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, 1998

                          COMMISSION FILE NUMBER 1-8137

                                       OR

/ /      TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15 (D) OF THE  SECURITIES
         EXCHANGE ACT OF 1934

                          AMERICAN PACIFIC CORPORATION
             (Exact name of registrant as specified in its charter)

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

3770 HOWARD HUGHES PARKWAY, SUITE 300
LAS VEGAS, NV                                                    89109
(Address of principal executive offices)                       (Zip Code)

                                 (702) 735-2200
              (Registrant's telephone number, including area code)

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

         Indicate  by check mark  whether the  registrant  has filed all reports
required to be filed by Sections 13 or 15 (d) of the Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. YES /X/  No / /

                      Applicable Only to Corporate Issuers

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common  stock,  as of the latest  practicable  date:  8,219,537 as of
April 30, 1998.

<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 5 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 14 through 19 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 page 10 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  matters  were  submitted  to a  vote  of  Security
              Holder's at the Registrant's  Annual Meeting of Stockholders  held
              on March 10, 1998:

                  1) Election of the  following  four Class A Directors to serve
                  for a term of three years expiring in 2001:

                                   Number of
              Nominee              Votes For            Number of Votes Withheld
              -------              ---------            ------------------------

              Thomas A. Turner     6,719,289               410,614
              John R. Gibson       6,727,099               402,804
              David N. Keys        6,730,179               399,724
              Eugene A. Cafiero    6,342,167               787,736

                  2) Approval of the  adoption  of the  Registrant's  1997 Stock
               Option Plan:

                    Number of    Number of        Number of    Number of Broker
                    Votes For    Votes Against    Abstentions     Non-Votes
                    ---------    -------------    -----------     ---------

                    3,258,898    1,744,958        30,709          2,095,338

                  3) Approval of the grant of non-qualified stock options to the
              non-employee  members of the Board of Directors  currently holding
              office:

                                       -2-

<PAGE>
     Number of            Number of          Number of          Number of Broker
     Votes For            Votes Against      Abstentions           Non-Votes
     ---------            -------------      -----------           ---------

     4,027,804            972,921            33,840                2,095,338

                  4) Approval  of the grant of  non-qualified  stock  options to
               John R. Gibson,  Chief Executive  Officer and President and David
               N. Keys, Executive Vice President and Chief Financial Officer:

     Number of            Number of          Number of          Number of Broker
     Votes For            Votes Against      Abstentions           Non-Votes
     ---------            -------------      -----------           ---------

     4,312,448            970,066            30,185                1,817,204


ITEM 5.       OTHER INFORMATION

              None.

ITEM 6.       EXHIBITS AND REPORTS ON FORM 8-K

              a)           (i)  The  following   Exhibits  are  filed  herewith,
                           portions of each of which have been omitted  pursuant
                           to a request for confidential treatment:

                           10.1     Long-Term  Pricing  Agreement  dated  as  of
                                    December    12,   1997    between    Thiokol
                                    Corporation-Propulsion    Group    and   the
                                    Registrant.

                           10.2     Partnershipping  Agreement  between  Alliant
                                    Techsystems   Incorporated  ("Alliant")  and
                                    Western  Electrochemical  Company and letter
                                    dated  November 24, 1997 from the Registrant
                                    to  Alliant  and  revised   Exhibit  B  with
                                    respect thereto.

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

                           27.      Financial Data Schedule.

              b)           The  following  Reports on Form 8-K were filed during
                           the three-month period ended March 31, 1998:

                           1)       Form 8-K dated February 19, 1998,  reporting
                                    the  Registrant's   intention  to  effect  a
                                    private  placement  offering  of $75 million
                                    principal  amount  of  senior  notes  during
                                    March 1998.

                           2)       Form 8-K dated February 19, 1998,  reporting
                                    certain pro forma financial information.

                           3)       Form 8-K dated March 27, 1998, reporting the
                                    acquisition   of  certain   assets  and  the
                                    completion  of a  private  placement  of $75
                                    million principal amount of senior notes.


