and 1996, and $3,582,000 and $4,565,000
during the nine-month periods ended June 30, 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.

ENVIRONMENTAL PROTECTION EQUIPMENT OPERATIONS

Environmental protection equipment sales were approximately $1,103,000 and
$174,000 during the third quarter of fiscal 1997 and 1996, and $2,082,000 and
$1,138,000 during the nine-month periods ended June 30, 1997 and 1996.  As of
June 30, 1997, this segment had a backlog of approximately $135,000.  Two
equipment purchase orders, totaling approximately $750,000, were received in
July, 1997.  The Company has submitted a number of bids on significant projects,
although there can be no assurance that any of these bids will result in future
orders.

HALOTRON OPERATIONS

Sales of Halotron amounted to approximately $703,000 and $48,000 during the
third quarter of fiscal 1997 and 1996, and $1,627,000 and $321,000  during the
first nine 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 $2,304,000 and $2,035,000 during the three-month periods
ended June 30, 1997 and 1996, and $6,936,000 and $6,941,000 during the nine-
month periods ended June 30, 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 nine
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 nine-month periods ended June 30, 1997 and 1996.

                                       14
<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, Halotron, and  environmental protection equipment 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 SFAS No. 121, 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 June 30, 1997, the Company had approximately $65
million and $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.  (See Note 5 of Notes to
Condensed Consolidated Financial Statements.)

As discussed in Note 6 to Notes to Condensed Consolidated Financial Statements,
the Company is engaged in a planning process that may, upon implementation of
the plan, result in the recognition of restructuring charges.

LITIGATION

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

                                       15
<PAGE>
 
INFLATION

Inflation did not have a significant effect on the Company's sales and operating
revenues or costs during the six-month periods ended June 30, 1997 or 1996.  The
Company does not expect inflation to have a material effect on gross profit in
the future, because any increases in production costs should be recovered
through increases in product prices, although there can be no assurance in that
regard.

LIQUIDITY AND CAPITAL RESOURCES

On July 29, 1994, the Board of Directors of the Company authorized the
repurchase of up to 1.5 million shares of the Company's common stock through
open market purchases and private transactions.  Such authorization was briefly
suspended.  As of June 30, 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 $5,252,000 and $4,727,000 during the
nine-month periods ended June 30, 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

                                       16
<PAGE>
 
          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 environmental products have limited applications and
          highly concentrated customer bases. Reference is also made to Notes 5
          and 6 of Notes to Condensed Consolidated Financial Statements.

     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.

                                       17