                                       -3-

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



Date:    May 13, 1998                    /S/ DAVID N. KEYS
                                         --------------------------------------
                                         David N. Keys
                                         Executive Vice President,
                                         Chief Financial Officer, Secretary
                                         and Treasurer;  Principal Financial
                                         and Accounting Officer


                                       -4-

<PAGE>

                          AMERICAN PACIFIC CORPORATION
                 Condensed Consolidated Statements of Operations
                                   (unaudited)

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                      FOR THE THREE MONTHS                            FOR THE SIX MONTHS
                                                          ENDED MARCH 31,                                ENDED MARCH 31,
                                                    1998                    1997                   1998                    1997
------------------------------------------------------------------------------------------------------------------------------------

<S>                                            <C>                     <C>                   <C>                    <C>         
Sales and Operating Revenues                   $ 14,119,000            $ 9,382,000           $ 25,387,000           $ 17,778,000
Cost of Sales                                     9,129,000              8,025,000             17,235,000             15,108,000
                                               -------------------------------------------------------------------------------------
   Gross Profit                                   4,990,000              1,357,000              8,152,000              2,670,000

Operating Expenses                                2,247,000              2,269,000              4,430,000              4,632,000

Equity in Earnings of Real Estate Venture                                  100,000                300,000                100,000

                                               -------------------------------------------------------------------------------------

Operating Income (Loss)                           2,743,000               (812,000)             4,022,000             (1,862,000)

Net Interest and Other
   Expense                                          750,000                293,000              1,463,000                533,000
                                               -------------------------------------------------------------------------------------
 
Income (Loss) Before Credit
   for Income Taxes                               1,993,000             (1,105,000)             2,559,000             (2,395,000)

Credit for Income Taxes                                                   (376,000)                                     (816,000)
                                               -------------------------------------------------------------------------------------

Net Income (Loss) Before Extraordinary Loss    $  1,993,000            $  (729,000)          $  2,559,000           $ (1,579,000)

Extraordinary Loss-Debt Extinguishment            5,005,000                                     5,005,000
                                               -------------------------------------------------------------------------------------

Net Loss                                       $ (3,012,000)           $  (729,000)          $ (2,446,000)          $ (1,579,000)
                                               -------------------------------------------------------------------------------------
Basic Net Loss Per Share:

   Income (Loss) Before Extraordinary Loss     $        .24            $      (.09)          $        .31           $       (.19)

   Extraordinary Loss                          $       (.61)                                 $       (.61)
                                                ------------------------------------------------------------------------------------

   Net Loss                                    $       (.37)           $      (.09)          $       (.30)          $       (.19)
                                               -------------------------------------------------------------------------------------

Average Shares Outstanding                        8,165,000              8,098,000              8,151,000              8,098,000
                                               -------------------------------------------------------------------------------------

Diluted Net Loss Per Share:

   Income (Loss) Before Extraordinary Loss      $       .24            $      (.09)          $        .31       $           (.19)

   Extraordinary Loss                           $      (.60)                                 $       (.61)
                                               -------------------------------------------------------------------------------------

   Net Loss                                     $      (.36)           $      (.09)          $       (.30)      $           (.19)
                                               -------------------------------------------------------------------------------------

Diluted Shares                                    8,337,000              8,098,000              8,280,000              8,098,000
                                               -------------------------------------------------------------------------------------
</TABLE>

See the accompanying Notes to Condensed Consolidated Financial Statements.

                                       5
<PAGE>
                          AMERICAN PACIFIC CORPORATION
                      Condensed Consolidated Balance Sheets
                                   (unaudited)

--------------------------------------------------------------------------------
                                                MARCH 31,         SEPTEMBER 30,
                                                  1998                1997
--------------------------------------------------------------------------------
ASSETS

CURRENT ASSETS:
   Cash and Cash Equivalents                 $ 19,029,000        $ 18,881,000
   Accounts and Notes Receivable                9,297,000           5,551,000
   Related Party Notes Receivable                 588,000             637,000
   Inventories                                 12,217,000          11,116,000
   Prepaid Expenses and Other Assets            1,083,000             979,000
                                             -----------------------------------
      TOTAL CURRENT ASSETS                     42,214,000          37,164,000

Property, Plant and Equipment, Net             19,212,000          19,314,000
Intangible Acquisition Assets                  40,279,000           1,540,000
Development Property                            6,945,000           7,362,000
Real Estate Equity Investments                 17,517,000          20,248,000
Other Assets                                    2,793,000             873,000
Restricted Cash                                 1,168,000           3,580,000

                                             -----------------------------------
      TOTAL ASSETS                           $130,128,000        $ 90,081,000
                                             -----------------------------------


See the accompanying Notes to Condensed Consolidated Financial Statements.

                                       6

<PAGE>
                          AMERICAN PACIFIC CORPORATION
                      Condensed Consolidated Balance Sheets
                                   (unaudited)

<TABLE>
<CAPTION>


-----------------------------------------------------------------------------------
                                                        MARCH 31,    SEPTEMBER 30,
                                                          1998           1997
-----------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
<S>                                                <C>              <C>
   Accounts Payable and Accrued Liabilities        $   3,993,000    $   7,519,000
   Current Portion of Long-Term Debt                   1,168,000        6,166,000
                                                   ------------------------------
      TOTAL CURRENT LIABILITIES                        5,161,000       13,685,000

   Long-Term Debt                                     75,000,000       24,900,000
   Long-Term Payables                                  2,694,000        2,376,000

                                                   ------------------------------
      TOTAL LIABILITIES                               82,855,000       40,961,000
                                                   ------------------------------

Commitments and Contingencies

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

SHAREHOLDERS' EQUITY:
Common Stock                                             837,000          829,000
Capital in Excess of Par Value                        79,152,000       78,561,000
Accumulated Deficit                                  (35,153,000)     (32,707,000)
Treasury Stock                                        (1,035,000)      (1,035,000)
Receivable from the Sale of Stock                        (97,000)         (97,000)
                                                   ------------------------------
      TOTAL SHAREHOLDERS' EQUITY                      43,704,000       45,551,000
                                                   ------------------------------

                                                   ------------------------------
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 130,128,000    $  90,081,000
                                                   ------------------------------
</TABLE>

See the accompanying Notes to Condensed Consolidated Financial Statements.

                                       7
<PAGE>
                          AMERICAN PACIFIC CORPORATION
                 Condensed Consolidated Statements of Cash Flows
                                   (unaudited)

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------------
                                                             FOR THE THREE MONTHS               FOR THE SIX MONTHS
                                                                 ENDED MARCH 31,                  ENDED MARCH 31,
                                                            1998             1997             1998            1997
--------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used For)
<S>                                                     <C>             <C>             <C>             <C>
   Operating Activities                                 $  5,110,000    $  7,151,000    $   (306,000)   $  6,297,000
                                                        ------------------------------------------------------------

Cash Flows Used for
   Investing Activities:
   Capital Expenditures                                     (679,000)       (389,000)     (1,648,000)     (1,301,000)
   Development Property Additions                            (51,000)        (54,000)       (405,000)        (54,000)
   Payment for Acquisition Intangible                    (39,000,000)                    (39,000,000)
   Net Cash Received (Advanced)
   on Real Estate Equity Investments                       1,018,000        (148,000)      3,031,000        (420,000)
                                                        ------------------------------------------------------------
Net Cash Used For
   Investing Activities                                  (38,712,000)       (591,000)    (38,022,000)     (1,775,000)
                                                        ------------------------------------------------------------

Cash Flows From
   Financing Activities:
   Principal Payments on Debt                            (30,000,000)     (6,168,000)    (31,166,000)     (6,168,000)
   Issuance of Senior Notes                               75,000,000                      75,000,000
   Premium Paid on Debt
     Extinguishment                                       (3,250,000)                     (3,250,000)
   Debt Issue Costs                                       (2,707,000)                     (2,707,000)
   Issuance of Common Stock                                  599,000                         599,000          70,000
   Treasury Stock Acquired                                                                                  (156,000)
                                                        ------------------------------------------------------------

Net Cash Provided by (Used For)
  Financing Activities                                    39,642,000      (6,168,000)     38,476,000      (6,254,000)
                                                        ------------------------------------------------------------
Net Increase (Decrease) in Cash
 and Cash Equivalents                                      6,040,000         392,000         148,000      (1,732,000)
Cash and Cash Equivalents,
 Beginning of Period                                      12,989,000      16,377,000      18,881,000      18,501,000
                                                        ------------------------------------------------------------
Cash and Cash Equivalents, End of
 Period                                                 $ 19,029,000    $ 16,769,000    $ 19,029,000    $ 16,769,000
                                                        ------------------------------------------------------------

Supplemental Disclosure of Cash
  Flow Information:
Interest Paid (net of amounts
  capitalized)                                          $  1,650,000    $    851,000    $  1,650,000    $    851,000
                                                        ------------------------------------------------------------
</TABLE>

See the accompanying Notes to Condensed Consolidated Financial Statements.

                                       8
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):

1.       BASIS OF REPORTING

         The  accompanying   Condensed  Consolidated  Financial  Statements  are
         unaudited  and do  not  include  certain  information  and  disclosures
         included  in the  Annual  Report  on  Form  10-K  of  American  Pacific
         Corporation (the "Company").  The Condensed  Consolidated Balance Sheet
         as of September  30, 1997 was derived from the  Consolidated  Financial
         Statements included in the Company's Annual Report on Form 10-K for the
         year ended September 30, 1997. Such statements should therefore be read
         in conjunction  with the  Consolidated  Financial  Statements and Notes
         thereto  included in the  Company's  Annual Report on Form 10-K for the
         year ended  September 30, 1997. In the opinion of Management,  however,
         all  adjustments   (consisting  only  of  normal  recurring   accruals)
         necessary for a fair  presentation  have been  included.  The operating
         results and cash flows for the three-month and six-month  periods ended
         March 31, 1998 are not necessarily  indicative of the results that will
         be achieved for the full fiscal year or for future periods.

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

2.       NET INCOME (LOSS) PER COMMON SHARE

         During the first quarter of fiscal 1998,  the Company  adopted SFAS No.
         128  "Earnings  per Share." SFAS No. 128 requires the  presentation  of
         basic net income  (loss) per share and  diluted  net income  (loss) per
         share.  Basic per share  amounts are  computed  by dividing  net income
         (loss) by average  shares  outstanding  during the period.  Diluted net
         income  (loss) per share  amounts are  computed by dividing  net income
         (loss) by average shares outstanding plus the dilutive effect of common
         share  equivalents.  Since  the  Company  incurred  a net  loss  before
         extraordinary  loss during the three-month and six-month  periods ended
         March 31, 1997,  diluted per share  calculations are based upon average
         shares  outstanding  during these periods.  Accordingly,  the effect of
         stock options and warrants  outstanding  for 3,525,000  shares at March
         31, 1997 was not  included in diluted net loss per share  calculations.
         Diluted net income before  extraordinary  loss and diluted net loss per
         share during the three-month and six-month periods ended March 31, 1998
         is  determined  considering  the dilutive  effect of stock  options and
         warrants.  The effect of stock  options  and  warrants  outstanding  to
         purchase approximately 2,900,000 shares was not included in diluted per
         share  calculations  during the three-month and six-month periods ended
         March  31,  1998 as the  average  exercise  price of such  options  and
         warrants was greater  than the average  price of the  Company's  common
         stock.


                                       9
<PAGE>
3.       INVENTORIES

         Inventories consist of the following:

                                           March 31,      September 30,
                                            1998               1997
                                            ----               ----

         Work-in-process                $ 7,963,000       $ 3,349,000
         Raw materials and supplies       4,254,000         7,767,000
                                        -----------       ------------
         Total                          $12,217,000       $11,116,000
                                        -----------       ------------

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 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.  On September 3, 1997,  the Court of Appeals
         denied the Petition for  Rehearing.  In October  1997,  the  plaintiffs
         filed a Petition for Writ of  Certiorari  with the Supreme Court of the
         United  States.  On February  23,  1998,  the Supreme  Court denied the
         Petition for Writ of Certiorari.

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

                                       10
<PAGE>
5.       INCOME TAXES

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

6.       FINANCING ACTIVITIES

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

         The Notes  mature on March 1, 2005.  Interest on the Notes will be paid
         in cash at a rate of 9-1/4% per annum on each March 1 and  September 1,
         commencing  September 1, 1998. The indebtedness  evidenced by the Notes
         represents a senior  unsecured  obligation  of the Company,  ranks pari
         passu  in  right  of  payment  with  all  existing  and  future  senior
         indebtedness  of the  Company  and is senior in right of payment to all
         future  subordinated  indebtedness of the Company.  The Indenture under
         which  the  Notes  were  issued   contains   various   limitations  and
         restrictions   including  (i)  change  in  control   provisions,   (ii)
         limitations  on  indebtedness  and  (iii)   limitations  on  restricted
         payments such as dividends,  stock  repurchases  and  investments.  The
         Company is obligated to register and have declared effective the Notes,
         or exchange them for identical  notes that have been  registered,  with
         the Securities and Exchange  Commission within certain  predefined time
         parameters.  In April  1998,  the  Company  filed a Form S-4  under the
         Securities  Exchange  Act of 1933 for the  purpose of  registering  the
         Notes.  The  registration  is in  process  and  has not  been  declared
         effective. If the Company does not consummate an effective registration
         of the  Notes  within  the  required  time  frame,  certain  additional
         interest will accrue at a rate of 0.50% per annum.

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

7.       ACQUISITION

         On March 12, 1998 (the "Closing Date"), the Company acquired,  pursuant
         to a purchase  agreement (the "Purchase  Agreement")  with  Kerr-McGee,
         certain process data, technical information,  customer lists, marketing
         contracts and related expertise of Kerr-McGee related its production of
         AP (the  "Rights")  for a purchase  price of $39.0  million.  Under the
         Purchase  Agreement,  the Company  acquired an option (the "Option") to
         purchase  all  or  any  portion  of  the  inventory  of  AP  stored  at
         Kerr-McGee's  premises on the Closing  Date,  which is not owned by, or
         identified   to  a  firm  order  from,  a  Kerr-McGee   customer   (the
         "Inventory"). The


                                       11
<PAGE>

         Option is  exercisable  from time to time  within  the 12 month  period
         commencing on the Closing Date (the "Option  Period").  The Acquisition
         did not include  Kerr-McGee's  production  facilities (the  "Production
         Facilities")  and certain  water and power  supply  agreements  used by
         Kerr-McGee  in the  production  of AP.  Under the  Purchase  Agreement,
         Kerr-McGee ceased the production and sale of AP although the Production
         Facilities  may continue to be used by Kerr-McGee  for production of AP
         under certain limited circumstances described below. Under the Purchase
         Agreement, Kerr-McGee reserved a perpetual, royalty-free,  nonexclusive
         license to use any of the technology  forming part of the Rights as may
         be necessary or useful to use, repair or sell the Production Facilities
         (the "Reserved License").

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

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

         Under the Purchase  Agreement,  Kerr-McGee  has agreed to indemnify the
         Company  against  loss or  liability  from claims  associated  with the
         ownership  and  use  of  the  Rights  prior  to   consummation  of  the
         Acquisition   or   resulting   from  any  breach  of  its   warranties,
         representations  and  covenants.  The Company  has agreed to  indemnify
         Kerr-McGee  against loss and liability from claims  associated with the
         ownership and use of the Rights after  consummation  of the Acquisition
         or resulting  from any breach of its  warranties,  representations  and
         covenants.  In  addition,  Kerr-McGee  has agreed that it will,  at the
         Company's  request,  store  any  Inventory  as to which  the  Option is
         exercised until 90 days after the Option expires, introduce the Company
         to AP customers  that are not currently  customers of the Company,  and
         consult with the Company  regarding the production and marketing of AP.
         The Company  has agreed  that,  at  Kerr-McGee's  request,  it will use
         reasonable  efforts to market Reclaimed Product on Kerr-McGee's  behalf
         for up to three years following consummation of the Acquisition.

         The purchase  price of $39.0  million was  recognized  as an Intangible
         Acquisition Asset and is being amortized to cost of sales on a straight
         line basis over a ten-year period.

8.       AGREEMENTS WITH AP CUSTOMERS

         In December  1997,  in  connection  with the  Acquisition,  the Company
         entered into an agreement with Thiokol with respect to the supply of AP
         through  the year  2008.  The  agreement,  which  was  contingent  upon
         consummation of the Acquisition,  provides that during its term Thiokol
         will make all of its AP purchases from the Company.  The agreement also
         establishes a pricing  matrix under which AP unit prices vary inversely

                                       12
<PAGE>

         with the  quantity of AP sold by the  Company to all of its  customers.
         The Company  understands that, in addition to the AP purchased from the
         Company,  Thiokol  may use AP  inventoried  by it in prior years and AP
         recycled by it from certain existing rocket motors.

         In December  1997,  in  connection  with the  Acquisition,  the Company
         entered  into  an  agreement  with  Alliant  Techsystems   Incorporated
         ("Alliant") to extend an existing  agreement through the year 2008. The
         agreement  establishes  prices for any AP purchased by Alliant from the
         Company  during  the term of the  agreement  as  extended.  Under  this
         agreement  Alliant  agrees to use its efforts to cause the Company's AP
         to be  qualified  on all new and current  programs  served by Alliant's
         Bacchus Works.


                                       13
<PAGE>

MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS

OVERVIEW

The Company is principally engaged in the production of AP for the aerospace and
national defense industries.  In addition, the Company produces and sells sodium
azide, the primary  component of a gas generant used in automotive airbag safety
systems,  and Halotron, a chemical used in fire suppression systems ranging from
portable fire  extinguishers  to airport  firefighting  vehicles.  The Company's
other lines of business include the development of real estate in Nevada and the
production of environmental  protection equipment,  including waste and seawater
treatment systems.

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

SALES  AND  OPERATING  REVENUES.  Sales of the  Company's  perchlorate  chemical
products,  consisting  almost entirely of AP sales,  accounted for approximately
61% and 56% of revenues  during the  six-month  periods ended March 31, 1998 and
1997,  respectively.  In general,  demand for AP is driven by a relatively small
number of DOD and NASA contractors;  as a result, any one individual AP customer
usually accounts for a significant portion of the Company's revenues.

Sodium azide sales  accounted for  approximately  24% and 29% of revenues during
the six-month periods ended March 31, 1998 and 1997,  respectively.  The Company
has incurred  significant  operating losses in its sodium azide operation during
the last three fiscal years. Although the Company has achieved significant gains
in market share that appear to relate to an  anti-dumping  petition filed by the
Company  against  three  Japanese  sodium  azide  producers  and  the  resulting
suspension  agreement,  the  Company  believes  that  these  factors  were fully
incorporated into the market by the end of fiscal 1997. The Company's evaluation
of the sodium azide market  indicated that the cash flows associated with sodium
azide operations would not be sufficient to recover the Company's  investment in
sodium azide  related fixed assets and, as a result,  the Company  recognized an
impairment  charge with respect to those  assets of $52.6  million in the fourth
quarter of fiscal 1997. Depreciation expense is expected to decrease annually by
approximately  $4.0  million as a result of the  impairment charge.

Real estate and related sales  amounted to  approximately  9% and 4% of revenues
during the six-month  periods ended March 31, 1998 and 1997,  respectively.  The
nature of real estate  development  and sales is such that the Company is unable
to  reliably  to  predict  any  pattern  of  future  real  estate  sales  or the
recognition of the equity in earnings of real estate ventures.

Sales of Halotron  amounted to  approximately  1% and 5% of revenues  during the
six-month  periods  ended  March 31,  1998 and 1997,  respectively.  Halotron is
designed to replace halon-based fire suppression  systems.  Accordingly,  demand
for  Halotron  depends upon a number of factors  including  the  willingness  of
consumers to switch from halon-based  systems, as well as existing and potential
governmental regulations.



                                       14

<PAGE>
Environmental  protection  equipment sales accounted for approximately 5% and 6%
of  revenues  during  the  six-month  periods  ended  March  31,  1998 and 1997,
respectively.

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

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

INCOME TAXES. The Company's  effective income tax rates were 0% during the three
and  six-month  periods  ended  March  31,  1998 and 34%  during  the  three and
six-month periods ended March 31, 1997. The Company's  effective income tax rate
decreased  to  17%  for  the  entire  1997  fiscal  year  as  a  result  of  the
establishment of a $10.4 million deferred tax valuation  allowance in the fourth
quarter.  The  Company's  effective  tax rate will be 0% until the Company's net
operating  losses  expire  or  the  Company  has  taxable  income  in an  amount
sufficient to eliminate the need for the valuation allowance.

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997

SALES AND OPERATING  REVENUES.  Sales increased $4.7 million,  or 50% during the
three  months  ended March 31, 1998 to $14.1  million  from $9.4  million in the
corresponding  period of the prior  year.  This  increase  was  attributable  to
increased  sales of  perchlorate,  sodium azide,  real estate and  environmental
protection  equipment.  Such  increase  was  partially  offset by a decrease  in
Halotron sales. Approximately $3.5 million of the $4.7 million increase in sales
was attributable


                                       15
<PAGE>

to increases in perchlorate  sales. This increase was primarily  attributable to
the pendency and ultimate consummation of the Acquisition.

COST OF SALES. Cost of sales increased $1.1 million, or 14%, in the three months
ended  March 31, 1998 to $9.1  million  from $8.0  million in the  corresponding
period of the prior year.  This  increase  was  principally  due to increases in
perchlorate  and sodium azide sales volume.  As a percentage  of sales,  cost of
sales  decreased  in the three months ended March 31, 1998 to 65% as compared to
86% in the  corresponding  period  of the  prior  year.  This  decrease  was due
principally to the increase in  perchlorate  and sodium azide sales volume and a
reduction in  depreciation  expense as a result of the sodium  azide  impairment
charge referred to above.

OPERATING  EXPENSES.  Operating (selling,  general and administrative)  expenses
decreased  $.1 million,  or 1%, in the three months ended March 31, 1998 to $2.2
million from $2.3 million in the corresponding period of 1997.

NET INTEREST  EXPENSE.  Net interest and other expense increased to $.75 million
in the three months  ended March 31, 1998 from $.3 million in the  corresponding
period of the prior year  principally  as a result of the  cessation of interest
capitalization  on  the  Company's  Ventana  Canyon  residential  joint  venture
project.

SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997

SALES AND OPERATING  REVENUES.  Sales increased $7.6 million, or 43%, during the
six months  ended  March 31,  1998 to $25.4  million  from $17.8  million in the
corresponding  period of the prior year.  The  increase was  principally  due to
increased  sales of  perchlorate,  sodium azide,  real estate and  environmental
protection  equipment.  Such  increase  was  partially  offset by a decrease  in
Halotron sales. Approximately $5.0 million of the $7.6 million increase in sales
was attributable to increases in perchlorate  sales. This increase was primarily
attributable to the pendency and ultimate consummation of the Acquisition.

COST OF SALES.  Cost of sales increased $2.2 million,  or 14%, in the six months
ended March 31, 1998 to $17.2  million from $15.1  million in the  corresponding
period of the prior year.  The  increase in cost of sales was  primarily  due to
increases in perchlorate and sodium azide volume. As a percentage of sales, cost
of sales  decreased in the six months ended March 31, 1998 to 68% as compared to
85% in the corresponding period of the prior year. The decrease was attributable
to the increase in perchlorate  and sodium azide sales volume and a reduction in
depreciation  expense as a result of the sodium azide impairment charge referred
to above.  Cost of sales is expected to increase by  approximately  $4.0 million
annually as a result of the amortization of capitalized Acquisition costs.

OPERATING  EXPENSES.  Operating  expenses were $4.4 million during the six-month
period ended March 31, 1998 compared to $4.6 million in the corresponding period
of the prior year.

NET INTEREST  EXPENSE.  Net interest and other expense increased to $1.5 million
in the six months  ended March 31,  1998 from $.5  million in the  corresponding
period of the prior year  principally  as a result of the  cessation of interest
capitalization  on  the  Company's  Ventana  Canyon  residential  joint  venture
project.  Interest  expense will increase  significantly  in future periods as a
result of the  issuance of the Notes  described  in Note 6 of Notes to Condensed
Consolidated Financial Statements.


                                       16

<PAGE>
INFLATION

Inflation did not have a significant effect on the Company's sales and operating
revenues or costs during the  three-month  or six-month  periods ended March 31,
1998 or 1997.  Inflation  may have an  effect on gross  profit in the  future as
certain of the Company's  agreements with AP and sodium azide customers  require
fixed prices,  although certain of such agreements contain  escalation  features
that should  somewhat  insulate the Company from  increases in costs  associated
with inflation.

LIQUIDITY AND CAPITAL RESOURCES

As  discussed  in  Notes 6 and 7 of Notes to  Condensed  Consolidated  Financial
Statements,  in March 1998,  the Company sold Notes in the  principal  amount of
$75.0 million, acquired certain assets from Kerr-McGee for a cash purchase price
of $39.0  million  and paid $28.2  million to  repurchase  the  remaining  $25.0
million principal amount  outstanding of the Azide Notes. In connection with the
Azide Notes  repurchase,  the Company  recognized an extraordinary  loss on debt
extinguishment of approximately $5.0 million.

Cash flows  provided by (used for) operating  activities  were ($.3) million and
$6.3 million during the six-months ended March 31, 1998 and 1997,  respectively.
Cash flows from operating  activities declined in the first six months of fiscal
1998  principally as a result of changes in certain  working  capital  balances,
most notably a significant  increase in  receivables  related to AP shipments in
late March 1998.  Such  receivables  are  scheduled to be collected in the third
quarter of fiscal 1998. The Company believes that its cash flows from operations
and  existing  cash  balances  will be adequate  for the  foreseeable  future to
satisfy the needs of its operations.  However,  the resolution of contingencies,
and the  timing,  pricing  and  magnitude  of orders  for AP,  sodium  azide and
Halotron, may have an effect on the use and availability of cash.

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

The Company is currently in the process of evaluating its computer  software and
databases to determine whether or not modifications  will be required to prevent
problems  related  to the Year 2000.  These  problems,  which  have been  widely
reported  in the  media,  could  cause  malfunctions  in  certain  software  and
databases with respect to dates on or after January 1, 2000,  unless  corrected.
Based upon its  evaluation to date,  the Company does not believe that the costs
of any  modifications  required  to correct for Year 2000  problems  will have a
material  impact on  operations,  although  there can be  assurance  given  with
respect thereto.

FORWARD-LOOKING STATEMENTS/RISK FACTORS

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


                                       17
<PAGE>

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

          1.   (a)  Declining  demand  or  downward  pricing  pressure  for  the
               Company's  products as a result of general or  specific  economic
               conditions,  (b)  governmental  budget  decreases  affecting  the
               Department  of  Defense  or NASA  that  would  cause a  continued
               decrease  in  demand  for AP,  (c) the  results  achieved  by the
               Suspension  Agreement  resulting from the Company's  anti-dumping
               petition  and the possible  termination  of such  agreement,  (d)
               technological   advances  and  improvements  or  new  competitive
               products  causing a reduction  or  elimination  of demand for AP,
               sodium  azide  or  Halotron,   (e)  the  ability  and  desire  of
               purchasers  to  change  existing  products  or  substitute  other
               products for the Company's  products based upon perceived quality
               and pricing, and (f) the fact that perchlorate chemicals,  sodium
               azide,  Halotron and the  Company's  environmental  products have
               limited applications and highly concentrated customer bases.

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

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

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

          5.   The  effects  of, and  changes  in,  trade,  monetary  and fiscal
               policies,   laws  and   regulations   and  other   activities  of
               governments,  agencies or similar organizations,  including,  but
               not limited to, environmental, safety and transportation issues.

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


                                       18
<PAGE>

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

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

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




                                       19